- Demand for real estate investments not expected to deter but will turn selective; M&A and distressed opportunities a major investment trend in the new cycle
- Investment surge in the aftermath of GFC unlikely to be repeated
- Rethinking real estate and the sharing economy given sustained safe distancing measures.
- Investors to turn more open to niche and alternative property sectors
- Dichotomy between online and offline retail to blur further
Asia Pacific – 28 April 2020 – Close to two months after various restrictions were imposed in the region to stem the spread of COVID-19, ranging from lockdowns to travel bans, attention is now directed at rebooting stalled operations once the pandemic eases. The Asia Pacific Real Estate Association (APREA), on April 23, initiated a roundtable with prominent leaders in the real estate industry to discuss the post-pandemic investment landscape.
Participants concurred that strategies will have to be recalibrated to take advantage of opportunities in this new normal. Social distancing measures will redefine how we work, live and play, and could permanently alter consumption habits and lead to a further blurring of the online and offline divide.
Synchronized fiscal and monetary stimulus will no doubt be critical in mitigating the economic consequences of the measures. In the aftermath of the Global Financial Crisis, unorthodox quantitative easing programs have created a super cycle in real estate investments before an untimely end from the outbreak. Likewise, the real estate landscape is likely to undergo another transformation in the post-pandemic era.
Mr. John Lim, Chairman of APREA and CEO of ARA Asset Management, believes that in the current and near-term, the real estate credit market may be a positive space to be in. ARA, which manages a S$88 billion of assets globally, recently acquired Venn Partners, a London-based specialist debt fund manager, to form ARA Venn for this purpose.
“The security and covenant protection relative to equity exposure provided by real estate credit is regarded as more defensive in a volatile market,” he said.
Agreeing, Dr. Chen Lijian, Senior Executive President of China Orient Summit Capital and APREA’s China Chapter Chairman, believes it is timely to ride on trends that the pandemic will likely accelerate.
“The post-pandemic environment will be conducive to opportunistic strategies involving debt and a need to reposition assets. Demand for debt financing will emerge to an increase in NPLs, industry consolidation as well as offshore high-yield debt instruments,” he elaborated.
“The crisis will force many of us to go back to basics and focus on asset management to value-add. This means a renewed focus on tenants and the asset at hand to improve tenant stickiness and to physically enhance our assets to improve valuations,” added Mr. Lim.
Mr. Hideki Yano, CEO, Sumisho Realty Management and APREA’s Japan Chapter Chairman, similarly expects pockets of the industry to face solvency issues.
“If it takes a while to recover from this pandemic, distressed opportunities will emerge. In other words, this also means that well-capitalized players with strong balance sheets will be able to seek M&A of struggling players,” he reiterated.
However, heightened risk aversion means deals still at the negotiation stage will be repriced as risk premiums increase.
Ms. Ada Wong, CEO of Champion REIT and APREA’s Hong Kong Chapter Chairperson observed, “The bidding pool for assets is shrinking. The current bond market is implying a higher credit spread even for investment-grade issuers. Investors will look for higher return requirements, so we are not surprised to see cap rate expansion.”
Dato’ Stewart Labrooy, Chairman, AREA Management Sdn Bhd and APREA’s Malaysia Chapter Chairman also noted that more scrutiny will be inevitable, “While capital will remain mobile and performing real estate will find suitors globally, risk assessment will be a greater part of the investment process.
While investment sentiment will be hit in the short term, there are adequate drivers in the region for investors to take note of once a sustained recovery kicks in. For one, Chinese real estate prices will be more stable in the post-pandemic cycle, as the government is resolved to stabilize the sector and engineer a soft landing. Interest in industrial and logistics assets and ancillary sectors such as data centres will be extended from the last cycle.
Mr. Neel Raheja, Group President of K Raheja Corp and APREA’ India Chapter Chairman, also sees growth beckoning for India.
“Businesses will revisit its technology infrastructure and risk management framework to deal with such catastrophes in the future. For those looking to decentralize, India’s market provides huge opportunity for the shift of technology operations due to a lower cost base and a ready pool of talent,” he said.
While the market will need some time to find its footing, there is cause for optimism in the longer term with recovery in Asia Pacific outpacing other regions, fuelled by spare capital, ample liquidity and investors’ willingness to explore niche and alternative asset classes. The money created still needs to go somewhere.
