Real Capital Analytics / August 11th, 2021
Singapore, August 11, 2021 – The recovery in Asia Pacific’s real estate investment market continued with steady sales growth in almost all major markets in the second quarter of 2021, with volumes increasing year-on-year for a third consecutive quarter, the latest Asia Pacific Capital Trends report from Real Capital Analytics showed. This was the quickest pace of growth seen since the middle of 2019.
Investment activity across the Asia Pacific region hit US$40.3 billion in the second quarter, an 11% increase compared to the same period last year. For the first half of 2021, activity climbed to US$77.6 billion, up 8% on the same period in 2020.
Sales in the second quarter surged ahead in all top 10 markets except Japan, which saw a 47% year-on-year decline to US$5.5 billion. China was the region’s biggest market in Q2 2021 with a deal flow of US$12.4 billion, a 6% year-on-year increase, while its half year activity registered a transaction volume of US$22.1 billion, a 9% increase compared with 2020. The Australian market, which moved up to the second most-invested market in Asia Pacific during the second quarter, recorded deal flow worth US$8.1 billion, a 45% jump on equivalent volumes in 2020.
Industrial sales reached a new quarterly record and the retail sector staged a comeback, while the decline in investor sentiment around offices continued. Cross-border investors accounted for one-third of all investments in the second quarter; Investors from within the Asia Pacific region spent more in the region than their U.S. and European counterparts for the first time since Q2 2019. The largest deal closed within the quarter was GIC and ESR’s joint acquisition of the Milestone Industrial Portfolio from Blackstone in Australia for US$3 billion. Among the capital groups, investment by REITs totaled nearly US$9 billion, led by those from Australia, Singapore, Hong Kong, and South Korea. Insurance companies closed a record US$6.1 billion worth of deals in the first half of 2021.
David Green-Morgan, RCA’s Managing Director for Asia Pacific, said: “The recovery in Asia Pacific’s real estate investment market extended to nearly all the major countries, except for Japan. While the magnitude of transaction volume growth may seem modest, it is worth remembering that activity did not plummet in the Asia Pacific region, as seen elsewhere in the world in 2020. One of the main themes we are seeing is the rise of China as the biggest investment market in the region, at the expense of Japan. It is not so much about Japan falling back – it remains one of the biggest and most resilient real estate markets globally – but China’s seemingly unstoppable growth trajectory. China’s emergence at the summit of the most-invested markets in the region has quickly become the norm.”
Industrials Deal Flow Surges While Retail Renaissance Catches Attention
The industrial sector surged in the second quarter to US$13.4 billion, an 82% jump on the same period last year, narrowly behind office sales. This was only the third time the US$10 billion threshold was surpassed for industrial transactions during a quarter. Volumes grew substantially across each of the major Asia Pacific markets, notably in Hong Kong and Singapore, which has supported a steady rise in pricing. Average yields across major markets have fallen between 75 and 100 basis points over the past 12 to18 months, to levels in line with offices.
The retail sector continued its renaissance in certain markets. Deal flow almost doubled in the quarter to US$9.8 billion, with a concentration of shopping center transactions. Brookfield’s US$1.4 billion purchase of a portfolio of five malls in China from a joint venture between the Abu Dhabi Investment Authority (ADIA) and Macquarie Group was also the largest retail deal in H1 2021. However, deal volumes only exceeded pre-pandemic levels in Australia, China and South Korea.
Investment in the office sector was US$13.6 billion in Q2 2021, fractionally ahead of industrial deal flow but 16% below the same quarter last year. Sales of offices were US$30.1 billion in the first half, down 12% compared to H1 2020, and 40% below the same period in 2019. CBD office pricing was broadly stable at the regional level, but widening pricing emerged between the top and bottom quartile assets – a proxy for prime and secondary properties, respectively. This trend was evident in Seoul, Sydney and Tokyo. However, in Singapore, the reverse occurred with the gap narrowing, indicating that investor demand for office properties was well distributed throughout the broader office market.
Elsewhere, second quarter hotel volumes across the region were US$1.9 billion. While this was 13% down on the same period last year, the pipeline of hotel deals has grown to reach almost US$4 billion, as investors bet on a post-pandemic tourism sector bounce. Sales of apartments were US$1.3 billion, a 77% drop-off compared to Q2 2020, when Blackstone completed a multibillion-dollar multifamily deal in Japan.
China Retains Status as Largest Asia Pacific Market in First Half of 2021
China first rose to become the largest Asia Pacific market in 2020 and continued to outperform Japan in the first half of 2021. After a blip in the first quarter of last year, investment in commercial real estate has marched on, reaching a near-record level in H1 2021. The acceleration in China’s investment sales was partly due to Beijing’s “three red lines” policy, which has triggered a cascade of asset sales. And there has been no shortage of demand for Chinese real estate from both domestic and cross-border investors.
