The final day of the 2024 ULI Asia Pacific summit in Tokyo featured a capital markets panel with leaders from both European and North American funds, who shared their insights into the region’s real estate markets—and how those markets stack up against their global counterparts.
Taking a high-level perspective, the panel’s consensus was that liquidity overall remains tight, even as regional economic growth continues to give an edge to the Asia Pacific. The panel agreed that, for the most part, potential rebounds were still off the table.
According to Scott Kim, CEO of PIMCO Prime Real Estate Asia Pacific: “It’s probably about 12 to 18 months before we see a bottom, depending on which market you’re talking about. That’s especially the case for greater China—we still haven’t seen [distress selling]—so seeing some opportunities [appear] there will probably be a sign.”
Investor perceptions of Chinese markets continue to be negative, said moderator Stuart Crow of JLL. He noted that “very few” deals were happening, and many funds were taking China off their investment mandates, at least for “fundraising purposes.” But prospects in other jurisdictions could be more favorable, Crow added. Japan, for example, continues to see significant capital inflows from global funds. Drawn by the low cost of capital and easy access to leverage, funds are still able to underwrite strongly positive net returns.
In terms of sector allocations, both office and retail assets were deemed to be largely out of favor for now, with investors gravitating instead toward alternative themes that stimulate consumer demand—especially multifamily affordable housing, data centers, student housing, senior living, and hotels.
Real estate debt has recently emerged as another investment option in the Asia Pacific market, with an increasing number of such deals, particularly in Australia.
According to Hong Kong-based Patrick Kanters, CIO Private Investments at APG Asset Management: “The thinking is to get pretty much equal returns at a lower risk profile. At certain points of the cycle, it’s extremely attractive to add the same people running the equity, because it takes a similar type of underwriting, a similar network, and a similar understanding of the market. So it’s always been a nice risk-adjusted return provider, albeit for the overall [portfolio] it’s limited to around five percent.”
ESG may be relatively new as an investment theme, but it’s become an indispensable consideration in any major deal. Environmental factors are particularly important for institutional investors from Europe, and both panelists representing European funds said they supported the inclusion of ESG in decision making.
As APG’s Patrick Kanter observed, climate transition has today become a key risk factor: “We now have harmonized models embedded into our valuations. In the early days, we would just see if a company would score high on GRESB, but today we are focused on the assets themselves. We compare where the asset is in terms of greenhouse gas emissions and energy intensity to the Paris Agreement pathways. In that way, we see how much additional [capital expenditure] is needed once the asset is stranded. Even though many valuers might not take this into account yet, we do apply it, and not just for climate transition risk—physical climate risk is now also fully embedded in our models.”
