Singaporean Buyers Drive Strong Asian Outbound InvestmentSenior Analyst, Asia-Pacific Research at CBRE
Asian outbound commercial real estate investment volume stood at $25.3 billion in the first half (H1) of 2018, and the strong flow of capital from the region witnessed in recent years shows no sign of abating.
Of note in the first six months of this year has been the emergence of Singaporean investors, who have replaced China as the largest source of capital. The limitations of their local investment market, compressed yield environment and regulatory constraints have prompted investors from Singapore to explore overseas markets, which often provide higher returns.
Singaporean outbound investment registered $9.1 billion in H1 2018, representing 36 percent of Asia’s total. Meanwhile, outbound investment in H1 2018 for Hong Kong was $5.6 billion (22 percent), China’s was $5.3 billion (21 percent), and South Korea’s was $3.1 billion (12 percent). Major transactions by Singaporean buyers included the acquisition of a nationwide logistics portfolio for about $2.3 billion, along with a number of other big-ticket deals.
Chinese Buy Less and Sell More
The rise to prominence of Singaporean buyers also comes at a time when there has been a noticeable slowdown in Chinese outbound investment. In fact, Chinese outbound investment fell from $26.3 billion in H1 2017 to $5.3 billion in H1 2018. This was largely due to the government’s capital controls subjected on overseas acquisitions by Chinese companies. As a result, purchasing activity by large companies has weakened. Also, these companies needed to bring their capital back into their homeland because they were heavily debt-ridden from previous aggressive overseas expansions. Financial difficulties played another crucial role in the dampened investment activities.
Purchasing activity by Chinese buyers in H1 2018 was largely confined to Hong Kong. At a time when they are buying less, Chinese groups are also selling more, with several major disposals witnessed during the period.
Aggressive and rapid overseas expansion by Chinese investors in recent years has seen some debt-ridden groups forced to offload assets, primarily in the U.S., to raise cash. Disposals have come in the form of hard asset sales as well as offloading shares in overseas companies previously acquired through M&A.
CBRE Research expects Chinese groups to continue selling assets in the second half of 2018 as they look to improve liquidity and lock in profits from earlier investments. In particular, a number of corporations under financial strain are expected to seek opportunities to strengthen their balance sheets by selling portions of their overseas real estate holdings.
EMEA Remains the Most Preferred Region
Europe, the Middle East and Africa (EMEA) retained its position as the preferred destination for Asian investors in real estate, attracting $10.2 billion worth of Asian outbound capital in H1 2018, representing 40 percent of the total. EMEA is followed by Asia and the Americas, representing 34 percent and 20 percent of investments, respectively.
Singaporean and Hong Kong investors continue to purchase assets in EMEA due to the relatively attractive prices compared to their domestic market. Europe offers investors the opportunity to acquire assets with long lease terms and a freehold structure.
Major deals included Singapore’s CapitaLand Commercial Trust’s purchase of an office asset in Frankfurt with a 10-year weighted average lease expiry in what was its first acquisition in Europe.
Asian capital also displayed a stronger appetite for property in gateway cities in H1 2018,* with more than half of the transactions occurring within such markets.
Despite concerns over Brexit, many international financial institutions retained their headquarters in London, and the city will preserve its status as Europe’s major financial hub, at least in the short and medium term. These fundamentals, along with its relatively attractive yields and stable tenancies, ensured London remains the preferred destination, accounting for 25 percent deals.
Long-term Asian investors were especially active in the EMEA and particularly in London’s office sector, displaying a solid appetite for office assets with longer master leases.
Property Companies Display Strong Demand
Property companies remained the most active investor type, accounting for half of the total investment turnover in H1 2018. They were the most active buyer group in all regions with the exception of the Pacific, where private investors were the dominant players.
Activity was led by Singaporean property companies, which retain a keen interest in the U.S. and Europe amid limited investment opportunities in their domestic market.
In addition to the aforementioned purchase of a nationwide logistics portfolio, another Singaporean property company acquired a logistics portfolio comprising 21 assets across Germany and the Netherlands worth $589 million, as strong e-commerce growth in these regions drives robust demand for logistics facilities.
Within Asia, property companies are primarily focused on development projects. Activity during H1 2018 included a Chinese developer acquiring an industrial asset in Kwai Chung, Hong Kong, which it plans to convert into restaurants, office space, and retail shops.
Investment Momentum Set To Continue
Singaporean, South Korean and Hong Kong investors’ strong investment appetite, particularly for assets in Europe and the U.S., will continue to drive Asian outbound investment in the medium- to long-term. Investment momentum is expected to remain steady in H2 2018. However, disposals by Chinese corporations are forecast to continue, with sales involving several assets in the U.S. nearing completion.
In terms of the preferred assets, Asian investors are expected to continuously seek core assets located in the gateway cities. As these income-generated assets are still limited in their home country, investors are attracted by the office and logistics assets in Europe and the U.S. A number of big-ticket deals by Singaporean property companies and Korean institutional investors are set to close in the coming months, and another active investment by the Asian capital can be expected in the second half of the year.
However, the increasing trend of a stronger U.S. dollar remains a key factor for investors to consider. Foreign exchange volatility can pose an increasing burden in the cost of financing for Asian investors seeking opportunities in the U.S. Investors are advised to carry out foreign exchange hedging to minimize the potential risks associated with the volatility.
*Gateway Cities here refer to 14 major regional cities including London, Frankfurt, Paris, Hong Kong, Beijing, Seoul, Shanghai, Singapore, Sydney, Tokyo, Los Angeles, New York, Washington and San Francisco.