David Green-Morgan, RCA’s Managing Director for Asia Pacific, said: “While the two markets have been in close contention since 2016, the gap between China and Japan has really opened up this year. Part of this has been a more recent surge in investment in the other Tier 1 cities of Beijing, Guangzhou and Shenzhen, joining Shanghai as regulars within the top ten most invested cities in the region. Should momentum from this first half continue, China’s position as the most-invested market could well extend to the full calendar year.”
Japan Slips to Third in Country Market Rankings; Tokyo Keeps Top City Spot
Japan slipped to third-most active market in the second quarter, but Tokyo remained the most-invested city throughout Asia Pacific, despite a 32% year-over-year decline in investment volume to US$8.7 billion. The city’s enduring dominance has been cemented by strong investor interest in its multi-family market, which performed the best of all the property sectors in the first half. Both domestic and cross border investors have maintained a strong presence in the market, resulting in apartment yields continuing to trend downwards even as those in other cities have been stable or inching upwards.
Investor Demand for South Korean CBD Offices Supports Double-Digit Volume Growth
After a record year in 2020, South Korea’s commercial real estate market extended that streak well into 2021. Second quarter volume alone rose 36% year-over-year from last year’s trough, but South Korea was also one of the few markets where first half deal volume surpassed pre-pandemic levels. Institutional appetite for prime offices in Seoul has surged during the pandemic era, pushing average office prices up sharply since the end of 2019. Price per pyeong grew by almost 40% in the Gangnam district and 47% in the traditional CBD. In contrast, appetite outside the CBD was more tepid, with volumes down almost two-thirds year-on-year.
Benjamin Chow, RCA’s Head of Analytics for Asia, said: “Seoul’s extraordinary commercial pricing trajectory has been one of the biggest stories of this recovery. Of all the gateway cities in the world, it is now the one with the fastest commercial property price growth, at over 20% throughout the past 12 months. While much of this has been due to a rapid rise in office pricing, we are also beginning to see a two-tier market develop within the office sector. Investors have chased after a small pool of prime assets, leaving the broader market standing on the sidelines. It remains to be seen how much longer these lofty levels of growth can be sustained, but for the moment office prices on a per square foot basis remain well below the levels of other global cities.”
Singapore Posts Strong First Half of 2021
Singapore investment activity almost doubled in the first half, up 97% on last year. While still some distance from 2019’s unusually high watermark, the US$4.7 billion worth of acquisitions recorded at the midpoint of this year was the third highest ever. More than half that total came from cross-border investors, putting Singapore at the top of the list of destinations of overseas investment for the first time ever. Most of that capital was directed towards the office and industrial sectors, but Singapore also closed a rare apartment deal: Taiwan’s Tsai family acquired the upmarket Eden residential scheme for US$220.2 million from Hong Kong developer Swire Properties.
David Green-Morgan, RCA’s Managing Director for Asia Pacific, said: “Office volumes in Singapore – one of the most volatile sector-markets in the region – has picked up this year with price increases across the board. But Singapore’s office price growth stands out from the rest of the region for another reason – it’s not just prime offices that are benefitting from this boom. Strong cross-border interest has spilled over into the secondary office market as well, with record levels achieved in the second quarter. The sale of Robinson Point, a grade B office building, at S$3,800 per sq ft, set a new standard for an entire office block.”
Hong Kong’s Recovery Underway but Lags Pre-Pandemic Deal Flow
Hong Kong investment activity recovered well in the second quarter. Volumes were US$2.7 billion, up 79% on the same quarter in 2020. Half year volumes reached US$4.3 billion, 62% above the same period last year but still substantially below the city’s pre-pandemic level. One bright spot was the industrial sector, where volumes totaled US$1.5 billion in Q2 2021, the highest ever tally for a single quarter.
Benjamin Chow, RCA’s Head of Analytics for Asia, said: “Hong Kong’s office and retail price declines have finally bottomed out, with retail yields even beginning to track back downwards in 2021. However, investors remain cautious about both these sectors, diverting their attention to the industrial sector instead. Since the pandemic began, virtually all the overseas money flowing into Hong Kong this year has gone to industrial properties, in comparison with Hong Kong’s golden era where less than 10% of capital deployed went into that sector.”
India and Taiwan Extend Red-Hot Transaction Volume Streaks
India and Taiwan, which had banner years in 2020, extended their red-hot streaks in the second quarter. Investments in India reached US$1.1 billion in the second quarter, a near five-fold increase on the same quarter in 2020. Sales in Taiwan reached US$1.0 billion, up 103% on the same quarter last year, while its half year volume of US$2.4 billion set a new high for the market.
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