Despite slowdown, Asia Pacific real estate investment rebounds 35% in Q3 2020
Vietnam’s industrial sector maintains strong interest from investors, while logistics and data centre investments accelerating regionally
Asia Pacific real estate investment showed signs of recovery in the third quarter of 2020 with US$35 billion in direct transactions committed between July and September 2020. Volumes rebounded 35% quarter-on-quarter, and while overall third quarter numbers were down 19% year-on-year, transactional activity accelerated across several major markets as investors deployed capital with more confidence than at any other period of 2020, according to JLL (NYSE: JLL).
A third quarter investment rebound was led by activity in North Asian markets, with China (-10% year-on-year), South Korea (-2% year-on-year) and Japan (-18% year-on-year) all experiencing more transactional activity due to some resumption of economic activity in their respective markets. Concurrently, Tokyo and Seoul have also emerged as the top two cities globally for investment year-to-date 2020, according to JLL Research.
Investment activity in Australia (-45% year-on-year) and Hong Kong (-27% year-on-year) remained subdued over the quarter.
"The first major signs of a resumption of investment activity emerged in the third quarter, with investment volumes showing meaningful improvement in China, Korea, and Japan. While uncertainty will remain for the foreseeable future, we believe that low transactional activity has bottomed out, and our optimism for the fourth quarter continues to grow," says Stuart Crow, CEO, Capital Markets, Asia Pacific, JLL.
JLL observes that many Vietnamese developers are raising capital for large-scale development porfolios. These portfolios are attractive to investor because of the size of cash flow, high returns and growth potential of an emerging real estate market like Vietnam. Although these transactions are still under negotiation and legal review, this is still considered a positive factor for Vietnam real estate market because of foreign investors' confidence in the market recovery and improvement of buyer purchasing power in the coming quarters.
Major themes tracked by JLL in the third quarter of 2020 include:
- Logistics and data centre outperformance: During the third quarter, the broader industrial market performed strongly with transactions up 76% year-on-year, primarily driven by logistics and data centre deals. These assets accounted for 70% and 31% of Japan and China transactions, respectively, in the third quarter of 2020. Asia Pacific office transactions were down 35% year-on-year, while retail and hotel transactions fell 51% and 87% year-on-year in the third quarter, respectively.
- Normalising investor mix: Brewing confidence in recovery was supported by the return of more institutional investment managers in the third quarter. In contrast, activity in the first half of 2020 was mainly due to private investors as larger investment managers waited for more clarity before deploying capital.
- The cost of capital continues to compress: For the region, the cost of capital declined sharply in the last six months, boosting buyers' acquisition power as they look to take advantage of narrowing spreads. Financing costs fell 50 to 100 bps year-to-date, further drawing investment managers back to the market.
“We note that the cost of capital for bond issuance Vietnamese developers will tend to increase in order to compensate for a greater risk as Covid-19 is affecting the global economy and Vietnam is no exception. This can be seen as many local developers have experienced difficulties in accessing commercial bank loans, even though the lending interest rates have decreased compared to previous years. However, commercial banks also place great emphasis on credit quality, hence a number of real estate business cannot satisfy these loan conditions,“ commends Khanh Nguyen, Senior Director, Capital Markets, JLL Vietnam.
"Investors returned in greater numbers in the third quarter, reaffirming their appetite for North Asia assets and real estate linked to logistics and data centres. We're confident that the fourth quarter will present a broader range of opportunities across the region, particularly in classes like multifamily and rebounding markets like Singapore," says Regina Lim, Head of Capital Markets Research, Asia Pacific.
“For Vietnam, the pandemic certainly has impacts on real estate businesses. Unlike in the peak years, in general, there will be a number of domestic real estate firms facing liquidity problems. Foreign investors will also be more cautious in their investment. Mergers and acquisitions are not the only way to grow a business, as there are other alternatives to access larger sources of capital. However, businesses still need to ensure clarity and transparency in order to be ready to participate in the potential but also challenging capital markets,” Khanh concluded.
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