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Getting back to normal: the outlook on cross-border real estate in APAC

10 December 2020

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In a recent webinar hosted by Intertrust Group, experts discussed why they’re optimistic for the future of cross-border real estate.

In light of a recent Knight Frank Active Capital Report, which noted a significant drop in Asia Pacific (APAC) commercial transaction volumes over the first three quarters of 2020, there is increased focus on the outlook for APAC real estate transactions in the year ahead. In a webinar hosted by Intertrust Group on 2 December 2020, a panel of experts discussed many of the issues affecting the market. How, for example, has COVID-19 affected business and what trends were at play over the past twelve months? Looking forward there seems to be general optimism for a bounce back in 2021, but challenges remain. Patience and discipline will be required until normal service can be resumed.

Looking back over the past year, COVID-19’s effect on the market gradually lessened. Daniel McDonald, MD at J.P. Morgan Asset Management, feels that “some banks were initially reluctant to lend early on, but that opened up again and ultimately people were willing to transact. There are still a lot of deals in the marketplace.” Neil Brookes, Head of Asia Pacific Capital Markets at Knight Frank, also feels the industry initially took a ‘wait and see’ attitude. However the potential for a rebound, he says, is strong: “Because this was more of an income shock than a capital markets shock, people focused on asset management and less on acquisitions. There’s a huge amount of private equity real estate capital waiting on the side-lines to be deployed in APAC.”

According to Mr Brookes, differences have largely followed geographical lines. “Markets exposed to cross-border investors – Singapore, Australia and, to some extent, Hong Kong – have seen the biggest falls in transaction volumes. And the markets where there’s a very strong domestic investor base – South Korea, Japan and, to some extent, China – volumes have held up well. So overall, volumes are down but generally there’s still a reasonable amount of activity.”

Compounding challenges

Andrew Cannane, Executive Director Australia, Intertrust Group, agrees but believes the business slowdown in Australia specifically was exacerbated by the Foreign Investment Review Board (FIRB) there “bringing down a zero dollar threshold and a six-month approval turnaround period for all foreign acquisitions made by all offshore buyers. So, previously favoured countries with Exchange of Information treaties such as Singapore, the UK and Canada had up to a A$1.2 billion dollar threshold whereby they could make acquisitions without FIRB approval. The fact that there now further approvals required by FIRB has absolutely impacted on fund structuring and […] deal flow.”

In terms of investment types, Knight Frank’s Mr Brookes has seen a big pullback in portfolio sales over the past six months and a shift towards high value asset sales of individual properties – largely because it’s easier to do due diligence on a high value property than on a portfolio of smaller assets.

Due diligence has actually been one of the recurring challenges of the COVID-19 period. Given the restrictions on travel, European investors especially have found it difficult to carry out checks on APAC investments. This is now being addressed through increased capital partnering as well as more use of assignable technical due diligence reports by owners. In a sign of the times, drones also have a role to play in order to inspect an asset remotely.

Promising sectors

As for future opportunities, Intertrust Group’s Mr Cannane identifies some encouraging signs: “As a service provider, we have had a large amount of enquiries from people overseas looking to transact predominantly in industrial, some office and healthcare – and I feel that’s a forward indicator in terms of economic activity and transactions in the year ahead.” On offices, J.P. Morgan Asset Management’s Mr McDonald believes that “there are two trains of thought. First, people will work at home more in the future. Or, second, to get back to work, companies will have to create safer environments – and so need more space. Over time, the office sector will bounce back quite strongly.”

Other sectors set for growth include logistics – especially in China where GDP growth has quickly returned to being positive. Mr Brookes ranks Chinese logistics as his number one target right now followed by Japan and Australia at number two and three respectively.

Overall, there appears to be increasing positivity in the market. COVID-19 has changed some things forever: the ubiquitous Zoom meeting and verification by DocuSign are here to stay. But, with the prospect of a vaccine becoming more and more real, the expectation of a return to normal is stronger now than at any time in the last year.