Change is in the air in the commercial real estate market of the region. The Emerging Trends in Real Estate® Asia Pacific 2018 report highlights the continued existence of excess liquidity in the region, with competition to buy prime assets in major Asian markets reaching “unprecedented levels.”

Vietnam’s Ho Chi Minh City in particular is singled out as a developing market. Colin Galloway—an Urban Land Institute consultant and the report’s principal author who spoke at an event in Hong Kong—even went as far as describing it as “the next China” in terms of interest and potential. The city clinches the top spot in all recommendations to buy: office, residential, retail, industrial, and hotel. Making the decision to invest in the city is not the hard part; finding assets to buy is. Despite the large amount of interest, there are still only small amounts of investable stock.

Singapore, which was ranked 21st in the previous City Investment Prospects list, has made a remarkable bounce back to third place this year. Following two years of declining rent amid a sluggish economy and a glut of supply, investors believe that the bottom is in sight, and that things will soon look up.

Tokyo also is given honorable mention in the Emerging Trends survey, where a healthy spread between current cap rates and Japan’s extremely low sovereign bond prices have turned it into an attractive spot for yield investors.

With an abundance of capital pouring into the region, the report points out that life is being made “increasingly difficult for anyone looking to invest in Asian real estate.” This challenge has led to changes in investor behavior: while some core buyers are migrating up the risk curve in search of yield, others are moving down the risk curve as they make conservative investments that will generate lower core proceeds.

Opportunistic investors are now being forced to tamper their return expectations, but both core and opportunistic investors are turning their attention toward value-add properties. This comes at a good time, since more and more buildings in Asia are in need of refurbishment and repositioning, creating opportunity for investors with capital.

There are more shifts: alternative asset classes, once overlooked or dismissed, are now moving into the spotlight. Competition is thinner among these unconventional options and the yields are higher.

“There are more investors nowadays who are willing to look at niche asset classes than in the past,” said Galloway.

Data centers, for example, are gaining favor. “Right now, we’re about to build one of Hong Kong’s largest data centers, basically from the ground up,” said Hong Kong panelist James Wong, executive director of Hon Kwok Land Investment Co. Ltd. in Hong Kong. “Our rental, to give you a taste of what it’s like: a warehouse when we bought it at breakeven was $15 a square foot; by the time we finish if we build a warehouse today, probably $20 a square foot. If we do a data center, it’s probably $280 a square foot.”

Affordable housing and multifamily housing also are on the ascendant—it’s a sector that appeals to institutional investors, but a viable business model is still being sought. Apart from Japan, Asian markets have little history of build-to-rent as an asset class.

Similarly, student housing and senior housing are increasingly becoming options for investors to consider. Student housing, in particular, has been booming in Australia, while senior housing is set to become a big deal in the Asian context, where populations are aging rapidly.

Coworking operators are now the biggest source of demand for new office space in many major Asian cities. This new trend has been met with some reluctance from investors and landlords, though. “I’ll tell you why developers are very, let’s say, diffident about dealing with coworking spaces. One of my leasing guys told me, ‘James, you realize these are a bunch of kids who are going to take over these spaces, these are not grown-ups, these are kids! So if the company that’s doing the coworking fails to pay the rent, you shut them out, these kids are going to form a picket line in front of our building!’” Wong joked.

He added: “I think the main reason, though, is not the picket line, but the fact that the hurdle, the barrier of entry for coworking is so low—anybody can call themselves coworking—as a landlord, you’ve got to have to go through double the kinds of checks.”

“We’re seeing a lot of morphing of the classic cowork model, and I think we work as a classic example of this, where it’s gone from renting to individuals who are startup founders which have one, three, five people, actually to renting to corporates,” said Hong Kong panelist Lawrence Morgan, chief executive officer of Nest/Metta.

Top trends identified by the report include the following:

  • Traditional risk/return classifications are breaking down in the Asia Pacific region.
  • Many opportunistic investors are now revising their return expectations downward.
  • Investors are converging in the value-add space, looking to make money from working their assets rather than via leverage or rental growth.
  • Investors are migrating into different markets and asset classes. Fund managers are now willing to look at data centers, affordable housing projects, build-to-rent facilities, as well as student and senior housing.

The top ten markets are as follows:

  1. Sydney, Australia;
  2. Melbourne, Australia;
  3. Singapore;
  4. Shanghai, China;
  5. Ho Chi Minh City, Vietnam;
  6. Shenzhen, China;
  7. Tokyo, Japan;
  8. Guangzhou, China;
  9. Auckland, New Zealand; and
  10. Osaka, Japan.