Asian Real Estate Investment Outlook for 2015

Top Five Trends to Follow in the New Year

The outlook is bright for Asian overseas property investors, with Asian investment into the U.S. on the rise. While investors from China are leading the pack, they are not alone. Asian cross-border investment into the U.S. and other developed markets is entering a new, expanded, and exciting phase.

Here are our partners’ perspectives on the Top 5 trends to follow as we enter 2015:

1. The Golden Age is Over; It’s Time to Diversify

The mindset of Asian investors has shifted in recent years, and they see this as a time to diversify. In particular, Chinese investors have been actively expanding their investments in the U.S. and other major markets around the world, as well as a variety of real estate asset classes in China. For example, we are seeing Chinese developers who were previously only interested in residential developments getting involved in other deals including agriculture, senior living facilities, and health care facilities.

“There’s a feeling in China that the golden age has ended. Chinese investors are diversifying within the Chinese market as well as outside it. This is partly due to the maturity of the market but also the recognition that diversification is important to establish yourself as a long-term player.”

The Chinese government has generally been diversifying its holdings. Over the past 10 years, the Chinese government has been investing through its sovereign funds into all types of investments, and we have seen an uptick in this activity. Chinese investors are also seeking opportunities in other Asian countries.

“A lot of Chinese investors are investing in Korea as well as Japan.”

Beyond China, we also are seeing more Asian investors expanding channels of real estate investment. Due to this, we expect to see an increasing use of indirect strategies of investment into funds and financial products, rather than direct real estate ownership. Asian cross-border investors will increasingly be investing and using multiple channels of investment to access offshore markets. This means investing in, and in some cases sponsoring, private equity real estate funds or investing in real estate securities like REITS or funds of funds. We also expect to see more engagement in separate account and club deals where the foreign investor may partner with a few other like-minded investors with similar objectives.

“Creative and ambitious Asian cross-border investors who are in search of higher yields and returns will be increasingly looking beyond the traditional office building or shopping center asset to other types of real estate- related investments, whether it’s student housing, port and logistics facilities, or agricultural and forestry resources. These new asset classes will not only help these investors to diversify risk, but will also be a natural response to the increasing competition for the core real estate assets.”

2. Asian Investors are Going Solo

In recent history, Asia-based institutional investors and developers generally have chosen to team with an American or global partner to make a U.S. property deal. But that is starting to change.

“We still see a lot of joint ventures, but Asian investors are getting more and more comfortable with going solo in major urban areas. They are looking for joint venture platforms not just to share the risk but to learn the business.”

Asian investors feel like they have had a lot of experience in developing real estate in China—and they are doing it on their own. At the same time, sovereign wealth funds in China are acting as, and investing as, limited partners in private equity funds in the U.S. on a continuing basis and they are very active in that as well. For the near future, it is expected that Asian investors will to continue to seek out American partners when working on real estate deals in tertiary markets—particularly in development deals.

“With development, Asian investors like to have some local knowledge. They like having a local developer have a piece, so that they can tap into the local knowledge of zoning, building, and the local market.”

3. Yield Motivates Movement Towards Secondary Markets

When the tide of Chinese investment into U.S. real estate started to take shape, it was the general consensus that the trend was being driven by investors’ desire to park cash in a safe haven. And while this is still true to a certain extent, Chinese and other Asia-based investors are starting to put greater weight on the yields when they search for a deal. Consequently, Asian investors are flocking to secondary markets, moving beyond the “usual suspect” major gateway cities of New York, London, and Paris.
“One of the reasons why the Chinese are investing in the U.S. and elsewhere is that they are seeing a saturation point in their own market and seeing terms dropping. You’re going to want to put your money where you can make the most money, primarily. Investors are looking in Europe, the U.S., Canada, and Australia because they think they get much better returns, long term, outside.”

We are seeing a greater geographic expansion for investment and expect this to continue. Cross-border Asian investors will increasingly also look at places like Chicago, Washington, D.C., San Francisco, Frankfurt, and Milan. We’ve already seen activity in Boston, St. Louis, and Houston.

4. Stability Drives Cross-Border Investment into the U.S. and Europe

Asian investors are generally seeking opportunities in countries that offer economic and political stability, transparency, and a predictable legal system.

“There is definitely a sense of Asian investors looking for stability in other markets, but at the same time there is an economic slowdown in some home markets in Asia. This, together with difficulties in acquiring land, rising costs, and mounting competition, is continuing to drive more cross-border investment.”

For investment into the U.S., EB5 financing is a factor.

“Although it’s temporarily suspended, the general availability of EB5 financing is making it easier for individual Chinese citizens to invest in the United States, get a Visa, bring their children here, and get them educated in U.S. universities and high schools. So that’s a very strong trend.”

5. Trophy Assets Take the Prize

It is hard to acquire a trophy asset in many Asian countries as there are not a lot of trophy assets that are traded very often. In contrast, trophy assets are easier to acquire in the U.S. and Europe. In addition, these are appealing markets in which to acquire iconic properties because the government is not a liability.

“The United States and Europe are safe because there is a rule of law. You know the government isn’t going to take your trophy asset away from you.”

We expect to see increased competition for prime, well located, fully leased or stabilized office and retail properties located in gateway cities like New York, London, and Paris. As a result, we will likely see prices for these prime, core assets driven up and, in some cases, yields will be further compressed to levels even below the peak before the past global financial crisis. The question, however, remains how long the current market rates will last.

“Asian investors are buying iconic assets at high prices. They may look back one day and think that buying a hotel for $1.95 billion was a steal. Who knows?”