In Asia Pacific (Apac), investment in commercial real estate is expected to pick up in the second half of this year, while high net worth and institutional buyers will become more active once there is greater clarity around future interest rate movements in the second half of this year, predicted a CBRE report in May.
In contrast, interest rate hikes and fears of a global economic slowdown caused a sharp slowdown in commercial real estate transactions in all Apac markets from 2021 to 2023, the CBRE report said. Also, in the last few months, several Chinese property developers have been placed into liquidation in Hong Kong’s courts, with Dexin Xhina Holdings the latest as China Construction Bank (Asia) seeks the repayment of a $350 million loan due in 2022.
“The most interesting thing in the report is the positive outlook towards Apac,” Alan Child, a property consultant in Hong Kong, told FinanceAsia.
“We will begin to see an increased uptake in demand later this year particularly if the anticipated rate cuts are applied. This will primarily be led by private equity,” Child predicted.
In the Apac commercial real estate sector, “we have seen a degree of repricing and any shortfall from the banks will be taken up by private equity,” said Child.
Non-bank lenders will account for an increasing share of real estate deals in Apac as volatility in public markets forces banks to take a more cautious approach to lending, said a JLL report on May 9.
“Restrictive monetary policies have led to capital value corrections and banks taking a more conservative stance to lending,” says Pamela Ambler, head of capital markets research at JLL Asia Pacific.
Asian banks still hold approximately 80% of loans issued in the region, according to the JLL report.
Offloading debt
However, as banks look to offload debt to bolster their balance sheets, this presents a growing avenue for non-bank lenders, including credit funds, to step into the market and provide alternative financing, said the JLL report.
Banks are looking to reduce their commercial real estate exposure and half of lenders have already increased scrutiny of commercial real estate opportunities, with 44% exploring foreclosure and 30% considering selling loans if their watchlist - assets at risk of default - increases significantly, added the JLL report.
According to JLL Capital Markets data, the amount of dry powder available for private debt investments in the region is rising, driven by the growth in credit opportunities, 23%, volatility in public markets, 23%, and the higher returns relative to equity investments, 13%.
“Due to the end of the cheap-money era, return expectations of private debt is expected to be higher than private equity,” said Ambler.
There are $257 billion of senior real estate debt in Apac, leading to a projected funding gap of $8.4 billion from 2024 to 2026, according to the CBRE report. The funding gap of $8.4 billion in Apac commercial real estate is minimal compared to the US where the funding gap is $157.3 billion and Europe where the funding gap is $191.4 billion, said the CBRE report.
“In terms of their economies these are relatively small funding requirements. Again, Australia in particular, is forecast to receive increasing levels of foreign investment particularly in the logistics and hotel sectors. China is managing its own specific issues in relation particularly to the residential development funding issues and we can expect to see a gradual turnaround as the government tackles these challenges. This should lead to greater opportunities for investment in other sectors which are location focussed,” said Child.
CBRE estimates $71 billion or 28% of commercial real estate debt in Apac is non-recourse debt, meaning creditors can seize only assets stipulated in the loan agreement should debtors default, while $186 billion or 72% is recourse debt, where creditors are allowed to seize assets outside the loan agreement should debtors default.
From the lender’s point of view, a recourse loan reduces the risk associated with less creditworthy borrowers, so lenders can charge a lower interest rate on their loans, making the loans more attractive to borrowers, the CBRE explained.
Apac’s commercial real estate market has a greater share of recourse loans compared to the US and Europe, so there is a relatively lower chance of distressed assets coming to market in Apac, said the CBRE report. With limited distress in Apac, fund raising for debt strategies in this region will remain limited for this year, leaving investors to instead focus on traditional strategies such as value-add and core strategies, the CBRE report explained.
Most office markets in Apac will see improvement in ICRs this year, projected the CBRE report.
However, the Hong Kong office market will remain under pressure this year, while the city’s retail market, which has been relatively stable, will also face rising risks, said a Fitch Ratings report on February 1. “This will add to local banks’ asset-quality challenges, but we expect the receding risks in their mainland China property portfolio – after several years of significant provisioning – to offset the impact, driving a modest decline in the sector’s credit costs.”
There are other alternatives in the commercial space, such as pubs.
James Smithers, national director – investment management, HTL Property, said in webinar earlier this month: “Pubs have been an undervalued/mispriced asset class, the highly accretive real estate being underpinned with five income streams across food, beverage, gaming, retail, and accommodation, is unlike any alternative opportunities available in the market.”
Sydney-based Smithers added: “The next 6-12 months will be an interesting time and I think assets will be keenly contested, and that development space will be important as investors look to diversify due to environmental, social and governances (ESG) in a high-cash generative sector.”
With additional reporting from Andrew Tjaardstra.
