Knight Frank launches the latest Active Capital Asia Pacific. It aims to provide an insight into how the real estate market in Asia-Pacific performed historically and how it is predicted to play out in 2022, thereby acting as a guide for investors. The report also highlights an important theme – Environmental, Social and Governance (ESG).
For investors in the Asia Pacific (APAC), the last decade probably ended in 2019, as momentum was upended by the pandemic. Knight Frank’s Capital Gravity model suggests that while the next few years will see a boost in investment volumes, 2022 is likely to see a sharp rise in activity, providing investors the opportunity to rebalance portfolios, execute business plans and further their strategic goals.
Cross Border Investment Trends and Drivers:
• Strong US dollar powers higher outlay by US investors
• Record dry powder
• Asset rotation spurred by
Investors moving up risk curve
Higher debt cost/inflationary pressures
Recovery in hospitality and retail assets
Appeal of prime grade offices
Increasing allocations to sustainable assets
• Diversification/inflation hedge
Top Capital Sources in APAC in 2022:
The US dollar has gained sharply amid the Fed’s widely anticipated rate hike cycle to trade at two-decade highs. To some investors, this will no doubt be a boon as assets in the region will be cheaper given the strength of the US dollar. Investors from the US has perennially been APAC’s largest capital source, followed by Singapore and Hong Kong SAR. Investments from Hong Kong SAR, which boosts a significant base of investors, will also continue to remain strong.
Paul Hart, Managing Director of Commercial Markets says, the total inbound cross-border volume in Hong Kong SAR reached HK$12,765 million in 2021, surging by 6.8% YoY. Going forward, we expect high-spec industrial buildings, in particular, modern logistics, cold storage and data centre properties to remain sought after by investors amid the booming e-commerce landscape. Repurposing of hotels into long-stay residential, co-living, or other uses will remain a trend as long as the hospitality sector is constrained by Covid.
Cross Border Investors’ APAC allocations in 2022:
Globally, the office sector is expected to account for over two-thirds (69%) of cross-border investment volumes in 2022. As more workers return to the office, higher utilisation rates should translate into a more active leasing market. Still, the pandemic has altered work habits and the future of office could well be hybrid. Logistics are now increasingly viewed as core while retail has turned opportunistic. The thematic spotlight in 2022 will be on post-pandemic strategies.
We expect investors to focus on the region’s long-term structural fundamentals again. Investors will also gravitate to more active asset management strategies, such as repurposing and value-add plays, to generate alpha.
Knight Frank’s proprietary Sustainably Led Cities Index
The issue with ESG is now more prevalent than ever and globally, investors are placing more emphasis on ESG considerations at every level of their assets. Knight Frank introduces our APAC Sustainably Led Cities Index with the aim of helping investors understand how the cities they are investing into might influence their benchmarking and risk outcomes.
Our research covers 36 commercial real estate markets across the APAC region, scoring their urbanisation pressures, climate and carbon, and green score, which can be combined into an overall sustainably led cities score.
We have identified Singapore, Sydney, Wellington, Perth, and Melbourne as the Asia-Pacific’s top five green-rated cities for commercial real estate. The top ranked cities usually benefit from a myriad of factors, such as reduction in carbon emissions per person, large number of green spaces, and low urbanisation pressures - according to Knight Frank report.
Christine Li, Head of Research, Asia-Pacific, said: “While the real estate sector in APAC is adapting to the risks of these events, investors should still brace themselves for the impact of climate risks and erratic weather changes on their investment portfolios. The Index is closely aligned to what investors are interested in when benchmarking their portfolio and individual buildings.”
Neil Brookes, Head of Global Capital Markets, said: “Investors are placing more emphasis on strategies that maximise their returns from their ESG efforts. We have seen a swift uptake of ESG metrics benchmarking in the APAC region in recent years, motivated by the imminent need to curtail climate risks.
Paul Hart adds, “Hong Kong’s ESG acceptance and development has lagged other gateway locations. But it is refreshing to see local developers now paying more attention to ESG. Leading developers are addressing their internal policies and governance touching upon project planning, green financing, leasing, operations, and facilities management. Hong Kong has around 125 million sq ft of private held old commercial buildings, aged 30 years or above, representing 48% of total commercial buildings in Hong Kong. Landlords face significant hurdles to incorporate sustainable features into their buildings as the building design and supporting infrastructure is outdated. Properties without sustainable elements owned by landlords who don’t incorporate social and governance ethos into their operations will become unattractive to many corporate occupiers.