APAC real estate to continue feeling pandemic effects

A long-term approach is key for real estate investors. Rushabh Desai, chief executive for Asia Pacific at Allianz Real Estate shares his insights on the asset class, risks and the firm's recent asset acquisitions in the region. What is your investment outlook for real estate in Asia Pacific over the coming 12 months? Covid-19 has brought about unprecedented levels of uncertainty on a global basis. In the next 12 months, the Asia Pacific real estate market will continue to feel the effects of the pandemic, even as it enters the recovery phase ahead of its US and Europe counterparts. The impact of Covid-19 differs by sector and by country. Logistics, community retail and residential have proven to be relatively resilient whereas prime retail and co-working spaces struggle as they have been most exposed to physical containment measures. Longer-term implications of Covid-19, including the future of offices, will only be fully understood once we are past the crisis. Allianz Real Estate’s strategy is to align our investments with secular macro trends in the region such as urbanisation, domestic consumption, infrastructure, localisation and digitisation. Covid-19 has accelerated these mega trends and validated our investment strategy within the region. In our experience, having a diversified portfolio of core investments with downside protection helps in navigating uncertainty, and positions us well for recovery.  What do you see as the top three risks to real estate as an asset class? The top three risks to real estate, in my opinion, are: (i) Market;
(ii) Asset-level; and
(iii) Leverage. Market risks are factors that affect financial markets’ overall performance including, geopolitical issues, local market developments, and global health pandemics like Covid-19. Market risks are a cause for concern as they tend to be beyond our control and affect the asset class on a broad level. Asset-level risks stem from specific property types, micro-location sectors they are in. For example, Covid-19 has greatly affected hospitality and prime retail assets while accelerating the growth and demand for logistics assets. Lastly, how one manages leverage can significantly impact the investment performance – an over-leveraged property will have a narrow margin for error, while properties with healthy levels of debt can absorb falling rental rates or extended vacancies. With Covid-19 the availability of bank financing has reduced, and spreads have gone up amplifying the impact on borrowers with tight debt service ratios or covenants. Allianz Real Estate has acquired a number of assets in Asia Pacific, namely in Japan and Australia. What investment value does this region have to offer and what are you looking to unlock? Asia Pacific offers an ideal balance between developed economies and growth economies, with strong secular consumption growth supporting stable real estate demand. We align our investments with secular macro trends in our key target markets and have expanded our network of offices in Asia Pacific to support our growth in the region. Japan offers one of the highest stabilised real estate yield spreads in the region – particularly assets in the ‘big four’ cities which offer strong urbanisation trends coupled with limited net supply. We recently acquired a portfolio of prime multi-family residential assets in Tokyo that is stabilised and has a well-diversified tenant base. Australia, in particular logistics and office sectors, offers long-term leases with in-built inflation linked rental escalations. Offices, on the back of net positive demand, offers healthy rental growth prospects. Logistics sector has proven to be resilient with demand underpinned by e-commerce and international trade. We recently partnered with Charter Hall to acquire a portfolio of prime logistics assets on a sale-and-leaseback from Aldi. We are also interested in student housing as it taps into international education which is one of the pillars of growth for the Australian economy. Despite border controls impacting enrolments currently, we have appetite to opportunistically increase investments in this area. In China and India, our focus is on office and logistics investments in tier-1 locations. We will also continue to look for core opportunities in Singapore, South Korea and Hong Kong which provide stable, recurring income. © 2020 funds global asia

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