Investors embracing riskier real estate to improve returns | Alternatives
Rising prices and falling returns on quality real estate around the world are forcing Asian investors to move up the risk curve and become more imaginative about where to find value.
Increasingly, they are turning to retail and logistics assets, taking on distressed properties, and willing to take responsibility for remediation to increase their investment returns.
Discounts on some retail properties after a year of reduced business, thanks to Covid-19, have attracted some asset owners in the area. Troy Rieck, LGIA Super’s chief investment officer in Brisbane, noted that some of his fund’s retail assets were down between 15% and 25%. Even so, he has no plans to sell.
Troy Rieck, LGIA Super
“Maybe at these prices we should buy,” he told AsianInvestor.
Asia Pacific retail sales grew 6% through March 31, according to real estate consultancy JLL. Rival CBRE predicts that direct investor flows into retail and hospitality assets in the Asia-Pacific region will increase 20% this year.
Rieck said he is also preparing to take advantage of high prices in logistics and related sectors to sell assets that the fund already owns. “We look into selling at the right price and are happy to split it elsewhere in the portfolio,” he said.
APG Asset Management, the investment arm of the Dutch pension fund APG, is similarly interested. In January, Graeme Torre, Managing Director of APG Asset Management, told AsianInvestor, “We are looking for a partner who can come up with a formula for reinventing retail when needed.”
The company has been expanding its Asian property allocation in recent years, as has its team, which now stands at 15. Torre added in January that APG was also looking for distressed hospitality opportunities in the area so that its hotel brands could launch at a better entry-level price.
DISTRESSED ASSET SEARCH
Real estate advisors and fund managers say there is increasing demand for opportunistic and distressed assets in general, with the proportion of investors who have inquired about such strategies in the past 18 months has increased from a tenth to one in four.
“Institutes are concerned about pricing. They see increased opportunities for higher risk such as opportunistic strategies, ”Joseph Lee, co-CEO and president of Igis Asset Management in Seoul, told AsianInvestor.
Igis Asset Management
He said he’s looking for “fixer-upper” projects like used buildings in prime locations in Seoul. His company intends to buy such properties with a 5.5% to 6% rental yield and then renovate it by converting the lower floors into retail and convenience stores before selling the building for a 4% yield that decreases with the price of property properties increases.
This would match the returns on such properties to the broader market for the Korean capital. Office returns in the Korean capital fell from 4.5% to 4% in the twelve months ended March 31, according to Real Capital Analytics.
“Korean domestic investors are moving up the risk curve,” agreed Henry Chin, research director for CBRE in the Asia-Pacific region.
He said investors have started turning away from Seoul’s three central business districts. Instead, they focus on technology business clusters in places like Phangyu in south Seoul, where sale-and-lease-back deals have become popular. CBRE declined to estimate what yields are available at such locations.
The willingness to take risks is growing far beyond Korea. According to CBRE’s January 2021 Asia-Pacific Investor Intentions Survey, the proportion of Asian investors looking for distressed or opportunistic opportunities is 29%, its highest level since 2016. This is part of a global trend. The real estate advisor’s 2021 Americas Investor Intentions Survey, published in April, found that the proportion of investors looking for the same assets in America is at the same level, an all-time high.
In addition, 72% of respondents said they were actively investing in one or more alternative sectors, up from 54% in 2020.
TARGET LEVEL 2
In China, too, investors want to be a little off the beaten track.
Kelvin Wong, head of the Chinese real estate division at Schroder Pamfleet in Hong Kong, said he is looking for higher-yielding office opportunities outside of Shanghai’s central office districts, which he believes are 5% to 10% overpriced. It has started to focus on business parks outside the city center, which are home to a mix of technology and media, life sciences and pharmaceutical companies.
They tend to be fairly safe tenants, and rents have increased slightly in the commercial estates. This contrasts with rental and sales ratings in Shanghai’s prime office locations, which fell 6% for the year ended March 31, according to JLL’s quarterly Office Overview report.
“Downsizing – with tenants in the financial sector giving up space – and oversupply has made it harder to identify opportunities,” Wong told AsianInvestor.
Rental yields in Shanghai’s prime office locations are now 5.5%, according to Tim Graham, head of capital strategies for the Asia-Pacific region at JLL in Singapore, while those on the outskirts of the city, where many business parks at TMT, Life Science – and pharmaceutical tenants are popular are around 5.7%.
Stuart Mercier, Brookfield
“Cost-conscious companies find their way to high-quality projects outside the CBD. This is only now happening in China as prices in the CBD have reached levels where businesses have been sold and new, high quality products are marginally meeting their needs, ”said Stuart Mercier, director of real estate for Asia at Brookfield Asset Management.
HONG KONG UPGRADES
Allan Lee, Head of Asia Ex-China Real Estate at Schroder Pamfleet, is pursuing a similar strategy in Hong Kong.
He told AsianInvestor it is focused on opportunities in the city’s logistics and retail sectors, targeting low-yield buildings that generate returns of around 3%. His fund will hold the assets and increase their returns by incrementally increasing them and increasing rents to increase their annual return over three to five years before eventually reselling the properties at a nearly 4% return.
Lee said he particularly wants to upgrade outdated warehouses to serve as cold stores or to set up state-of-the-art logistics facilities for e-commerce tenants. In retail projects, sublet, non-discretionary retail buildings are identified, renovated and new tenants sought in order to capitalize on people’s dependence on local convenience stores.
“The pandemic is here to stay; Consumer and business habits are changing, ”said Lee.
Logistics assets are sure to become increasingly popular with investors. At the beginning of 2018, the property subgroup’s average yield spread was 120 basis points (bp) wider than office assets in the Asia-Pacific region, according to CBRE. In the third quarter of 2020, however, this value had decreased to 90 basis points.
While logistics assets are generally in good demand, some fund managers are less convinced of the appeal of retail properties.
“We continue to actively explore new opportunities in resilient sectors such as logistics and housing, while we are more cautious on segments that have been hit harder by the pandemic, such as retail,” said Danny Phuan, head of Asia Pacific acquisitions at Allianz Real Estate, said AsianInvestor.