APAC real estate investors heavily focused on yield spreads
APAC real estate investors heavily focused on yield spreads
| 10 July 2017
Asia Pacific real estate investors remain heavily focused on yield spreads as investment intentions move further away from capital appreciation strategies.
According to CBRE Research’s new report, New Channels for Old Favourites – Fresh Approaches to Investing in Australia, Japan and Vietnam, the search for yield is driving investors to more mature regional real estate markets like Australia and Japan, while simultaneously diversifying away from traditional markets including Sydney, Melbourne and Tokyo.
The report highlights ‘overcrowding’ in the Sydney and Melbourne markets, which has seen yields compress by 140 – 150 basis points over the past four years, is bringing more risk adverse cities such as Brisbane, Adelaide, Canberra and Perth into focus.
CBRE’s Australian Head of Research Stephen McNabb said these markets could offer investors yields of between 100 and 200 basis points above those in Sydney and Melbourne – in addition to less buyer competition.
“As the Sydney and Melbourne markets reach their peak in terms of yield, investors are looking for new locations – in particular markets that offer a higher yield spread,” Mr McNabb said.
“The gradual improvement of Queensland’s economy, which has been gaining momentum over the past 12 months, is making Brisbane look more attractive – particularly given the yield in prime assets of 6% – 6.5%. Office vacancy is forecast to drop below 10% by the end of 2019, which will support rental growth and ultimately yield compression.”
Brisbane is expected to be the first tier II office market to see a recovery in 2017, amid solid flight to quality activity. Adelaide and Canberra are set to follow with both markets stabilising, while Perth will lag with rental growth not expected until at least 2018.
“For every year we spend above trend, the cycle tells us we spend one year below trend. After five years above trend, Perth is now in its fourth year below trend,” Mr McNabb explained.
“Capital injection in Perth is expected to increase over the next five, with investors now focused more on relative income yield as the main motivation for investment.”
CBRE Research attributes the search for yield to broader participation of institutional investors, including sovereign wealth funds (SWFs), insurance companies and pensions funds, which collectively invested US$22.5 billion first time into Asia Pacific real estate between 2013-2016. With the relaxation of outbound investment regulations for insurance companies in China, Taiwan and South Korea, CBRE Research also anticipates sustainable interest in high yielding, yet longer-term, returns to match liabilities.
CBRE’s Executive Managing Director, Capital Markets, Pacific, Bruce Baker said Australia remained a compelling investment destination, with investors looking further afield from Melbourne and Sydney for opportunities.
“The favorable commercial yield spreads in Australia’s two largest cities confirms their status as amongst the most consistently sought investment markets in Asia Pacific. But given intense competition and limited available stock in Sydney and Melbourne, investors are now more willing to move up the risk curve into less familiar but stable markets like Brisbane,” Mr Baker said.
According to CBRE Research, investors focusing on the mature Australia and Japan markets must manage the search for yield with a strong risk management framework. With more attention directed towards yield spreads versus capital appreciation in Australia and Japan investments, there are three areas of risk facing investors in the medium-term.
•Liquidity risk: Investors chasing yield in Australia and Japan are more exposed to liquidity risk, especially during periods of market downturn. To mitigate liquidity risk, CBRE Research sees investors turning to funds that have more flexible investment horizons or alternative exit strategies including converting close-ended funds to open-ended funds to avoid being forced to exit assets during low liquidity and high price volatility.
•Currency risk: Freely traded currencies like the Australian Dollar and Japanese Yen are both subject to volatility and require investors to operate active hedging programs to manage the associated currency risk of investing in both markets. However, hedging movements in the Australia Dollar and Japanese Yen are generally well understood by investors, supported by a sophisticated market of liquid instruments.
•Business party risk: Investors entering into mature real estate markets such as Australia and Japan, and emerging destinations like Vietnam, often opt for or are required to enter through a joint venture (JV) partnership. In order to align investment interests and views, CBRE Research observes investors scrutinizing track records of potential partners more heavily and performing more thorough due diligence to assess investment and strategic objectives.
“Irrespective of location or asset class, investors that chase an elevated yield premium understand that heightened risks are par for the course. However, the diversity of risk mitigation tactics now being used by investors in markets like Australia and Japan shows that many expect to play the yield strategy across real estate portfolios for the foreseeable future,” says CBRE’s Director of Research for Asia Pacific, Robert Fong.
Additional themes with the Asia Pacific real estate investment space, include:
•Diversity of Entry Points: Investors now have more potential entry points available to facilitate real estate investment. Direct investments, portfolio, joint venture and indirect investments through real estate funds remain popular. Apart from conventional ways to capture real estate exposure, real estate debt investment is emerging as an alternative channel, particularly in the Australia market, given the tighter credit environment.
•JV Openness: More investors are focusing on establishing and deepening relationships with local developers through JVs due to the limited availability of assets in certain markets. Co-investments with other investors also continue to evolve in Asia Pacific as an alternative avenue to capture outsized exposure to an individual asset or portfolio of assets.
•Benefitting from Portfolio Rebalancing: Institutional investors continue to diversify portfolios and pivot towards Asia Pacific real estate assets to offset low government bond yields and interest rates. The inclusion of direct real estate investment also continues to attract institutional investors searching for stable, risk-adjusted returns.
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About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2016 revenue). The company has more than 75,000 employees (excluding affiliates), and serves real estate investors and occupiers through more than 450 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com.