Executive Summary. Real estate remains an attractive asset class. Key trends to watch. Respondent s profile and survey methodology

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1 CBRE Research

2 Executive Summary 04 Real estate remains an attractive asset class 05 Key trends to watch 12 Respondent s profile and survey methodology CBRE, INC. CBRE RESEARCH 2

3 2018 CBRE, INC. CBRE RESEARCH 3

4 EXECUTIVE SUMMARY Investor appetite for Asia Pacific real estate remains robust in 2018, driven by the twin objectives of securing stable income streams and asset class diversification. While concerns about potential global and local economic shocks weakened for the second consecutive year, investors are more concerned about higher property prices. The high price of core assets and search for higher returns continues to drive investors towards core-plus/good secondary and value-added assets. This year marked the first time that value-added has overtaken prime core as the most preferred asset. Investor focus is broadening away from the traditional preferred markets of Shanghai, Sydney and Tokyo. Several cities are attracting attention, led by Singapore, Melbourne, Brisbane and regional cities in China and Japan. The survey found narrower return expectations among different strategies, pointing to more competition for assets offering high single digit unlevered returns. The industrial and logistics sector is seeing a substantial increase in investor interest, driven by structural changes including e-commerce growth and the development of modern logistics facilities into an institutional investment product. Investor demand for multi-family owing to high housing prices and declining home ownership affordability across the region. With occupiers increasingly demanding flexible leasing terms and space usage, many investors hold the view that co-working is the future of office work environment and an amenity for tenants. Most investors believe that up to 20% is the ideal proportion of co-working space in a single office building to enhance its value. Although Asian outbound investment continues to eclipse previous records and Chinese investors still comprise the largest source of capital, Chinese outbound investment is expected to slow this year CBRE, INC. CBRE RESEARCH 4

5 REAL ESTATE REMAINS AN ATTRACTIVE ASSET CLASS

6 % of respondents Asia Pacific Investor Intentions Survey 2018 STRONG INVESTOR APPETITE FOR REAL ESTATE Investor appetite for Asia Pacific real estate remains robust. An overwhelming 92% of respondents indicate that their investment activity in 2018 will be the same or greater compared to Real estate fund managers display stronger intentions to purchase more this year, a finding supported by CBRE Research s The Next Wave of Capital Deployment report published in January 2018, which estimated that approximately US$53 billion of real estate private equity capital will be deployed into Asia Pacific real estate by Figure 1: Purchasing activity intentions over the past three years 100% 80% 60% 84% 80% 92% 40% 20% 0% Buy more About the same Buy less Source: Asia Pacific Investor Intentions Survey, CBRE Research, March 2016, 2017 & CBRE, INC. CBRE RESEARCH 6

7 DRIVEN BY STABLE INCOME STREAMS AND RISK DIVERSIFICATION Investor demand for real estate is being motivated by the objective of securing stable income streams and asset class diversification. Figure 2: Main motivation for investing in real estate compared to last year In comparison with other asset classes including equities, bonds, direct real estate and real estate securities, direct real estate has provided more stable returns over the past decade while also being less volatile. This, together with the higher volatility in equities and bonds witnessed since the beginning of this year, is strengthening investor appetite for direct real estate investment. As interest rates gradually move into the upward cycle, there will be limited room for further yield compression to drive value growth. For the second consecutive year, less investors selected capital value growth as the major motivation to invest in real estate. 3% 27% 19% 26% 26% 18% Asset class diversification Stability of income stream Capital value growth Source: Asia Pacific Investor Intentions Survey, CBRE Research, March 2017 & CBRE, INC. CBRE RESEARCH 7

8 INVESTORS CONCERNS SHIFT TOWARDS PROPERTY PRICING The improved global and regional economic outlook is fostering a more optimistic attitude among investors. Several export-orientated economies in the region including China, Japan, Hong Kong, South Korea and Singapore recorded better-than-expected economic growth last year thanks to the recovery of global trade. Figure 3: Greatest threat to property markets Global and local economic shock Concern about potential global and local economic shocks weakened for the second consecutive year. In contrast, investors are more concerned about property prices. Rising interest rates are expected to place pressure on asset prices, especially now that property yields have already moved below pre-crisis levels and the gap between property yields and long-term government bond yields has narrowed further. Property is overpriced Faster than expected rises in interest rates Global political instability Overbuilding leading to excess supply % 10% 20% 30% 40% 50% 60% % of respondents Source: Asia Pacific Investor Intentions Survey, CBRE Research, March 2017 & CBRE, INC. CBRE RESEARCH 8

