Real Capital Analytics / May 10th, 2021
Singapore, May 10, 2021 – The recovery in Asia Pacific commercial real estate investment activity gained pace across multiple markets in the first quarter of 2021, the latest Asia Pacific Capital Trends report from Real Capital Analytics showed. This follows from the final quarter of 2020 that proved to be a record quarter for many markets in the region.
For Q1 2021, investment activity across the major income-producing property types slipped just 12% year-over-year to US$29.6 billion, with five of the largest eight commercial real estate markets posting higher levels of deal volume versus the first quarter of 2020.
China overtook Japan to emerge as the most active commercial property market in the quarter, registering transaction volume of US$8.0 billion, a 4% increase compared with the same period last year. Hong Kong and Taiwan showed substantial double-digit increases, while activity in Singapore jumped by 200%. Japan was the largest drag on overall investment volume in the Asia Pacific region, with deal volume falling back to US$6.9 billion. South Korea deal-making also ticked down, after the country recorded record levels of annual activity in 2020.
David Green-Morgan, RCA’s Managing Director for Asia Pacific, said: “Commercial property sales in the first quarter are evidence of a recovery gaining ground across the Asia Pacific region. China emerged as the most active market, while momentum rebuilds in Hong Kong, Taiwan, and Singapore. While Japan was the weakest link, this masks the resilient performance in Tokyo, which saw robust cross-border investor appetite.”
Retail Comeback Continues With Deal Flow at Pre-Pandemic Levels
Retail investment activity continued its comeback in the first quarter. Sales inched up to US$5.7 billion, a 2% increase compared to last year, and represented the second consecutive quarter where investment levels kept pace with pre-pandemic levels. The retail recovery coincides with pricing falls across several major markets, driven by retailers rationalizing their occupancies throughout the last 12 months. At the same time, the strong pandemic recovery in some of the major Asia Pacific markets has allowed normal retailer trading operations to resume, drawing investor attention. For example, shopping mall deal activity has surged by more than 80%, compared to the first quarter of last year.
Office deals were down to US$13.9 billion, an 18% year-over-year fall, while the industrial sector recorded the largest increase in quarterly deals, up to US$7.3 billion, a 5% increase compared to last year. In contrast to the retail sector, office pricing has not softened as much, which may explain the lackluster quarterly deal flow. In China and Singapore, office price declines have been marginal, compared with the falls in the prices of local office REITs, while in Japan, prices only started to ebb towards the end of last year. By contrast, in South Korea and Australia, office prices have continued to rise.
The hotel sector remains the weakest sector. Volume has more than halved over the past 12 months as the number of deals has dried up. Since the beginning of 2020, around US$1.5 billion worth of hotel deals have fallen through, RCA data shows. In particular, deals in the South Pacific and Southeast Asia have almost completely evaporated. The hotel sector recorded US$1.6 billion in the first quarter, representing a 36% decline compared with the same quarter last year. Elsewhere, deal flow in the apartments sector fell 30% year-over-year to US$1.1 billion.
Sustained Domestic Investment is Central to China’s Market Resilience
China emerged as the most resilient market during the Covid period. The market’s outperformance can be attributed to strong domestic investment supported by robust economic growth. Deal volume was distributed amongst Tier 1 and 2 Chinese cities. Notably, liquidity in Beijing increased throughout the pandemic, while Shenzhen and Suzhou both notched record volumes for a first quarter.
Benjamin Chow, RCA’s Head of Analytics for Asia, said: “Continuity in China’s deal momentum throughout last year owes much to the responsiveness of commercial pricing. Office price growth lost steam once the pandemic took hold, while retail pricing continued to soften throughout the past year. These price retracements across the major sectors helped to support domestic investor appetite, which has helped to maintain deal flow over the Covid period.”
