APAC Industrial Property Investment Plunges 62% as Yields Fizzle

Investment in Asia Pacific industrial property totalled $7.2 billion in the second quarter, plunging 62 percent from the record levels achieved during the same period a year earlier, as higher borrowing costs and swelling asset values compressed yield spreads in many of the region’s markets, according to MSCI.

Despite the steep decline in industrial deal volume compared to the second quarter of 2021, which at $19 billion notched the highest total ever for a three-month period, MSCI noted in its Asia Pacific Capital Trends report released last week that by the quantity of deals closed, 2022’s first half was still the second-busiest ever, trailing only the same period in 2021.

Even so, with yields on industrial property shrinking after the sector’s surge and capital costs climbing, spreads have been squeezed, MSCI said.

“The industrial sector’s fall from grace was one of the biggest stories of the quarter, as elevated pricing and the sharp rise in borrowing costs combined to stall momentum,” said David Green-Morgan, head of real assets research at MSCI. “Instead, the focus has switched back to the office sector, with the majority of the region’s biggest investors piling into the asset class this year.”

Spreads Squeezed

In 2021’s record-breaking quarter, industrial yield spreads to 10-year government bonds sat at 250-500 basis points for most of Asia Pacific’s major markets, according to MSCI data. The ensuing bout of yield compression squeezed the spread to below 100 basis points in several key markets, including Australia, South Korea and Hong Kong, by the second quarter of this year.

With borrowing costs soaring above industrial yields, a slowdown in deal activity was to be expected at some point, but industrial spreads remain well above 100 basis points in two of the region’s biggest markets, China and Japan.

Australia was home to APAC’s single largest industrial deal in the first half, when Blackstone paid $1.5 billion to acquire a 49 percent stake in Dexus Australia Logistics Trust from Singapore sovereign wealth fund GIC.

Still, the country wasn’t immune to concerns over higher borrowing costs and weakening economic growth in the second quarter, with the volume of all real estate deals priced at $10 million or more falling 26 percent year-on-year to $8.4 billion, dragged by a sharp drop in industrial investment.

“As with the rest of the region, bigger deals are holding up much better in Australia, even as volumes of smaller deals have contracted considerably,” Green-Morgan said.

Extreme Swings

MSCI catalogued just two other big-ticket industrial deals in the second half, with a GIC-backed ESR fund buying DLJ’s Shanghai industrial portfolio of 77 properties for $713.6 million and China Resources picking up a pair of warehouses in Hong Kong from Kerry Properties for $588.8 million.

The industrial sector’s second-quarter dip stood in stark contrast to the region’s office deal volume, which rose 9 percent year-on-year to $22.1 billion, as well as apartment investment, which edged up 4 percent year-on-year to $2.2 billion.

“The extreme swings in both deal activity and pricing mean that some investors who entered the sector late when yields were at their sharpest will face an unenviable position this year amidst the rising cost of debt,” MSCI said. “By contrast, the rest of the sectors which experienced more moderate rates of growth last year have continued to motor on, with activity increasing across the office and accommodation sectors.”