9 STOCK IS AVAILABLE BUT PRICING IS HARD TO JUSTIFY The limited availability of product and asset pricing have traditionally been the major obstacles facing real estate investors. This year, investors displayed greater concern about high asset prices amid what is still an intensely competitive market for prime commercial real estate in Asia Pacific. The investor pool continues to broaden, and now consists of traditional players such as property companies, REITs and real estate funds, along with institutional capital and high net worth investors looking for asset diversification. Concern about the availability of stock weakened this year, with more investors indicating that they are willing to sell. However, investors still find it hard to justify current pricing. Figure 4: Biggest obstacle to acquiring assets over the past three years Asset Pricing Asset Availability 38% 35% 44% CBRE Research foresees that slower rental growth expected in 2018, together with the expectation of higher interest rates, could prompt investors to adopt a less aggressive stance towards underwriting. 16% 24% 18% Source: Asia Pacific Investor Intentions Survey, CBRE Research, March 2016, 2017 & Institutional capital includes insurance companies, pension funds and sovereign wealth funds 2018 CBRE, INC. CBRE RESEARCH 9

10 INVESTORS FOCUS ON CORE-PLUS AND VALUE-ADDED The high price of core assets and search for higher returns continues to drive investors towards core-plus/good secondary, which entails investing in prime assets in non-core areas or non-prime assets in core areas, and value-added assets. This year s survey marked the first time that value-added has overtaken core as the most preferred asset. Investors are exploring different ways to create value through asset enhancement, such as incorporating retail elements or rent-paying amenities into office buildings. Other strategies include upgrading through interior and exterior renovation and conversion to alternative use. Figure 5: Preferred investment strategy Source: Asia Pacific Investor Intentions Survey, CBRE Research, March 2016, 2017 & CBRE, INC. CBRE RESEARCH 10

11 STRONGER INTEREST IN SINGAPORE, MELBOURNE AND REGIONAL CITIES IN JAPAN AND CHINA Figure 6: Top ten preferred cities for investment (cross-border* only) Japan remains the top destination for investment, with Tokyo ranking as the most preferred city. Investors are also displaying strong interest in regional cities such as Osaka and Fukuoka. Both cities offer solid fundamentals as well as higher entry yields. Melbourne eclipsed Sydney as the most attractive city in Australia, a result due to its stronger rental growth supported by tight vacancy. Brisbane received stronger interest from cross-border investors considering counter cyclical plays, with office rents recently bottoming-out after a five-year correction and expected to recover over the next two years. The office market recovery helped propel Singapore to among the top three destinations for cross-border investors for the first time since the survey began in As Grade A assets are scarce and aggressively priced, investors are focusing on office properties with upgrading potential as Grade A rents will continue to grow. Shanghai continues to be the most desired market in China, with transaction volume rising to an historical high in Tier II cities with strong fundamentals such as Hangzhou, Nanjing and Chengdu are also gaining more traction from investors. Note: *Cross border refers to respondents domiciled in the different country as the most attractive destination selected Source: Asia Pacific Investor Intentions Survey, CBRE Research, March CBRE, INC. CBRE RESEARCH 11

12 KEY TRENDS TO WATCH

13 #1: NARROWER RETURN EXPECTATIONS AMONG DIFFERENT STRATEGIES This year s survey asked investors to estimate total unlevered returns available in the Asia Pacific real estate market. The results indicated narrower return expectations among different strategies. Core / core-plus investors estimate most available returns at 3-6%, while value-added investors expect 6-9%. Opportunistic investors anticipate 6-12%. The low yield environment and overlapping investment strategies mean that these expectations are below those that were held previously. Figure 10: Investors views of total unlevered total returns available in Asia Pacific Core/Core-plus Value-added 1-3% 3-6% 6-9% 9-12% 12%+ CBRE Research advises investors to consider that there will be more competition for assets offering a return profile of around 6-9%. High-risk profile investors are seeking value-added assets as a low risk opportunistic strategy to achieve target returns. Opportunistic Legend Note: ^Unlevered total returns (average annual over 3 years) Source: Asia Pacific Investor Intentions Survey, CBRE Research, March 2018 Less available Most available 2018 CBRE, INC. CBRE RESEARCH 13

