Investors offload foreign assets

Asian outbound commercial real estate investment fell 25 percent to US$19 billion in the first half of 2019, weighed down by the rebalancing of portfolios by Chinese investors as well as global economic uncertainties, the world’s leading property consultancy CBRE has reported.

Purchasing by Chinese mainland buyers, who have shifted to net sellers since the second half of 2018, continued to weaken, with just US$1.4 billion worth of transactions completed during the six-month period.

That was less than a third of what was registered a year earlier and the lowest half yearly total for several years, according to CBRE data. Between January and June, Chinese mainland investors, mainly conglomerates and insurance companies, continued to offload assets in key overseas markets including London, New York and Vancouver — albeit at significant profit.

This, along with existing capital controls, is likely to perpetuate the trend of net disposing by Chinese mainland investors.

Hong Kong-based capital, meanwhile, declined for the fourth consecutive half yearly period to US$2.6 billion in the first six months of this year, though demand for prime assets in Sydney, Melbourne and London continued to be strong, CBRE analysis showed.

“Purchasing will be led by a limited group of investors including sovereign wealth funds such as China Investment Corporation and the State Administration of Foreign Exchange, and corporates acquiring assets for self-use, particularly in markets participating in the Belt and Road Initiative,” noted Alan Li, president of CBRE China.

“Overseas-listed companies whose primary business is real estate, such as Chinese mainland developers listed in Hong Kong, will also be active in investing capital overseas. Their focus has recently shifted toward smaller stabilized assets and commercial development opportunities with their partners.”

Asian outbound flow momentum, however, is being spurred by new sources of capital looking for diversification, a low interest-rate environment, historically low yields and new destinations gaining popularity, CBRE’s biannual analysis has found.

Notably, South Korean investors contributed the largest portion of outbound flows in the first half of 2019. Led by large pension funds, sovereign wealth funds and, more recently, asset management and securities companies, South Korean investors doubled their purchasing activity from within two years ago to US$6.8 billion in the first half of 2019. While major gateway cities in Europe, particularly Paris, Amsterdam and select cities across Germany, remain popular amongst South Korean investors, Ireland, Poland and Czech Republic are increasingly attracting South Korean capital.

Singaporean capital, which inked deals worth US$5.7 billion during the six-month period, constituted the second-largest source of Asian outbound capital. Their acquisition strategies focused primarily on office and logistics properties while a growing interest in emerging European cities has been demonstrated. Singaporean investors have, compared with South Korean counterparts, engaged in a broader range of investment activities. One common trend emerging amongst Singaporean investors for diversification purpose is the pursuit of higher yields and alternative investments, including student accommodation and data centers. Singaporean investors also remain keenly focused on opportunities within Asia, as they accounted for 43 percent of total Asian flows into the region.

Elsewhere in the region, Japan reemerged as a key source of capital in Asian outbound flows in the first half of 2019. Since the adoption of a real estate mandate by the state pension fund and subsequent foray into alternative investments, the volume of outbound investment activity by Japanese buyers rose for the third consecutive half yearly period to US$1.9 billion. In particular, Japanese real estate companies showed ongoing demand for direct real estate investment while institutional investors still prefer indirect ways to gain overseas real estate investment exposure.

“Asian capital is not homogenous,” said Henry Chin, head of research for CBRE’s APAC/EMEA regions. “While there are over-arching factors like geopolitical uncertainties and low interest rates which will affect the region as a whole, investors from each market possess a different set of motivations and have different options in capital deployment.”

In terms of popular destinations, Paris and Tokyo have replaced London and Hong Kong to be the favorite investment destinations of Asian investors. Shanghai ran a close third, moving up two places from same period a year ago.

Looking forward, gateway cities in Europe will remain the major focus, although a broader range of locations will be considered. Purchasing will be led by South Korean, Japanese and Singaporean buyers, with activity from Hong Kong-based investors expected to recover in the coming months as they seek to diversify their portfolios.

In terms of property type, offices will remain keenly sought after, although more investors will be seeking to increase their exposure to assets benefiting from ongoing structural change, such as logistics.

Asian investors can still capture alpha returns through a defensive, blended portfolio which combines both direct and indirect investments in core properties, CBRE said.