Faced with a trade dispute and a 10-year economic expansion, read how investors can look for returns in both retail and commercial markets.
With the ranks of the wealthy growing in Asia, investors seeking to diversify their portfolios could consider how best to incorporate real estate.
Property has always had the reputation of being high on both risk and reward but, as today’s market features a major trade dispute and a 10-year economic expansion that may be losing steam, high-net-worth (HNW) investors have plenty of avenues to find returns in both retail and commercial markets in Asia and abroad, says Chris Marriott, CEO of South East Asia for global property agent Savills Plc.
“I think the outlook is still positive, and probably the best gauge would be the attitude towards real estate investing in Asia-Pacific, the number of funds and private equity firms that are present in the market and the amount of cash that they’re intending to raise,” he says.
According to Marriott, about US$20 billion was raised for funds in the Asia-Pacific market in 2018, while the 63 funds in the region had about $55 billion in “dry powder,” or cash-like securities that can be used to make future asset purchases.
With Asian economies continuing to outperform their western counterparts on growth, funds in the region have been following suit in their geographic distribution. “Not only do we have an increase in the proportion of total assets being allocated to real estate, within that real estate category, most funds are trying to increase their location to the Asia-Pacific region,” says Marriott.
According to a survey from The Economist Intelligence Unit (EIU), commissioned by RBC Wealth Management, 78 percent of high-net-worth-individuals (HNWIs) in Asia say they invest in residential real estate in the Asia Pacific region.
The New wealth rising survey, which targets HNWIs and their adult children, as well as high-earning professionals across China, Hong Kong, Singapore, Taiwan, Canada, the U.S. and UK, looks at the shifting landscape of global wealth, what it will be invested in and who is investing.
With the largest wealth transfer in history underway, major attitudinal shifts are emerging. Interests are swinging from local to global, smart philanthropy is taking hold, and impact- and alternative investing are going mainstream. As wealth shifts—globally and from one generation to the next—the influence of affluence will change.
As that wealth shifts across generations, it’s also moving across jurisdictions, says Michael Reed, head of RBC Wealth Management, Southeast Asia, and chief executive, RBC Singapore Branch. “The destinations of choice are the U.S., Canada, UK, and Australia,” he explains. “Those countries offer education, lifestyle, sound property markets and quality retirement options that appeal to many high-net-worth families.”
The Asia-Pacific region is a collection of markets with their own individual characteristics. Within the region, the bulk of activity has been spread among Hong Kong, Japan, South Korea and China, with commercial real estate often being the dominant investment. Internationally, the activity has been in developed markets such as the UK, Australia and particularly the United States, which saw US$19.1 billion from Asia-Pacific investors in 2018, leading all countries, according to Savills.
The EIU data found more than half of respondents in Asia (57 percent) say they hold commercial real estate within the Asia Pacific region.
For a more targeted approach, Marriott suggests considering alternative investment categories such as student housing and retirement homes, which are two areas seeing strong growth, both in Asia and internationally, thanks to favourable demographics.
Moving into individual markets does require a deeper knowledge of that market, and a better understanding of local risks. Investors need to keep in mind that real estate is usually not as liquid an investment as a stock or bond, which means it takes longer to sell an asset. For investment in commercial real estate, it can be important to track industrial supply, demands and GDP that may impact those lead indicators.
According to the New wealth rising survey, almost half of investors in Hong Kong (47 percent) say they currently hold real estate in their portfolios. Additionally, of the HNWIs in Asia who say they own a secondary domestic residence, more than half (57 percent) say their primary purpose is long-term investment.
“You’re going to look at the political, legal and financial risks involved in any specific country,” says Marriott. “Legal in terms of land title ownership and the ability to inforce ownership laws, financial in terms of currency exchange and interest rates, and the requirement to hedge your currency.”
Another option is to invest in logistics, which operate out of buildings for storage and distribution. This is a rapidly expanding space as global trade continues to grow. “There’s been strong growth in logistics in China; we’re starting to see that also grow in India, Indonesia, and Vietnam,” says Marriott, adding that the increase is driven by growth in e-commerce.
The U.S.-Chinese trade dispute has dominated headlines of late, and for good reason. According to a recent report by the Asian Development Bank, the conflict is currently the largest risk to the Asian economy, and many economists have cut growth forecasts as a result.
The EIU survey found 83 percent of HNWIs in Asia say it’s more important than ever to future proof one’s wealth. Additionally, more than half (56 percent) say global economic uncertainty is a top concern when it comes to their ability to create, preserve or manage their wealth.
The trade dispute has raised concerns about the economic outlook for both the U.S. and China, as well as the broader Asia region, but it also presents opportunity. According to Marriott, international private equity funds continue to invest money in Chinese markets despite the continuing uncertainty – seeking to take advantage of more opportunistic pricing.
“I think it’s actually creating an opportunity in China, rather than changing necessarily the dynamic,” he says. For instance, concern over the dispute can increase the appeal of buying convertible debt in real estate developments, as the securities bring in interest payments, but can be converted to stock in the project if it is successful. The economic stress of the dispute also is prompting some developers to sell assets in order to clean up their balance sheets, which presents opportunities for a savvy investor.
Economic uncertainty can be troubling for investors, and means they should proceed with caution, but it doesn’t change the long-term economic picture for the region.
There is also reason to believe the financial activity in the real estate sector globally still has plenty of momentum. According to research firm Preqin, assets under management in the real estate sector are projected to hit $1.2 trillion in 2023, which would be a 50 percent increase from 2017.
“The fundamentals are that there is a broad, long-term-sustained economic boom in Asia-Pacific,” says Marriott. “There will be cyclical booms and busts within each individual country, but the broad economic facts will remain the same.”
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