14 % of respondents Asia Pacific Investor Intentions Survey 2018 #2: A THEMATIC SECTOR FOCUS The industrial and logistics sector is seeing an increase in investor interest, largely at the expense of retail. This is being driven by structural changes including e-commerce growth and the development of modern logistics facilities into an institutional investment product. Investor appetite for multi-family is rising as high housing prices create strong and stable demand for rental accommodation. Japan has long been the sole destination for multi-family investment in Asia Pacific, but China is beginning to offer considerable opportunities, supported by government initiatives to develop the rental housing market. Australia is also a potential destination for the multi-family sector, with fundamentals appearing attractive for both domestic and international investors. Figure 11: Preferred sectors for investment % 30% 20% E-commerce growth driving interest in logistics assets High housing prices creating demand for rental apartments 10% 0% Office Industrial & Logistics Retail Multifamily Hotels Source: Asia Pacific Investor Intentions Survey, CBRE Research, March 2016, 2017 & CBRE, INC. CBRE RESEARCH 14

15 HIGH HOUSING PRICES DRIVE DEMAND FOR MULTI-FAMILY The jump in popularity of multi-family is being driven by declining homeownership affordability. Surging property prices are outstripping wage growth and making it difficult for Asia Pacific millennials to accumulate the necessary capital to buy their own home. 63% of respondents to CBRE Research s Asia Pacific Millennials Survey published in 2016 said that they were forced to rent homes due to being unable to buy them. Median housing prices in tier I cities in Asia Pacific are more than 10 times greater than average household incomes. The higher the price multiple to income, the more likely it is for millennials to either live at home with their parents or rent accommodation. Figure 12: Millennials attitudes toward renting property 63% agreed that this generation is forced to rent as buying a property is out of reach for most Figure 13: Median housing price to annual household income ratio Some investors are already exploring rental apartment opportunities in Beijing, Shanghai and Hong Kong, as these markets have a high housing price to income ratio compared to other tier-1 cities in the region. Target end-users are typically young professionals who have been working for two to three years. Source: Demographia, Q3 2015, MSCI, December 2015, Asia Pacific Millennials Survey, CBRE Research, October CBRE, INC. CBRE RESEARCH 15

16 INTEREST IN NICHE SECTORS IS RISING Investor demand for niche sectors is growing further due to rapid structural changes, relatively higher initial yields and comparative immunity to real estate cycles. Figure 14: Top five alternative sectors among investors Major country focus Demographic changes are piquing investors interest in retirement living, healthcare and student accommodation. Ageing populations in Japan and China will create more demand for retirement living and trigger demand for healthcare. Singapore is another potential market for healthcare due to its status as a medical tourism hub in Southeast Asia. Opportunities to invest in student accommodation lie mainly in Australia. Retirement Living Healthcare Data Centre Interest in data centres increased significantly in this year s survey, amid rapid growth in data usage. Opportunities to acquire data centres mainly exist in markets with large populations such as China, India and Japan, while Singapore holds considerable appeal as a regional focal point for Southeast Asia. Real Estate Debt Student Living Real estate debt is generating stronger interest among investors after weakening in last year s 0% 5% 10% 15% 20% 25% survey. The coming years will see significant debt refinancing pressure, particularly in China, where US$75 billion of corporate bonds will need to be refinanced by listed Chinese real estate companies between Source: Asia Pacific Investor Intentions Survey, CBRE Research, March 2016, 2017 & CBRE, INC. CBRE RESEARCH 16

17 #3: CO-WORKING EMERGES AS IMPORTANT NEW TREND Figure 16: Occupier trends that investors believe have the most impact on real estate value Figure 17: Locations where occupiers intend to increase their space over the next two years Flexible space Diversification from traditional office/retail properties Smart buildings Co-living Experiential retail Last-mile logistic Automation 42% 0% 10% 20% 30% 40% 50% Office in major business districts Office in decentralised locations Co-working centre CBD office Campus Serviced office Business park 33% 0% 10% 20% 30% 40% 50% With capital value growth increasingly being driven by income growth, it is essential that investors gain a thorough understanding of occupier requirements. When asked to identify the occupier trends exerting the greatest impact on real estate value, investors selected space that can be procured quickly, with little capital investment and at very flexible terms. This finding aligns with occupiers naming co-working centres as their third most preferred location for expansion over the next two years. Occupiers are no longer bound to CBD offices when considering new space, with their growing preference for flexible space increasingly being reflected by actual office take up in major Asia Pacific office markets. Source: Asia Pacific Occupier Survey, CBRE Research, March 2018, Asia Pacific Investor Intentions Survey 2018, CBRE Research, March CBRE, INC. CBRE RESEARCH 17