Japan’s Underperformance Masks Resilience in Tokyo’s Offices, Logistics and Apartments
Japan’s pullback in quarterly commercial property sales appeared significant, falling 46% year-over-year. However, transaction volume in the first quarter of 2020 had been substantial, as activity then was relatively unaffected by the pandemic. This makes the year-over-year comparison seem stark.
Tokyo remained the clear number one Asia Pacific metro for deal volumes in the quarter, with commercial property sales at US$3.9 billion. Japan’s capital remains a preferred location in Asia Pacific among cross-border investors, where offices, industrial and multifamily assets are favored. Tokyo registered the largest deal throughout the Asia Pacific region in the quarter, when BentallGreenOak bought the headquarters of Japanese entertainment conglomerate Avex for US$674.9 million.
David Green-Morgan, RCA’s Managing Director for Asia Pacific, said: “Logistics and apartment cap rates in Japan have seen accelerated compression over the past year to record lows, while strong cross-border investor appetite for offices has supported and stabilized pricing.”
South Korea Investment Dips Slightly After Record 2020, Prices Climb
Investment activity in South Korea fell, in line with the broader Asia Pacific region. Deals dropped to US$4.8 billion, a 13% year-over-year fall. In 2020, South Korea had achieved a new high-water mark for annual investment volume.
Seoul recorded the second-highest investment volume among Asia Pacific metros in the first quarter with US$2.1 billion in deals.
Benjamin Chow, RCA’s Head of Analytics for Asia, said: “It was always going to be difficult for South Korea to match last year’s record levels of activity. But the pullback in sales was relatively modest considering commercial property prices have continued to climb over the past year. Office price growth in South Korea was the strongest across all the major markets, while industrial yields have continued to fall in 2021.”
Singapore Sales Activity Roars Back from Low Base
Sales of commercial property in Singapore recovered sharply in the first quarter. After a torrid 2020, investment activity soared 200% to US$1.5 billion. Singapore was the third biggest recipient of cross border investment in the region, behind Sydney and Tokyo. Allianz and NPS teamed up to acquire OUE Bayfront from OUE Commercial REIT for US$476.4 million, while Blackstone, AEW, and PGIM have all been active so far this year.
Benjamin Chow, RCA’s Head of Analytics for Asia, said: “After standing on the sidelines of the logistics boom in 2020, industrial properties in Singapore have staged a comeback this year. Institutional investors have also been taking advantage of falling office prices, now back at 2017 levels, to secure a foothold in the Singapore CBD.”
Hong Kong Shows Signs of Recovery as Office Deal Volumes Double
Hong Kong investment activity is starting to show signs of recovery after a slide in deal activity and prices caused by political unrest and Covid-19 challenges. Sales of commercial property rose to US$1.4 billion, a 28% increase compared with the same quarter last year. Office deal volumes more than doubled in the first quarter, compared to the same period last year.
Benjamin Chow, RCA’s Head of Analytics for Asia, said: “While Hong Kong appears to be firmly in recovery mode, the trajectory of the recovery has been very gradual. Investment activity remains well below levels in 2016-18, but there have been some bright spots in terms of pricing. Yields of CBD shops have dipped once again, while office pricing in Kowloon has also bottomed out.”
Taiwan Storms Into 2021 After Record-Breaking 2020
Taiwan’s surge in investment activity continued. It started off 2021 with the strongest growth among APAC’s big eight commercial real estate markets, gaining 60% from a year prior to reach US$1.3 billion in income-producing commercial property sales. The largest transaction in the quarter was the US$330.6 million sale of the China Development Industrial Bank Building.
Benjamin Chow, RCA’s Head of Analytics for Asia, said: “Over the past year, Taiwan has been one of a small handful of markets in the world that has kept a tight lid on Covid-19 and avoided a second wave. The commercial real estate market has continued to power on, driven almost exclusively by domestic companies on expansion mode alongside strong GDP growth in Q1. All signs point to yet another strong year for investment volumes.”
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Lee Jing Hong
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Ong Chor Hao
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