While the Asia Pacific region has been somewhat insulated from the inflationary damage inflicted on economies in Europe and North America, the immediate outlook is gloomy, said leading global investors at the 2022 ULI Asia Pacific Summit; real estate owners need to protect their assets in the short term and focus on longer-term trends.
“It is going to get worse before it gets better,” said Rachel Lord, senior managing director and head of Asia Pacific at Blackrock. Peter Ballon, global head of real estate at CPP Investments and ULI global chair, added: “These are very unpredictable times, and when you’re investing in illiquid assets, that makes it even more complicated.
“But this is where investors will differentiate themselves. This is the time to figure out how to make investments. In the last few years in real estate, everything seemed to be going up. Well, now things are changing. And now it’s time for investors to figure it out.”
George Hongchoy, executive director and chief executive officer at Link Asset Management, which manages Asia’s largest real estate investment trust, said these were times for real estate investors to focus on their portfolio and prepare for future upside.
Link REIT is substantially invested in retail in Hong Kong and China; Hongchoy said the outlook for both was gloomy. Hong Kong is oversupplied with new retail malls, while in China he expects retail spending to be subdued, even in the absence of COVID restrictions: “People are tired, people are worried about their jobs. The economy’s not good. I think retail spending in China will be subdued. If you read some of the media coverage, people are now selling their luxury goods to try and get cash in their pocket. It’s very worrisome.”
Turning to China more generally, Lord noted that the inability of overseas investors to travel there was perhaps a more important factor than the current state of relations between China and Western nations. “You have to be able to travel there. You have to be able to see for yourself what is happening in all the cities, you have to experience what is going on in factories, and what’s really happening in the real estate developments.
“If the COVID situation improves and the border is open again and the economy starts coming back to life; I think that’s a different story. We have to see open borders, a more vibrant economy before you will have materially many people investing in China going forward.”
Ballon was bullish about the long-term prospects of the market. “We know that China will be a very large, attractive market to invest in. Current circumstances are not conducive to active investments but we are looking beyond that. We will see opportunities in China undoubtedly open up. If other foreign capital doesn’t come back, that would be just fabulous. We prefer less competition.”
He was also optimistic about Asia real estate’s focus on ESG matters while conceding the region was “lagging behind”. Ballon said this was due to ESG being a less pressing issue in Asia, compared with the U.S. and Europe. He also pointed out that, while Europe was focused on the environmental aspects, the U.S. was more concerned about social, reflecting different priorities for different nations—not that any view was necessarily wrong.
Lord pointed out that it was not the job of companies to tell consumers what to care about, saying, “There needs to be more clarity around the benefit that consumers, society, government, bondholders, shareholders, from companies being more at the forefront of the sustainable transition to net zero.
“We need more data, we need more science, we need more discussion. Transparency, openness and better data will help us make progress.”
Nonetheless, Asia needs to do more, Hongchoy said. “Government also needs to provide more leadership. In a lot of countries in in Asia the government is thinking about development, rather than how we develop on a sustainable basis. However we will regret it very soon if we keep doing it this way.”
Changing work patterns catalyzed by the pandemic led to some commentators predicting the death of the office, however the panel was optimistic that office real estate has a solid future in the hybrid working future. Lord said: “Flexibility is good, it benefits more women in the workplace for example, but there has to be a recognition that there is a lot lost by too much remote by too much dialing in from home.
“There needs to be a kind of a core location for staff to get together, which is obviously good for office investors. Depending on the type of work, that getting together might be three or four days a week, or one day a week.”
She mentioned that her personal experience showed that flipping from working at home to working from the office without planning caused productivity to fall, suggesting this organization would be important for companies going forward and that tools to help them do it would be good investments.
Ballon said business had not been able to quantify “the cost of not being together”, saying he regretted his virtual presence at the summit, as it meant he could not participate in conversations which occurred after the content sessions.
The panel concluded with some advice from the three panelists about what approach to take during the difficult economy. Hongchoy was blunt: “Think long term, but try to survive in the short term.”
“Don’t get distracted by the short-term headaches that we have over the next 18 months,” said Lord. “Remember that investing is for the long term. Think through the noise of what is happening right now, protect yourself and protect your portfolios through this period, but you’ve got to focus on those long-term themes, such as China or the transition to net zero.”
Ballon argued: “In these confusing time periods one can make the best investments. It’s when there’s no consensus on how to make money. The last few years, everyone’s been rushing to industrial and logistics, and everyone’s been fleeing retail. People have overplayed that. And so I think what has to be done in an environment like this is to chart your own path.”