Top trends in APAC real estate that investors need to know

6 July 2022
Real estate investment in Asia is not without complexities, but global real estate investors can find promising opportunities in both mature and emerging markets.

A resurgence in established real estate sectors such as hospitality and logistics, along with rising interest in alternative spaces, such as multifamily housing and co-working offices, are driving innovation. While Australia and Japan continue to draw attention, burgeoning markets in Singapore and Southeast Asia are opening attractive possibilities for foreign investment. In the long term, Asia Pacific real estate opportunities will be influenced by sustained economic growth, rising affluence and consumer spending.

To get a sense of trends, we emailed questions to two Vistra experts.

Otto Von Domingo is managing director and head of commercial for Southeast Asia, where he focuses on real estate investment markets. Thurai Thavasikkannu is the executive director of funds based in Singapore and works with real estate fund managers based inside and outside the country.

We asked Domingo and Thavasikkannu to discuss the real estate market in Asia, both what they’re seeing now and what to expect.

What are some emerging real estate trends in Asia Pacific that are important for investors to know about?

Otto: The hospitality sector is making a comeback now that more than two years have passed since the advent of Covid-19. Australia and Singapore have had high rankings in this industry in part because of the way they dealt with and recovered from the pandemic. Industry experts expect to see an uptick in investments in distressed hotels, particularly in Australia and Japan, but there may not be as much activity as some have anticipated. Japan and Korea continue to draw attention in the multifamily residential sector as housing prices climb. Korea remains appealing overall for its lack of restrictions on foreign investment in commercial and residential real estate.

Thurai: The trend in multifamily investments is interesting. While it has been a mainstay real estate asset class in the US and Europe, investment activity in Asia was previously focussed on Tokyo. However, in the past two years, investment in multifamily real estate has gradually broadened to more markets. Key drivers include housing affordability and migration, both from abroad and inward migration to major urban centres from other parts of the country, as the major cities in Asia remain strong magnets for education and employment.

We are also seeing investment interest in refurbishing older, well-located properties with upgrades for energy efficiency and health and wellness features supported by technology. Investors are also repurposing underutilised assets for alternative and higher-value use to keep pace with changes in tenant expectations and shifts in demand. One example is an investment by a client to acquire and convert an existing hotel to a co-living asset. The property’s location and its adaptability for co-living use were key considerations. The enhancement work is expected to be completed within less than a year and provide an attractive return on investment.

In terms of markets, besides Singapore, there is growing interest in Southeast Asia, particularly for industrial-logistics properties as firms seek to diversify their production and supply chains in Asia outside of China.

What are a few key differences between Asia and other regions when investing in real estate that tend to surprise foreign investors?

Otto: Asia is a challenging and complex environment for EU and US real estate investors due to major differences in tax, legal, political, regulatory and other considerations. The demographics also vary widely, with multiple languages and cultures, which creates added challenges. There are also differences within certain cultures. For example, China has more than 20 provinces, each with unique policies, practices and processes in terms of foreign investment.

Thurai: I would add currency to the mix. Investors must manage funding and cashflows in different currencies while being mindful of foreign exchange risk. Given the differences that Otto noted, it is common for investors to enter joint ventures with experienced partners who are familiar with the local market to access investment opportunities and operate the assets post-acquisition.

Cross-border investment structures in Asia tend to be more complex and multilayered. With a wide network of tax treaties, Singapore is an ideal location for setting up funds or master holding companies to invest in Asia or outside the region. The different countries also have unique onshore tax-efficient structures available to foreign investors, but these often come with fairly stringent regulations.

When considering these complexities, it is prudent for investors to get appropriate tax and legal advice and engage service providers with a local presence and the capability to provide an end-to-end service across the fund structure from the fund level to asset-holding entities.

Can you explain the recent fund regimes introduced in Singapore and Hong Kong?

Thurai: The key centres for fund management in Asia are Singapore and Hong Kong, and both have rolled out fund regimes to encourage formation and re-domiciliation of investment funds. Singapore introduced the Variable Capital Company (VCC) structure in 2020, which offers funds the advantage of a corporate legal form while enabling ease of distributions, more privacy for investors and operational efficiency through umbrella fund structures. The VCC has been an attractive addition to existing fund structures in Singapore, including limited partnerships, private limited companies and unit trusts.

Hong Kong rolled out its Limited Partnership Fund regime in 2020 and followed with other legislative changes to encourage private equity and venture capital fund managers to set up funds locally instead of relying on offshore fund structures. Carried interest paid to general partners from qualifying investment activity by Hong Kong limited partnerships is exempted from tax.

The changes in Singapore and Hong Kong have been well received by fund managers. We can expect further enhancements and incentives given the countries’ commitment to grow the fund management industry.

Are there any Asia Pacific real estate sectors that show promise?

Otto: Hospitality, logistics, commercial office space, data centres and multifamily residential opportunities are attractive. As economies rebound from the pandemic, changes in work habits, including a rise in remote work, have created opportunities as well as challenges. The shift away from centralised business districts, or CBDs, is creating appealing secondary markets that offer less expensive buildings and co-working spaces that are closer to people’s homes. Conversely, older financial districts in countries such as Singapore, for example, are being forced to reinvent themselves to deliver creative solutions for affordable housing and living environments.

Thurai: Investments in logistics real estate and data centres are supported by strong secular trends due to growth in e-commerce, cloud computing and 5G. Cell phone towers and fibre broadband were traditionally viewed as infrastructure but are now more broadly classified as digital real estate alongside data centres. There is also emerging interest in alternative real estate sectors, including co-living, self-storage and healthcare properties.

