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Asia Pacific Commercial Real Estate Investment Nearly Halves in the First Half of 2016 to Settle at Global Financial Crisis Levels

Real Capital Analytics / August 11th, 2016

Singapore, August 10, 2016 – Commercial real estate investment in the Asia Pacific nearly halved from a year ago in the first half of 2016 (excluding development sites), led by falls in Australia, China and Japan, according to data by Real Capital Analytics (“RCA”). Analysis in its first-ever report focused on the region showed that retail properties were particularly affected as investors turned more risk averse amid heightened market uncertainty and aggressive pricing,

The RCA data show that some US$43.5 billion worth of income-producing real estate changed hands in the region in the first half of 2016 (“H1 ’16”), a decline of 39% year-on-year (“YoY”). Volumes fell across all income-producing property sectors in H1 ’16, with retail showing the sharpest decline of 61% YoY as shoppers tightened spending and on underlying economic challenges across the region.

Petra Blazkova, RCA’s Senior Director of Analytics for Asia Pacific, said: “Investor concerns over external market volatilities drove investment activity to new lows. Primary among these threats are concerns over slowing economic growth, uncertainty around interest rates and growing regional and global concerns about deflationary pressures. This was further exacerbated by a mismatch in expectations as owners continued to price assets at historic highs while potential investors baulked at the resulting compression of yields.”

Quarterly Transaction Volumes (in US$)


The start of the year was already showing signs of significant slowdown but the second quarter of 2016 (“Q2 ’16”) illustrated a new level of concern amongst investors. Most countries, in particular the largest markets, recorded lower investment volumes. All property sectors across the board had their quietest quarter in absolute terms since the Global Financial Crisis.

In Japan, the region’s largest real estate market, overall investment volumes reached JPY1.38 trillion in H1 ’16, a fall of 48% YoY in local currency terms. Japan experienced the largest shortfall compared with its long-term average for transaction volumes in H1 ’16, with record lows in yields across all major markets deterring investors. Next-ranked Australia suffered a fall of 57% YoY in transactions to AU$10.2 billion in H1 ’16. That said, the difference between average office yields in the country and 10-year Australian government bond has widened to close to 500 basis points (“bps”). This will make Australia real estate a key target for investors.

“The decline in Australian transaction volumes is a supply issue: While Australia remains very attractive to domestic and foreign investors, they find it hard to place capital in this market as the majority of prime stock is owned by well-capitalized domestic players with little incentive to sell “ Blazkova from RCA adds.

In South Korea, overall investment volumes reached KRW2.0 trillion in H1 ’16, a fall of 24% YoY. Amongst RCA’s top 20 transactions in H1 ’16, only two were completed in the country: the Jongno Tower office building sold to Keppel Land, advised by IGIS, for US$333.5 million; and the LimKwang Migeun Dong office building sold to NongHyup Life Insurance for US$263.5 million.

In China, the sentiment was mixed. On the one hand, half-yearly volumes – excluding development sites – declined by 50% YoY to RMB49.7 billion. Transactions were largely concentrated in China’s Tier 1 cities. In terms of deal count, Beijing, Guangzhou, Shanghai and Shenzhen cumulatively represented 65% of all commercial property transactions. These figures were counter-balanced by another burst of activity for development site sales, which were up 25% YOY in H1 ’16, reflecting developers’ confidence in the market.

Still, there were bright spots across the region and it was the smaller markets that shone. For example, Singapore, Hong Kong and Taiwan registered growing volumes in both U.S. dollar and local currency terms.

Singapore recorded the largest increase in investment volumes in H1 ’16 – a gain of 35% YoY.  In absolute numbers, overall investment volumes reached S$5.8 billion. It is too soon to determine if the recovery is widespread or driven purely by the sale of Asia Square Tower 1 to the Qatar Investment Authority in June – the largest transaction in the region in the first six months of this year.

In Hong Kong, overall investment volumes reached HK$53.0 billion in H1 ’16. A 17% YoY gain was driven by a very strong first quarter, RCA’s analysis showed. There were also several other notable office transactions, such as the US$1.61 billion sale of Mass Mutual Tower to Evergrande RE Group by Chinese Estates and the US$1.28 billion sale of Dah Sing Financial Centre to Everbright group by SEA Group.

Aside from smaller markets outperforming the giants of the region, another positive trend in Asia Pacific was the continued globalization of its real estate markets. Despite the overall reduction in transaction volumes, cross-border activity continued to grow and accounted for almost 33% of total volume for the 12 months ending Q2 ‘16, which was the highest since the last peak in Q2 ‘08.

At the same time, Asian capital has been targeting real estate in Europe and North America with a growing significance for eight consecutive years. While capital export in 2016 so far has not been as robust, Asian capital outflows reached US$18.3 billion in H1 ‘16, which is still 75% above the 10-year average. Asian investors continued to look overseas for better returns than were available in their home markets, motivated by capital preservation, strategic diversification and also to capitalize on market cycles globally.

Blazkova from RCA said: “Looking ahead, there is more to come out of Asia. Regardless of their reasons for investing internationally, the marketplace is to become more competitive as new investors appear on the global stage looking for their first allocation. Amongst these are Japanese pension funds, Chinese insurance companies, Asian sovereign wealth funds and Australian superannuation funds.”

The Asia Pacific Capital Trends report also revealed:

  • The single largest property sale in H1 ’16 was the US$2.45 billion sale of Asia Square Tower 1 to the Qatar Investment Authority by BlackRock.
  • The largest portfolio sale during the period was Evergrande GE Group’s purchase from CC Land Holdings at US$840.7 million.
  • In Tokyo’s five central wards, top quartile office yields have compressed by 90 bps since Q3 ’12 while bottom quartile yields have compressed by 177 bps, causing the narrowest gap of 35 bps in pricing. This compression indicates lower quality stock and smaller assets are seeing competition from investors, along with prime office assets.
  • Tokyo, Hong Kong, Singapore, Sydney and Shanghai ranked as the top five markets for investment H1 ‘16, according to RCA market rankings.
  • Xian in China was the fastest climber in RCA’s city rankings, moving from 71st place last year to 24th in H1 ‘16 following a 143% YoY increase in total real estate investment, to US$232 million.