A Valuation Perspective On Asia Pacific Investor Intentions

By Tom Edwards & Danny Mohr in collaboration with Dr. Henry Chin

CBRE’s 2021 Asia Pacific Investor Intentions Survey published earlier this month contained a wealth of insight into commercial real estate buyers’ objectives for the coming year.

The annual survey – which polled more than 490 Asia Pacific-based investors in November and December 2020 – is a closely watched gauge of purchasing intentions and as such is keenly anticipated by the investment community along with service providers, including CBRE’s very own Valuation team.

Reflecting a broad-based improvement in market sentiment in recent months, the survey found that 60% of investors in Asia Pacific intend to purchase more real estate this year, the highest level since 2016.

Figure 1: Purchasing activity compared with previous years

Source: Asia Pacific Investor Intentions Survey 2021, CBRE Research, January 2021

In addition to pent-up demand, purchasing this year will be underpinned by a range of factors including the prolonged low interest rate environment, yield compression in several markets and improved asset availability.

There is also a substantial volume of core capital looking for a home, some of which is moving up the risk curve in search of build to core.

While these factors are set to be broadly supportive of property values in 2021, several nuances and dynamics are at play in individual sectors.

With the pandemic boosting demand for logistics property over the course of 2020, the sector was named the most popular for investment in this year’s survey, the first time it has claimed top spot.

Robust demand for this asset class is also reflected in investors’ pricing expectations: 23% of investors, mainly long-term institutional buyers, stated they were willing to bid above asking prices, indicating room for further logistics yield compression over the course of this year.

While the rise in logistics development will bring newer, smarter and tech-enabled facilities to market, this will naturally result in the increased obsolescence of older properties.

Figure 2: Preferred sector for investment

Source: Asia Pacific Investor Intentions Survey 2021, CBRE Research, January 2021

Although the survey noted weaker interest in offices this year, it nevertheless found that investors retain an optimistic view towards this sector, expecting a contraction in office purchasing activity of no more than 10% over the next three years.

As the quantum of investment ready to be deployed into real estate is too substantial to be satisfied by asset classes with a smaller market size, such as logistics, much of this capital will find its way into offices.

Core properties with long-dated leases to quality tenants and strong, durable investment-grade income will be keenly sought after, with such assets commanding prices at or above valuation.

While demand for retail remains weak, with few investors considering this sector, investors should prepare for the sector to self-level as the pandemic is contained, social distancing regulations are eased, and travel restrictions are loosened.

Among alternatives, data centres received stronger interest this year as a surge in demand for platforms to support remote working and e-commerce led to increased requirements for data storage.

However, factors such as high capital expenditure and the multiple albeit often complex entry routes into the sector continue to pose challenges for investors looking to ascertain income risk and the length of time required to ramp up.

Cold storage, which saw substantially increased demand over the course of 2020, remains keenly sought after but much of the stock in Asia Pacific is dated. New properties are attractive but amortising costly fitouts could alter views towards current tight yields.

Finally, the survey noted a rising number of investors including Environmental, Social, and Corporate Governance (ESG) criteria in their investments, a trend increasingly being driven by regulatory and tenant requirements.

As CBRE’s Valuation and Research teams observed in a recent report, this will inevitably lead to stronger demand for properties with sustainability and wellness features and may ultimately drive tenants to pay high rents and result in elevated property values.[1] Investors will need to incorporate such features into their buildings to maintain the rent profiles they are underwriting.

Figure 3: To what extent do you plan to adopt ESG criteria into your investment strategy?

 Source: Asia Pacific Investor Intentions Survey 2021, CBRE Research, January 2021

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To get in touch with our team, please contact Tom Edwards or Danny Mohr.

[1] Building a Smart Future: Identifying, Understanding and Leveraging Property Valuation Disruptors, CBRE Research, November 2020.