2015-03-25

Singapore Investors to Continue Searching for High-yielding Assets in Key Markets Worldwide

According to Colliers International’s latest white paper titled “Tug of War: Emerge as a Winner in the Game”, Asia is expected to witness a rising tide of both outbound and inbound real estate capital flows in 2015. 

The flow of real estate investment out of Asia is set to increase 61 per cent from US$46 billion seen in 2014, while inbound capital flow is forecast to witness an exceptional growth of 102 per cent from US$13.2 billion in 2014. 

Inbound1 and Intra-regional2 Real Estate Capital Flows into Asia

It is observed that there is a group of Asian investors who has refocused back on Asia, where the availability of stock for sale at realistic prices looks promising in 2015.

Mr Terence Tang (鄧文傑), Managing Director of Capital Markets & Investment Services | Asia at Colliers International, says, “The expected 102 per cent increase in inbound real estate investment in Asia this calendar year is more than 3 times the rate of growth in 2014. Capital is beginning to shift back to Asia, as we witness yield compression in most key US and UK markets, as well as yield improvements in some Asia markets with more realistically-priced assets surfacing. ”

Mainland China remains the most popular destination for inbound and cross-border real estate capital flows within Asia.  Other markets such as Hong Kong, Singapore and Tokyo are also on Asian investors’ shopping list, as they offer similar levels of liquidity, in the range of US$2-3 billion per year.

Mr Tang continues, “In particular, the office market across Asia is at a stage in the cycle, where new supply will increase 152 per cent to about 100 million sq ft – presenting significantly more opportunities to investors. Singapore, Hong Kong and Shanghai remain the best target destinations, but structural change in markets such as India, is making them more attractive.”

The recommended investment opportunity in Singapore lies in the residential sector; particularly, high-end luxury apartments.  On the back that transaction volumes are continuously falling and the inventory of apartment units are building up, the price gap between buyers and sellers is narrowing.  Given the correction in high-end residential prices, this asset class may begin to look attractive for the longer-term investors.

Nonetheless, the office sector in Singapore remains compelling, with its high occupancy and increasing rent rate.  However, with an above-average impending supply coming onto the market in 2017, investors’ interest may slightly soften towards the end of the year.

Of the cities in Asia, Shanghai remains the top target for inbound and intra-regional flows this year.  Office space in Pudong will be the recommended investment opportunity in 2015.  The office buildings currently yield 4-5.5 per cent, given sustained end-user demand and potential rental growth. Depending on the investor’s risk appetite, the expected IRR ranges from 12-15 per cent within an investment time frame of 5 years.

Opportunities for Outbound3 Investments

In 2014, there was US$46 billion worth of outbound real estate investments from Asia.  In terms of volume, Mainland China (31 per cent), Singapore (27.2 per cent) and Hong Kong (12.9 per cent) were the top 3 sources of outbound real estate capital, accounting for 71.1 per cent of the total outbound capital from the region.

It is expected that Asian outbound real estate investments will continue to strengthen and increase 61 per cent year-on-year in 2015.  Prime gateway cities, such as New York, London, Sydney and Melbourne, will continue to be the preferred destinations for Asian investors looking beyond their home region.

However, with existing income-producing assets being gradually snapped up and increased competition from local players, investors are also turning their attention to secondary locations – such as Los Angeles, San Francisco, Paris and Frankfurt – where there are prospects of better returns, albeit with marginally-higher risk.   

Singapore Investors’ Appetite

In 2014, the total outbound investment value (including cross border capital within Asia) made by Asian investors is approximately US$83.8 billion, of which some 24 per cent was contributed by Singapore. 

Specifically, Singapore investors invested some US$8.4 billion within Asia, which is approximately 15 per cent higher than the US$7.3 billion in 2013.  Meanwhile, capital flows from Singapore to outside Asia is some US$11.9 billion, about 32 per cent higher than US$9 billion in 2013. 

Typically, local investors are venturing out of Singapore to seek better yielding opportunities, as there is a lack of attractive ones at home.  The cooling measures implemented by the Government have limited the growth in returns in the domestic market, while comparatively, there are opportunities outside of Asia that offer higher yields and lower associated risks. 

Over the last 10 years, Singapore investors have accumulated a high level of wealth and the appreciating Singapore Dollar against Australian Dollar, Euro and Yen is expected to appeal to investors in seeking out assets in those countries.   In particular, the recovering economies of Americas and Europe provide strong fundamental reasons for investors, with foreseeable potential in a further growth in real estate rents and prices. 

Mr Tang comments, “Singapore investors will likely be buying an income-producing asset in a key gateway city that has a net yield of around five per cent, with tenancies for as long as they can get.  This serves as bond-like investment instrument for them.” 

Additionally, the continued capital outflow from the mainland Chinese investors, who are actively seeking alternative offshore investments, are injecting more liquidity in most of the key gateway cities in the world today than before.

In 2014, looking at outbound investments outside Asia, the top three cities that Singapore investors injected their capital were Sydney, Manhattan and London; and the top three popular asset class included office, industrial and hotel.    

Back in the home region, the top three cities favoured by Singapore investors were Tokyo, Kowloon and Shanghai; and the popular asset class were office, development sites and retail. 

Outlook

Looking forward, Singapore investors will be cautiously optimistic in 2015 and 2016, continuing their search for high-yielding real estate investments across key markets around the world – on the back of the lack of appropriate investment opportunities that commensurate with the risks in the domestic market.

While key gateway cities such as London, New York, Sydney and Melbourne, remain the preferred destinations for Singapore investors, secondary cities such as Munich, Cologne, Barcelona and Milan, are starting to be on the radar for more adventurous investors seeking higher yields.  Similarly, mature markets whereby professional services are easily attainable, such as Australia and the UK, will also be targets for the more adventurous developers, who are prepared to undertake development risks. 

Mr Tang comments, “Singapore investors will continue to be interested in investing in the US, although most find it difficult to enter the markets due to the high tax environment and restrictive tax regime.  With an increasing cost of funds, we expect Singapore investors to slow down their activities and re-examine their strategies in the US towards the second half of the year.”

Looking closer to the home region, Japan and India are potential investment targets.

Mr Tang notes, “In fact, we observe that Singapore investors are still keen to invest in the local market.  The recent acquisition by Blackstone in several en bloc residential developments in Singapore has re-ignited interest in the local market.”

He concludes, “Nonetheless, investors are still cautious, particularly with the increasing cost of funds and the softening housing rental market.  They are waiting for an opportune time when there are further price adjustments to get back into play. 

Notes:

  1. Inbound refers to real estate flows from the rest of the world to Asia (excluding cross-border flows within Asia). 
  2. Intra-regional refers to cross-border flows within Asia. 
  3. Outbound refers to real estate flows from Asia to global (excluding cross-border flows within Asia), unless otherwise stated.