In the short term, investors may tend to be more selective given the uncertain economic and interest rate environment, favouring prime assets and investments with a strong supply-demand dynamic.

How has the focus on environmental, social and governance (ESG) practices affected real estate investing in the region?

Thurai: The real estate industry accounts for a significant share of greenhouse gas emissions globally, so the “E” in ESG has attracted more attention as many governments across the region have committed to achieve carbon neutrality. A number of countries in Asia have introduced local green building certifications, which are often backed by incentives to encourage their adoption for new construction and upgrades to existing buildings. Building codes and regulations are expected to be tightened further. Investors are placing more emphasis on the green credentials of buildings, partly due to pressure from their stakeholders.

It helps that the economics for green buildings are becoming more favourable. Energy-efficient buildings have lower operating costs, especially in tropical locations, and there is growing evidence that tenants are willing to pay higher rents for green space. Those factors are positive for capital values. Banks are increasingly offering green financing solutions with the promise of lower borrowing rates tied to performance targets. Being attentive to sustainability is also viewed as good risk management.

Switching to governance — the “G” in ESG — there is a drive toward more transparency in diversity, inclusion and ethics. For fund managers, governance and transparency related to decisions and controls for managing investor funds are of utmost importance. Fund administrators must support their clients’ governance objectives through robust processes and controls for independent reporting and cash management and ensure compliance with anti-money laundering, tax and other regulations across the markets in which they operate. These processes and controls should comply with international assurance standards and be subject to periodic audits and reviews.

On the social agenda, there are instances where the real estate industry has contributed to greater social equity through investments in affordable housing, social infrastructure and rejuvenation of low-income neighbourhoods. This is an area where more could be done, with potential for supportive government policies.

Is there a country in the region that you feel has handled the pandemic particularly well and is poised to attract foreign real estate investors for that reason?

Otto: Australia and Singapore have handled the pandemic differently than other countries, and we are now seeing an increase in deal activities in those countries at a much faster rate. Australia, for example, responded quickly with border closings, containment strategies, and unified messaging from its government and scientific communities, building upon an existing culture of trust. Singapore’s testing and contact tracing strategies have served as a successful model. These have boosted confidence for prospective investors.

Could you give some background on Singapore real estate investment trusts (REITs) and what foreign investors should know about them?

Thurai: With the first S-REIT listed in 2002, 2022 marks the twentieth anniversary of the Singapore REIT — or S-REIT market. Currently, there are more than 40 REITs and property trusts listed on the Singapore Exchange, with a market capitalisation of approximately US$80 billion. The S-REIT market has a strong international flavour, as most Singapore REITs have diversified their portfolios through investments in other markets both in and outside Asia. In recent years, portfolios comprising fully European or US assets have been listed in Singapore with the growing recognition of Singapore as a global REIT hub.

S-REITs are tax-efficient structures for individual investors subject to the REIT meeting certain conditions on distribution of qualifying income. They are also subject to caps on development activity and borrowings, thus focussing REIT managers on generating income from completed assets while moderating financial risk. Therefore, S-REITs offer investors a good opportunity to gain exposure to largely stable income-generating portfolios. Given the large number of S-REITs, investors also have a fairly wide selection in terms of property sectors and geographies.

What’s the outlook in Australia and Japan for attracting foreign real estate investors?

Otto: Australia and Japan have traditionally been important markets for US and EU investors. Australia is showing positive signs of economic rebound with the new government in place and easing of Covid restrictions. A consistent deal flow kept Japan busy even during Covid. Despite a slow start in 2022, Japan’s economy is expected to gain momentum after the downturn in 2021.

Thurai: Both Australia and Japan are core markets in Asia for real estate investors given their relative depth and transparency. We continue to see investor interest in both markets. Rising commodity prices could be favourable for the Australian economy as an exporter. In Japan, as in other markets, the low borrowing rates have been positive for real estate investment returns. This warrants monitoring given the tightening of interest rates in other major economies, although thus far, the Bank of Japan seems inclined to keep interest rates low.

Could you speak about the effects of China’s lockdowns on its real estate market, and that market’s prospects for recovery?

Otto: China’s zero-Covid policy has dampened investor sentiment with deal activities coming to a standstill. Recovery is not expected anytime soon, even after restrictions ease — perhaps in late Q3 or early Q4, but that remains to be seen.

Is there anything we haven’t covered that you think foreign investors should know?

Otto: Thailand’s economy is recovering after the pandemic. Tourism is gradually opening and is expected to grow as restrictions ease and there are higher rates of vaccination. This could be a very promising market for global real estate investors.

Thurai: Like other regions, investors can expect some near-term uncertainty as central banks work through the current monetary tightening cycle. Asia has been less affected by the current geopolitical challenges in Europe. Investors view real estate as an inflationary hedge. Leases in Asia tend to be shorter on average, so rents can be more easily adjusted for inflation. Also, significant capital has been raised in recent years, which could provide some buffer if markets correct. Longer-term fundamentals for investment-grade real estate in Asia remain sound and are underpinned by sustained economic growth, rising affluence and consumer spending. Our clients are continuing to deploy capital when they find good opportunities.

Is there a current client or prospect story related to Asia Pacific real estate that you find illuminating?

Otto: Our clients are taking fascinating and innovative approaches to value creation. They are finding creative ways to infuse value in their investment portfolios by activities like building data centres with a solar component to generate power, pursuing development to align with their core business strategy, using new technologies for property management, and investing in Olympic villages. Those are just a few examples of how they are shifting strategies to maximise opportunities.