With investors across the Asia Pacific continuing to avoid mainstream asset classes as they seek out higher returns and more reliable income streams, attention has turned increasingly to “living assets”—a broadly defined concept that includes the multifamily, senior living, and student housing sectors.
Investors are beginning to migrate to projects involving development of affordable multifamily housing, an area that until recently drew next to no attention in the region. Now it’s starting to gain traction as higher interest rates, weak economies, and persistently high home prices make home ownership out of reach for many.
At the 2024 ULI Asia Pacific Summit in Tokyo, a panel of investors and developers from across the region explored the dynamics of the sector. While all panelists spoke of the vast potential of what remains an untapped market, they also noted various problems in trying to make headway as first movers.
Probably the most intractable issue is that rents in most Asian markets remain low relative to property values and therefore generate very thin yields (e.g., less than 3.5 percent in Tokyo). While many institutions are buying for the long term and are therefore willing to underwrite a degree of capital appreciation, this creates a significant overlay of risk.
According to Leonie Wilkinson, Sydney-based senior vice president of Brookfield Asia Pacific: “What we are mindful of is that it’s a new sector…. [O]ne of the challenges in Australia, because the sector doesn’t really exist yet, is that you’re taking development risk and then also have to operationalize [the asset], which in a new sector poses additional risks as well. So at this moment we’re not seeing the investment performance from the sub-sector in Australia that is acceptable to us.”
One way to address this is to recruit the aid of local governments to provide indirect financial support. According to Blake Olafsen, founding partner of Thailand-based home developer ACRE: “Something they can provide at a relatively low cost is either higher density or lower land price premium—density doesn’t really cost the government anything, it just gets regulation out of the way to allow private enterprise to build the product.”
Other ways governments can provide assistance is by offering preferential access to suitable sites, and facilitating availability of lower cost financing (or any financing at all).
Another issue that has historically acted as a drag on multifamily rental uptake in most regional markets is an ingrained cultural resistance to the idea of renting, as opposed to buying, a home. As Olafsen said: “There clearly is a cultural hesitancy, maybe not so much in Japan, but certainly in the rest of Asia, that if you don’t own your house, you’re a loser.”
That traditional resistance to renting, however, is beginning to fade, partly out of economic necessity, but also because people today are more mobile, and are expecting (or at least hoping) to work and live remotely—an ambition that a hefty mortgage would make problematic.
A further issue favoring the institutionalization of local residential sectors is that the quality of existing rental stock is often poor, and the private market landlords who generally own it are often unwilling or unable to upgrade it. According to Craig To, vice president of Shanghai-based co-living operator Vlinker: “The decentralized operators, probably just mom and pop owners, but professionally managed by a platform, offer living experiences that are not so great, because their properties often need repairing, they lack privacy, and they have no common areas suitable for young professionals or young tenants. And that creates opportunity for professional centralized institutional operators like us.”
Institutional owners are usually faster to respond to tenant requests and may be more cost-effective in doing so. In addition, they can throw in amenities such as gyms, social events, and food and beverage options that not only provide an edge over the competition, but also reduce the rate of tenant turnover, which is probably the biggest drag on project profits.
As a result, many major global investors are now making big bets on the long-term success of affordable housing in the Asia Pacific and are plowing funds into regional markets in an effort to gain first mover advantage.
