The Asia-Pacific region is arguably the most dynamic property investment market in the world, writes Glyn Nelson
Today’s climate of heightened risk aversion and uncertain outlook has made it more difficult to make property investment decisions. What is the appropriate price at which to buy or sell a property when we don’t know what the world will look like next quarter, let alone next year? Despite this atmosphere, we believe there are tremendous opportunities available for property investors in the Asia-Pacific region.
Asia-Pacific is arguably the most dynamic property investment market in the world and it is becoming increasingly difficult for property investors to ignore. Surging economic growth is not only generating tremendous opportunities for return-seeking investors but is also fuelling the rapid expansion of the invested universe.
We expect the region to become the largest invested market in the world by 2025. Additionally, we anticipate a dramatic change to the region’s investment landscape. What we now call developing markets could represent the majority of the regional opportunity set (56%) by 2025, up from 28% at the end of 2011.
Asia-Pacific markets are being affected by key mega-trends that are expected to have an enormous impact on mass consumption and the consequent growth of industry and commerce. Larger cities, smaller household sizes and the combination of income and wealth growth are expected to increase the demand for modern quality residential units dramatically across the value spectrum – from low-cost, affordable housing through to luxury villas.
The rise of the middle class and the emergence of the aspiring consumer are changing the shape of the retail industry. Urbanisation creates wealth at a greater density and dramatically increases discretionary spending, leading to extensive demand for global brands and the progression of consumer trends. Global retailers are expected to continue to increase their exposure in these markets, creating demand for modern-quality, professionally managed retail and logistics space.
The potential for property investors to capture such demand-side growth should be enticing as new and exciting investment opportunities are created. A key risk for investors is overly rapid expansion of supply as developers rush to meet the tremendous scale of demand. Indiscriminate development has caused considerable oversupply in some markets. A good example is India where the amount of office space in tier-one cities has tripled every five years since 1997, while current real rents are some 45% below where they were in the early 2000s.
As these markets grow, investors can expect key investment parameters such as market transparency to continue to improve. While applauding this, we strongly advocate that local knowledge is critical to successful investing and believe investors with the highest conviction are best set to outperform the market.
We suggest that on-the-ground investing can be challenging and believe it is difficult for global investors to invest away from their home markets successfully without specialist local help.
How should investors capture this growth and allocate to the region? The answer, regrettably, is that it depends. There is no one allocation strategy, just like there is no one investor. Allocation is contingent on many factors, such as the size and risk characteristics of an investor’s domestic market, risk tolerance (including the use of leverage) and return objectives. Broadly speaking, we believe investors can be grouped into two kinds: those seeking diversification and those seeking higher returns.
Investors looking for diversification are likely to be core investors targeting the highest risk-adjusted returns. Our research indicates investors with small domestic markets can be expected to benefit from a much more outward looking investment approach as their domestic risk-return trade-offs can be relatively poor. We believe the addition of Asia-Pacific property markets, which range from core mature markets (Japan and Australia) through to developing markets (China and India), could raise an investor’s risk-adjusted return.
Return-seeking investors can expect to find many opportunities in the region’s dynamic property markets. The growth in the Asia Pacific economies and their industries implies significant and steady demand for property. These investors can target a multitude of different investment styles, including opportunistic strategies such as development, or high conviction value-add strategies such as manufacturing core assets.
Which entry point an investor chooses can be critical to the eventual investment experience. For most investors we suggest that access to the region’s property markets is best accomplished indirectly, using either the listed or unlisted markets. In the listed market, direct property returns are best accessed through real estate investment trusts (REITs). These provide investors with liquidity but at the cost of short-term volatility. REIT availability can be limited, regulations can differ widely between countries and accessing listed opportunities beyond them requires certain trade-offs – for example, investing in developers or property proxies like upstream industries, such as concrete and steel production.
The Asia-Pacific unlisted fund universe is growing and maturing, expanding an investor’s potential opportunity set. They can offer access to a wider array of investment strategies and target returns, from core in mature markets to opportunistic in developing markets. Investors unfamiliar with a market or without the internal platform to underwrite direct fund investments can consider multi-manager investing. This investment type can provide investors with multi-faceted diversification (by style, country, sector and manager) as well as expert due diligence processes, local market experience and off-market investment opportunities.
The balance of investment across the two approaches should be driven by multiple considerations, the most prominent being the scale of opportunity sets that we believe favours an unlisted approach. We are mindful of multiple other issues, such as tolerance of volatility, liquidity, investment horizon, and how active or passive an investor wants to be.
We are confident global investors are set to remain attracted by the high growth of this region. We consider that the scope for return-enhancing strategies is arguably greater than diversification-related strategies and we believe the best access point is through indirect vehicles. The proximity to the local markets by experienced and trusted managers of indirect vehicles should, we believe, be of paramount importance in shaping the prospects and risks of prospective returns.
Glyn Nelson is head of property research for Asia-Pacific at Aberdeen Asset Management