Record 2022 in APAC for Capital Markets

The  Asia Pacific (APAC) region has been on a recovery trajectory since 2020, with transaction volumes in the first three quarters on an upwards trend, rising 26.3% year-on-year (YoY). Q4 is currently forecasted to be on pace with that of the last quarter of 2020, which could bring the year 2021 to a near-record year despite travel curbs and lockdowns.

Inbound volumes

APAC inbound volumes have cooled significantly, falling by about 25% in the first three quarters of 2021. The main contributor to lacklustre APAC inbound volumes is due to the drop in transaction volumes into Japan.

The market saw a 44.3% drop in transaction volume in Q1-Q3 2021 YoY. The Japanese market has always been popular for its apartment sector, and the fall in volumes for the market is reflected in the over 80% decline in overall APAC inbound volumes into the apartment sector.

The historically top sector, office properties, saw a US$2.0 billion decline in inbound volumes in 2021.

Outbound volumes

The key driver for APAC's outbound capital growth is the increase in Singaporean outbound transaction in the first three quarters of 2021. The market reached US$13.1 billion, growing 2.4 times from 2020.

Of the top ten markets of APAC outbound capital excluding intra-regional investments, nine recorded an increase in volumes during the period. The top two in the market grew significantly. The US saw a 108.9% increase to US$11.2 billion, and the UK by 98.9% to US$4.9 billion.

Missed opportunities

The scale of distressed opportunities and size of discounts, envisioned to be immense in the early stages of the pandemic, have, so far, disappointed. The weight of capital, betting on the region’s long-term structural fundamentals, has clearly put a floor to prices.

With rentals declining at a faster clip, yields have remained stable to marginally compressing, suggesting that acquisitions will not come at basement bargains. Logistics have clearly outperformed as investors raised allocations to the defensive asset class. The deal for Blackstone’s Milestone Logistics portfolio in Australia was sealed at a tight 4.5% yield with assets on the country’s east coast done at below 4%.

Sustainable real estate

There is now mounting urgency from all fronts of the real estate industry (investors, policymakers, corporates, etc.) to transform itself and meet sustainability needs. Sustainability is an increasingly global focus for real estate investors, and we expect this to spur capital flows towards green-rated buildings and buildings which have the potential to be made ‘green’ over the coming year.

These pressures are translating into tangible rewards for those willing to take first step. According to our Active Capital research, we found that buildings with higher levels of green-building accreditation commanded a greater premium on sales price.

In Australia, buildings with a National Australian Built Environment Rating Scheme (NABERS) of 5+, the highest rating, commanded a premium of 17.9%. Prime office buildings in Central London that have a BREEAM rating of Excellent also enjoy 10.5% premium.

Investor confidence

Investment activity in APAC in 2022 will be fueled by business confidence, the gradual removal of travel restrictions and the significant weight of capital that remains attracted to the real estate sector.

As both domestic and offshore investors remain deeply interested in the APAC region, transaction volume is expected to see a 20% uplift in 2022, leading to a bumper year similar to the pre-pandemic level, in line with the broad economic recovery theme in the region.

Office, retail, industrial thriving

We will see office sector as the target for potentially more than 60% of inbound investment into the APAC region. While there is a clear rise in investor allocations to sectors which benefit most from structural changes such as logistics and data centres, the office sector remains a stalwart investment.

The industrial and retail sectors are forecast to enjoy broadly similar levels of investment interest in 2022, with retail experiencing a shorter-term bounce, while industrial is forecast to continue its upwards trend in interest over the next few years.

Regional differences

Since 2013, the US has ranked as the most active capital source in the APAC region by volume but lost out in the number of deals to the Singaporeans in the first half of 2021. 2022 will continue to see US and Singapore fight for the top spot of capital spend in the APAC region.

Singapore’s sovereign wealth fund will continue to deploy capital at a vast scale throughout the region, from prime offices in Australia CBD to logistics in the Chinese Mainland. We will continue to see a resurgence of the S-REITs in 2022, as share prices reach pre-pandemic level and they compete to place capital. Huge firepower arising from super fund consolidations could boost investment activity in the next 12 months.

For more insights, you can download the full report here.