While the flow of outbound capital from Asia will accelerate this year, it is inbound capital that will take a “quantum leap” in 2015, according to a new white paper from Colliers International.
“Inbound investment into real estate in the region will increase by 102 per cent this calendar year”, Terence Tang, Managing Director of Capital Markets & Investment Services, Asia, predicts, “more than three times the rate of growth in 2014. The office market Asia-wide is at a stage in the cycle where new supply will rise 152 per cent to about 100 million square feet, presenting significantly more opportunities. Shanghai, Hong Kong and Singapore remain the best target destinations, but structural change in markets such as India is making them more attractive.”
Outbound flows into real estate will increase 61 per cent in 2015 from a record US$46 billion last year, Colliers predicts, thanks to continued appetite from traditional investors and relaxation measures on the policy front. For instance, China has streamlined the approval process for mainland companies that are investing outside the mainland. In Japan, the US$1.1 trillion Government Pension Investment Fund is considering allocating 3 to 5 per cent of funds to global real estate, which would make it the world’s largest real-estate allocation.
In terms of volume, mainland China (31.0 per cent), Singapore (27.2 per cent) and Hong Kong (12.9 per cent) have been the top three sources of outbound real estate capital, accounting for 71.1 per cent of the total outbound capital the region invested in 2014.
“Prime gateway cities such as New York, London, Sydney and Melbourne continue to be the preferred destinations for outbound Asian investors. But with existing income-producing assets being gradually snapped up and increased competition from local players, some overseas investors are turning to fringe locations in those markets where better returns are available,” Simon Lo, Executive Director of Asia Research and Advisory comments.
The Colliers capital-markets team, in its investor white paper “The Winners in Asia’s Tug of War,” notes that the secondary locations of gateway cities such as Los Angeles and Frankfurt offer the prospect of better returns, albeit with marginally more risk. That should encourage investors to expand their focus beyond New York and London, the perennial favourites in North America and Europe.
Any downside to the Los Angeles office market should be limited by the low entry point, with prices in the range of US$200 to US$275 per square foot for suburban buildings. That is a level that is lower than their replacement cost.
In Frankfurt, the case for decentralised office space is also compelling. The market is very liquid, and the German business hub set to benefit from its position as a major clearing centre for the Chinese yuan.
In Paris, off-plan office space in core locations offers plenty of promise, since yields are low for prime commercial space, and major local developers are looking to teaming up with equity partners for their projects using “Vente en état futur d’achèvement” (VEFA) contract.
San Francisco becomes a popular destination for Asian buyers and Colliers believes residential development sites downtown represent the best investment strategy.
In Asia, Shanghai will remain the top target for inbound and intra-regional flows. Colliers recommends office space in Pudong as the best investment play, yielding 4.0 to 5.5 per cent thanks to sustained end-user demand and potential rental growth.
The low yields in Hong Kong mean a passive “buy-and-hold” strategy is no longer attractive. The stronger U.S. dollar also translates to higher prices for outside investors thanks to the Hong Kong dollar peg. Colliers recommends value-add opportunities for long-term capital growth.
Like San Francisco, Singapore is an outlier where residential presents the best opportunity, in particular high-end luxury apartments. As inventory rises, asking prices have softened and the gap between buyers and sellers is narrowing.