Investors looking for lower prices on Asia Pacific office properties may be getting a chance not seen in over a decade, according to investors and analysts who joined an online forum hosted by Mingtiandi today, but they may have to wait until well into next year for that chance.
Appearing at MTD TV’s Value-Add and Opportunistic Office Strategies panel, Invesco Real Estate managing director and APAC investment strategist Thomas Au said he expects the region’s office market to have its “first meaningful price correction” since the 2008-2009 global financial crisis – which will open investment opportunities for players with cash on hand for acquisitions.
“People are turning their attention to value-add to look for higher returns, especially as the opportunity cost is higher in doing core,” Au said. “We do identify cracks here and there over the last 6-12 months and we expect these cracks to become more apparent and probably more cracks are to be found in the different markets over the next 12-18 months.”
Those cracks, in the form of a drop in prices or lower costs of financing, are likely to be more evident after the first few months of next year according to the panellists. In Japan, where interest rates remain among the world’s lowest, Alyssa Partners managing partner and chief executive Chedli Boujellabia said any substantial repricing in the office market will only happen in the coming six to nine months.
Holding Power Still Strong
MSCI’s head of real assets research David Green-Morgan said in the same panel, which was sponsored by Yardi, that any price correction across the region is not coming anytime soon as it will take time for transacted prices – which has been holding up recently – to catch up with the decline in property valuations.
“We’re in this slightly grey period where the gap between buyers and sellers is still quite wide – everybody knows the – the sellers are going to have to move their expectations,” Green-Morgan said. “This is when it all depends on some other factors – holding power, how much price growth we’ve seen over the last few years, refinancings, as well as the overall economic picture – then you start to bring a bit more liquidity back into the market as buyers and sellers move closer together.”
Across the region, the panellists agreed that the timing of when deal activity will rebound differs across markets.
Francis Li, international director and head of capital markets for Greater China at Cushman & Wakefield, said he expects the Greater China office market to slowly pick up next year as borders reopen.
“I think the Hong Kong market [will] pick up slowly and favourably… [but] I think we have to be careful with the huge supply coming up in the next three-four years that will lower our rental growth prospects,” he said.
The window to snap up heavily discounted assets in mainland China will likely stay open for another six to 12 months according to Li, as cash-trapped developers continue to offload office properties and development projects to pay off debts.
“This is a good opportunity honestly, for those who haven’t had a stake in the market in Hong Kong and China,” he added. “But I don’t expect this will go on forever, but maybe in the window of 6 to 12 months before the market settles down and the financial issue (is contained).”
In Japan, Alyssa Partners’ Boujellabia said Tokyo may see more deals coming in early next year as Japanese firms typically make last-minute divestments in the final quarter of their financial year, which ends in March. Despite high domestic liquidity and low financing costs, however, he said trades of office assets will remain muted in the near term or until the second half of 2023 as foreign investors turn cautious.
“Real estate still remains the highest yielding asset class (in Japan),” he said. “But the ingredients are not yet there in terms of creating an opportunity or cracks – we started to see a few cracks but not to a level to see significant repricing, at least.”
Green-Morgan shared the same view, stating that office investment activity in the world’s third largest economy will only start to pick up early next year.
Asia Pacific saw trades of office properties plunge 45 percent in the three months ending September, according to MSCI Real Assets data. While the sector continued to make up nearly half of all sales of income-earning properties in the region last quarter, the volume of office investments still declined more quickly than the industrial or retail segments.
While markets like Singapore and Sydney are already booking steady growth in grade A office rental, based on Cushman & Wakefield data, sliding office rents in Hong Kong and Shanghai may be the latest sign that asset values need to come down for investment opportunities to provide attractive yields for investors.
More Next Week
Following the value-add and opportunistic panel, the Mingtiandi Office Strategies Forum will be back for a final session on the Future of the Office panel at 10:00 AM Hong Kong time on Tuesday, 22 November.
That panel will feature Nadia Zhu, regional managing director for Hong Kong, Macau and Taiwan for The Executive Centre, Claude Touikan, co-founder and executive director with architecture and design firm Lead8, Eric Schaffer, chief executive of real estate technology firm essensys and Anshul Jain, head of Asia Pacific tenant representation and managing director for India and Southeast Asia at Cushman & Wakefield.
Exploring how workplaces are evolving post-pandemic, the live discussion will explore how office owners, designers and property professionals are creating workspaces to meet tenant demands for flexibility, sustainability and amenities.
The Asia Office Strategies Forum is MTD TV’s final series for 2022, wrapping up a set of 31 discussions across six forums which garnered over 4,000 live viewers of the online forums and more than 200 attendees for its on-location Singapore event in September.
MTD TV will be back in March next year with its annual APAC residential forum.