18 INVESTORS BELIEVE FLEXIBLE SPACE IS THE FUTURE With occupiers increasingly demanding flexible leasing terms and space usage, many investors hold the view that flexible space is the future of office work environment. Some owners are offering co-working as an amenity for existing tenants in the same building, providing occupiers with the flexibility to take space both on a traditional lease and also on a co-working basis. In general, investors looking to gain their exposure to the co-working trend intend to partner with third-party co-working operators as they are still evaluating and testing the sustainability of the flexible space concept. Figure 18: Why does co-working appeal to investors? Future of office work 32% An amenity for tenants 28% Property companies are opting to develop and operate their own co-working brands as an amenity and component of their overall tenant mix. Examples include Swire Properties Blueprint in Taikoo Place in Hong Kong and SOHO China s SOHO 3Q in its office portfolio in Beijing and Shanghai. Enhance long term building income 20% Source: Asia Pacific Investor Intentions Survey, CBRE Research, March CBRE, INC. CBRE RESEARCH 18

19 UP TO 20% IS THE OPTIMAL PERCENTAGE OF CO-WORKING SPACE IN AN OFFICE BUILDING TO ENHANCE ITS VALUE Most investors believe that up to 20% is the ideal proportion of co-working space in a single office building to enhance its value. If more than 40% of space in a single building is allocated to co-working, investors believe its value will be negatively affected. Figure 19: What proportion of co-working space impacts building value? Although some lower grade office buildings have recorded value appreciation after being repositioned to co-working, overall investors are unwilling to allocate too much space to this amenity. Only 39% of co-working operators are profitable globally. Source: Asia Pacific Investor Intentions Survey, CBRE Research, March CBRE, INC. CBRE RESEARCH 19

20 #4: POTENTIAL SLOWDOWN OF CHINESE OUTBOUND INVESTMENT Although Asian outbound investment continues to eclipse previous records and Chinese investors still comprise the largest source of capital, CBRE Research expects to see a continuation of the slowdown in Chinese outbound investment first witnessed in H following the introduction of new capital controls. Figure 20: Chinese outbound investment intentions 2017 vs 2018 More than the amount in 2017 This year s survey indicates that Chinese investors are less keen to invest overseas in While overall interest remains reasonably firm, fewer investors intend to invest more than they did in Government scrutiny of overseas real estate acquisitions will continue this year, with another set of capital controls coming into effect in March Real estate investment will subject to an additional layer of examination. The same amount as in 2017 Less than the amount in 2017 CBRE Research expects to see a stronger focus on Belt & Road countries and industry-related asset classes such as warehouses, industrial parks and ports, supported by more flexible regulatory treatment. Redeploying offshore capital is expected to drive some investment transactions, but any purchases will be considered carefully as they will also be subject to closer regulatory scrutiny. No intentions to invest oversesas 0% 10% 20% 30% 40% 50% 60% 70% Source: Asia Pacific Investor Intentions Survey, CBRE Research, March CBRE, INC. CBRE RESEARCH 20

21 CONCLUSION Despite high valuations, property remains an attractive asset class given its stability and risk diversification. Investors in the Asia Pacific real estate market will display strong demand in 2018 Although asset pricing poses a major obstacle, investors remain keen to purchase real estate for risk diversification. Investors focus is on income growth as capital value appreciation will increasingly be driven by income growth. The high price of core assets and search for higher returns will continue to drive investors towards core-plus/good secondary and valueadded assets. Investors are set to shift their focus away from the traditionally preferred markets of Shanghai, Sydney and Tokyo to other locations including Singapore, Melbourne, Brisbane and regional cities in China and Japan. Other key trends this year will include investors reducing their return expectations; a more thematic sector focus; stronger interest in coworking; and the continued slowdown in Chinese outbound investment CBRE, INC. CBRE RESEARCH 21

