ULI and PwC’s latest Emerging Trends reports shed light on what investors can expect in Asia Pacific and European real estate markets in 2016.
As in 2015, Asia Pacific core property assets are forecast to remain a mainstay for attracting abundant investor capital this year, with the most developed, liquid markets of the region viewed as safe havens, according to the recent Emerging Trends in Real Estate: Asia Pacific 2016. For investment and development, Japan and Australia continue to lead the pack; the top five most-favored markets are Tokyo; Sydney; Melbourne, Australia; Osaka, Japan; and Ho Chi Minh City, Vietnam.
According to the report, the main takeaways for investors interested in the Asia Pacific region in 2016 are:
- Transaction activity across the region is expected to match or exceed that of last year’s levels, which reached record highs even with weaker land sales in China during first half 2015.
- Buying momentum is unlikely to slow, despite near record-high yields in most markets.
- Some investors continue to move up the risk curve — investing in asset classes and geographies that provide better returns — albeit at a slower expected pace than in 2015.
- Although it remains a controversial view among investors, many now see rental growth — rather than cap rate compression — as the driver of future profits in Japan and Australia.
- Opportunistic returns are tough to find currently but are still in demand, with Japan and China viewed as the best countries for such returns.
- Emerging markets (such as Indonesia, the Philippines and Vietnam) remain appealing given their higher yields and growth potential, but most investors have been steering clear because of greater risk in the current environment, with high exchange rates and capital-flow volatility leading up to the U.S. Federal Reserve’s recent hike in the federal funds rate.
- More institutional investors are crowding into Asian markets, with a number of mergers and acquisitions as well as portfolio deals resulting from their need to invest large sums of capital.
- Risk remains abundant, with the most common concerns being faster-than-expected interest-rate increases or a hard landing in China that would affect the rest of Asia.
Even with the Asia Pacific region’s appeal to investors, capital continues to flow from investors in the East to safe-haven property markets in the West. According to Emerging Trends in Real Estate: Europe 2016, the top five European cities expected to attract capital in 2016 are Berlin; Hamburg, Germany; Dublin; Madrid; and Copenhagen, Denmark.
With ground-level disruptions — technology, demographics, social change and rapid urbanization — permeating the entire real estate value chain in Europe, investors are focusing on cities and assets rather than countries, states the report. More investors, too, are considering investments in hotel and niche property assets (healthcare, student housing and data centers) in 2016 given they benefit from urbanization and long-term demographic trends. Such assets are more operational in nature, which investors believe will help their investments outperform in 2016. Additionally, the vast majority of investors surveyed for the report view development as another way to attain outperformance this year, with some attempting to accurately anticipate and adapt to rapidly changing occupier demands.
The report also notes most property investors remain bullish on Europe given the low interest-rate environment and sheer weight of capital targeting the region. However, there is an undercurrent of caution because of geopolitical concerns, the United Kingdom’s possible exit from the European Union, China’s slowing growth and uncertainty regarding Europe’s economic recovery.
And while the industry is upset about the shortage of prime assets across Europe, no one surveyed for the report is predicting a downturn. Furthermore, even with recovering European markets, the majority of investors are expected to keep settling for relatively safe, modest returns by investing in core real estate in major European cities.
Here’s a summary from the report of the top trends for investors interested in European property assets this year:
- The rapid growth of online retail sales has keeps the logistics sector popular, with some viewing the asset class as a proxy for less-highly priced retail property depending on location.
- Global investors are taking on development projects — sometimes building or redeveloping an entire new urban district — as a way to attain new core assets as well as control over the process.
- It is important to identify cities that are progressive in their approach to infrastructure and can deliver the necessary development to service increasing urbanization.
- Residential investment in Europe continues to grow in importance in the real estate industry and is now viewed in the context of the key mega-trends affecting society, particularly the growth of cities.
- Alternatives assets such as healthcare, hotels, student housing and data centers are all expected to outperform core commercial real estate.
- The massive influx of migrants into European countries poses enormous issues for those nations as well as their cities, such as strains on housing as well as social and physical infrastructure.
For a look at the top 10 trends for investors according to Emerging Trends in Real Estate: United States and Canada 2016, click here.
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Jennifer Molloy is senior editor of Institutional Real Estate Asia Pacific.
