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Economy

Asia's investors are staying close to home

Brexit, uncertainty over U.S.-China relations keeps money in region

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Workers clean the windows of a building in Shanghai on March 21.   © Reuters

Asian investors have had a lot to take in over the past two weeks. First there was Article 50 to formally begin Brexit. Then a closely watched meeting between U.S. President Donald Trump and China's President Xi Jinping that saw the two countries agree to a 100-day plan for more trade talks.

Besides the strain of Brexit on Europe, elections later this year in France and Germany will further test the European Union. And despite the "tremendous progress" President Trump says he has made with China, the long-term relationship between the two superpowers remains uncertain.

Those of us in real estate can take some reassurance from the fact that market sentiment remains largely optimistic, even as analysts and investors hunt for value to guard against volatility. With returns on core and noncore assets in Asia Pacific improving, we're seeing more Asian investors looking to domestic and intraregional opportunities.

China's Asia ambitions

Chinese investors increased domestic real estate investment by 50%, funneling $29.1 billion into local assets last year -- mainly in Tier 1 cities Shanghai and Beijing, according to recent figures from JLL.

While China also invested a record $33 billion in property overseas in 2016, such a volume is unlikely to be sustained this year due to greater monitoring of Chinese capital outflows. This is coupled with news last month that new regulations are being introduced for overseas investment. The government has stated it will encourage investments deemed to bring "good social and economic benefits and conform to the Belt and Road Initiative."

We expect more capital to be diverted homewards or towards government-approved opportunities in Asia Pacific this year. The U.S.'s rejection of the Trans-Pacific Partnership is a boost for China to push the Regional Comprehensive Economic Partnership agreement and grow its influence here. China already doubled direct investment in six Southeast Asian nations, including Cambodia, Malaysia and Indonesia last year, according to estimates from Credit Suisse Group. On the real estate front, the country is now the top property investor in Malaysia, pouring in some $2.1 billion over the last three years. Alibaba Group Holding's intent to set up a logistics hub in Malaysia's Digital Free Trade Zone, near Kuala Lumpur International Airport, will further fuel Chinese interest and investment in the area.

Advantage South Korea and Japan

China is only part of the story. South Korea's domestic investment surged 75% to reach $12.4 billion last year. Investor appetite was mainly driven by corporate and institutional investors buying assets that offered attractive yields and long leases -- the office sector being the most attractive.

The political crisis surrounding President Park Geun-hye has also led to calls for increased scrutiny and reform of the country's "chaebols." Many of these family-owned conglomerates are divesting noncore assets and are offloading with leasebacks to improve their financial positions.

In Japan, low bond yields and a sluggish stock market have seen domestic investors armed with market knowledge and access to low interest rate financing to seek higher returns in real estate. Individual investors, in particular, flocked to domestic real estate investment trusts after the Bank of Japan adopted a negative interest rate policy last year.

Meanwhile, Asian investors are snapping up properties in Japan spurred by the upcoming Tokyo 2020 Olympics and ongoing tourist boom. Besides Tokyo, investors are looking at cities such as Osaka and Nagoya, which are currently seeing more construction and land being put up for sale to build apartments and hotels.

Safe haven Australia

Despite Japan's popularity, Australia remains the top real estate investment destination in the region. The country's transparency, substantial liquidity in buying and selling assets at stable prices, and healthy yield spreads all contribute to its appeal among Asian investors.

Chinese investors have been steadily increasing their exposure in Australia over the last few years -- their investment in real estate increasing tenfold since 2010. The South Koreans are making a strong play as well. They more than doubled their real estate investment last year, with high profile deals such as buying Woolworths headquarters in Sydney's northwestern suburb and the Louisa Lawson Building in Canberra. The signing of a memorandum of understanding by the Property Council of Australia and the Korea Association of Real Estate Investment Trusts is a sign that more capital could flow between the two countries.

Australia's continuing real estate boom highlights that Asian property investors will always seek safe markets -- and clear blue skies -- especially as the current global political climate appears somewhat cloudy for the foreseeable future.

Anthony Couse is the Asia Pacific CEO at JLL.

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