22 SURVEY PROFILE

23 RESPONDENT S PROFILE & SURVEY METHODOLOGY The fifth annual CBRE Investor Intentions Survey focuses on the forward looking views of real estate investors in Asia Pacific and was carried out online between 15 November 2017 and 31 January Figure 21: Profile of respondents A total of 366 responses were received. 82% of respondents were companies domiciled in Asia Pacific and the other 18% were domiciled primarily in Western Europe, the Middle East and North America. For the purpose of analysis, CBRE Research categorised some investors into groups. These included: Funds or asset managers (35% of respondents) and private equity firms (4%) which collectively accounted for 39% of respondents. Listed property companies & listed REITs (15%), Developers (13%), and private property companies & unlisted REITs (11%), which collectively accounted for 39% of respondents. Sovereign wealth funds, insurance companies, pension funds and family offices, which collectively accounted for 13% of respondents. CBRE Research used the broad categorisation investor to denote this group. Note: Real estate funds include funds or asset managers and private equity firms Investor includes insurance company, pension fund, sovereign wealth fund and private individual investors / family office. Other include property consulting firms, legal firms, aged care, civil Construction, hotel operators, logistics and retailer. Source: Asia Pacific Investor Intentions Survey, CBRE Research, March CBRE, INC. CBRE RESEARCH 23

24 CAPITAL MARKETS CONTACTS Asia Pacific Investor Intentions Survey 2018 ASIA PACIFIC Rob Blain Executive Chairman ASIA Tom Moffat Executive Director NORTH ASIA KOREA Don Lim Senior Director SOUTHEAST ASIA SINGAPORE Jeremy Lake Executive Director CAPITAL ADVISORS JAPAN Junichiro Muto Senior Director GREATER CHINA Alan Li Managing Director HONG KONG Stanley Wong Executive Director JAPAN Roderick Gerstman Associate Director TAIWAN Andrew Lin Senior Director SOUTH ASIA INDIA Gaurav Kumar Managing Director Nikhil Bhatia Managing Director THAILAND Kulwadee Sawangsri Executive Director VIETNAM Phuong Hang Dang Managing Director Xuan Quynh Nguyen Investment Manager GLOBAL CAPITAL MARKETS Yvonne Siew Executive Director INDUSTRIAL & LOGISTICS Dennis Yeo Managing Director PACIFIC AUSTRALIA Bruce Baker Senior Managing Director Mark Coster Senior Managing Director NEW ZEALAND Andrew Stringer National Director DEBT & STRUCTURED FINANCE Steven Lim Senior Director 2018 CBRE, INC. CBRE RESEARCH 24

25 For more information about this report, please contact: RESEARCH Henry Chin, Ph.D. Head of Research, Asia Pacific Leo Chung, CFA Capital Markets Specialist, Asia Pacific Karie Kwan Associate Director, Asia Pacific For more information regarding global research, please contact: Nick Axford, Ph.D. Global Head of Research Richard Barkham, Ph.D., MRICS Global Chief Economist Henry Chin, Ph.D. Head of Research, Asia Pacific Jos Tromp Head of Research, EMEA Spencer Levy Head of Research, Americas Follow CBRE CBRE RESEARCH This report was prepared by the CBRE Asia Pacific Research Team, which forms part of CBRE Research a network of preeminent researchers who collaborate to provide real estate market research and econometric forecasting to real estate. All materials presented in this report, unless specifically indicated otherwise, is under copyright and proprietary to CBRE. Information contained herein, including projections, has been obtained from materials and sources believed to be reliable at the date of publication. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. Readers are responsible for independently assessing the relevance, accuracy, completeness and currency of the information of this publication. This report is presented for information purposes only exclusively for CBRE clients and professionals, and is not to be used or considered as an offer or the solicitation of an offer to sell or buy or subscribe for securities or other financial instruments. All rights to the material are reserved and none of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party without prior express written permission of CBRE. Any unauthorized publication or redistribution of CBRE research reports is prohibited. CBRE will not be liable for any loss, damage, cost or expense incurred or arising by reason of any person using or relying on information in this publication. To learn more about CBRE Research, or to access additional research reports, please visit the Global Research Gateway at reports CBRE, CBRE, Inc. INC. CBRE RESEARCH 25

26 2018 CBRE, INC. CBRE RESEARCH 26