Investors should eye niche real estate

LONDON: Property investors should look into niche or non-traditional real estate in Asia-Pacific as there will be less pricing competition, says LaSalle Investment Management’s (LIM) “2014 Investment Strategy” annual report.

However, the report said such niche properties are likely to have more risk. Some potential sectors include student accommodation development in Sydney, Melbourne and Singapore; branded and boutique hotel development in key tourism hubs such as Hong Kong, Singapore or Seoul; and core space serviced apartments targeting the increasing number of expatriates in China’s tier one cities and Hong Kong.

LIM noted that in the case of serviced apartments in China and Hong Kong, it is advisable to look at refurbishment or asset upgrades instead of outright construction as the housing allowances of expats have been reduced. These can generate returns of about 4% to 6% in Hong Kong and slightly higher in China.  

Student accommodation, and branded and boutique hotels will give unlevered returns between 12% and 15%. By catering to the expanding middle class seeking non-group travel, branded and boutique hotels become attractive investments.

“Demand is ... projected to grow as Asian pension, insurance and sovereign wealth funds expand their allocations to real estate. This is making core space more expensive but for certain investors, the entry price is worthwhile given the quality of the income stream.

“This demand can also make value-added strategies attractive by restoring quality income streams through active asset management,” said Paul Guest, head of research and strategy, Asia-Pacific at LIM.

“As a result, investors will increasingly seek additional returns by accepting additional risk, whether through leasing, leverage or location. This risk-taking should broaden, provided there is no additional shock ... allowing the momentum to build as economic and financial conditions improve,” he said.

LIM also offered other opportunities in the Asia-Pacific for 2014. The income return generated by built-to-suit warehouse facilities in Hong Kong, Singapore and China make them among the most attractive long-hold options. Suburban retail in Japan and Singapore too have compelling risk-adjusted returns.

“Japan is competitively priced as it is relatively capital-starved. However, Singapore’s suburban market is tough to access as buildings rarely trade except as minority stakes in newer assets. Expect unlevered returns in the range of 3% to 8% in logistics, while suburban retail offers a tighter 5% to 7% return,” it said.

For investors who look for value-added properties, core offices remain expensive as the recovery gathers pace, making a variety of refit, refurbish or lease-up strategies for secondary or edge-of-CBD space attractive across the region.

“The tactics differ by market, from riding the upswing in core rents in Singapore to leasing-up and selling into growing core demand in Japan, or repositioning secondary stock in Seoul, among others. This value-added strategy can generate returns of 9% to 14%,” it said.

Furthermore, modern logistics infrastructure remains underdeveloped across much of the region as Japan’s industrial sector is becoming institutionalised, and China remains one of the least well-provided markets in terms of modern facilities.

Both countries have abundant tenant demand for good space although from a consolidation/cost saving perspective in Japan as opposed to for expansion in China. Investors should see returns ranging from 12% to 15%. LIM also favours the provision of risk capital for residential construction in Sydney (with returns of 12% to 15%).

“We expect continued growth in investment volumes and persistent upward pressure on pricing in many markets. The most aggressive competition will be for core space, niche areas such as luxury hotels, as well as development options such as China logistics.

“In fact, with the amount of capital targeting Asian real estate, most of the traditional real estate asset categories are relatively crowded, increasing the appeal of select niche of contrarian strategies,” said Guest.


This article first appeared in The Edge Financial Daily, on February 14, 2014.