Cross-border investments will potentially accelerate despite the short-term pause in APAC
Cross-border activity has come to define inbound and outbound Asia Pacific real estate investment over the past decade. In little over 10 years, Asia Pacific-domiciled capital has transitioned from an emerging source to the dominant source of real estate investment globally. This theme accelerated over the past 12 months, with committed capital from Asia Pacific outpacing other individual regions by over 30%.
The devastating impact of COVID-19 on livelihoods, economies and businesses, has changed this trajectory, but only temporarily, in our view. As the first region to feel the full impact of COVID-19, impose wide-ranging government lockdowns and rightly prioritize health and safety over short-term economic activity, investment volumes in Asia Pacific took the initial hit globally. In the first quarter, direct real estate volumes in Asia Pacific dropped more than other regions, representing a 26% decline year-on-year.
In the second quarter, we expect a similar, if not steeper, decline in investment volumes, as the full force of the crisis takes shape. EMEA and North America will follow a similar trajectory to Asia Pacific, but given this region’s position in the cycle, signs of activity have and will continue to emerge quicker than other geographies in the second half of 2020.
As some indications of investment resume, coupled with record amounts of dry powder to be deployed into Asia Pacific, estimated by JLL to stand at over $40 billion, questions are now being asked whether the pre-COVID trajectory of cross-border flows will continue? Short answer, yes. Long answer, it will take some time for investors to begin closing deals en masse as mobility limitations restrict inspections and existing portfolios are serviced.
But when activity does return, we will quickly see that the trend of cross-border capital has not waned as a result of COVID-19. If anything, the trend may accelerate.
Any increase of cross-border capital into Asia Pacific and a push by regional investors to deploy into other geographies will likely be driven by an appetite to increase diversification. On one hand, you have new investor classes such as high net worth individuals from Asia Pacific and funds from the Middle East recognizing the longer-term of Asia Pacific real estate. On the other hand, new corridors of intra-regional cross-border investment are emerging, including Japanese capital heading to India, and European funds are viewing the dynamics and demographics more favourably vis-a-vis their own competitive and crowded geography.
Diversification is also being influenced by a wider appreciation of the emerging alternatives sector in Asia Pacific. Offices remain the most core investment in this region, but conversations with both regional and global investors are increasingly gravitating more towards data centres, logistics and multi-family spaces.
Asia Pacific data centre and logistics real estate have become high demand assets from across the investor spectrum. With lockdowns in place and a gradual re-entry of economies now underway in some Asia Pacific markets, internet consumption has spiked, and eCommerce is boomed with the temporary closure of most retail businesses. This reality has placed data centres and logistics front-and-centre for investors domiciled in Asia Pacific, and firmly on the radar of those looking to expand their exposure from outside of the region.
The long-time bellwether for cross-border investment has been and will remain the office. But several factors will influence its role in investment decisions going forward. Leasing demand and expansion has essentially drawn to a halt across Asia Pacific. Owners are also grappling with cash flow issues and some do not see real estate as core to their recovery plans. As a result, sale and leaseback is a theme we’re having more conversations about. Furthermore, investors starting to talk more about debt than equity. All and all, various types of deal structures are now on the table, representing the strong fundamentals of this region pre and post-COVID.
Appetite for cross-border investment clearly remains, but how capital activity in Asia Pacific, both inbound and outbound, will look during and post-COVID may appear different. Some investors will decide to focus on home markets, but evidence is also mounting that diversification and areas of price discovery, will potentially accelerate activity in this region, both from Asia Pacific-based investors and global investors. As far as Asia Pacific is concerned, we expect that cross-border investment will again flex its muscle in the near-term.