Yield spread, higher-risk assets drive APAC real estate investments

Emphasis on capital appreciation has weakened due to current market conditions.

Favourable yield trends and higher risk/return strategies have now become key drivers of investment motivations in the real estate sector across Asia Pacific, according to CBRE’s Asia Pacific Investors Survey 2017.

Culling data from 504 respondents across the region, CBRE’s latest report analysed outlook and appetite of the region’s real estate investors and reveals that whilst Asia Pacific investors are less willing to invest more in real estate compared to the previous year, they now have stronger appetite for higher-risk assets due to the potential return.

CBRE found that 37% of respondents identify “chasing yield spread” as the main motivation for investing in real estate, compared to 15% in 2016. The emphasis on capital appreciation has weakened without the tailwind of further cap rate compression.

Respondents highlighted global and regional economic woes as key concerns, even if worries have eased to 25% from 46% in 2016. More respondents—up from 6% to 14%—also see faster-than-expected interest rate hikes as a threat, whilst overpricing continues to cause investor concern amidst fears that valuations could come under pressure from either leasing weakness or cap rate extension.

“The pursuit of higher yield is pushing investors towards a core-plus strategy, which means investing in prime assets in non-core areas, or non-prime assets in core areas,” said Robert Fong, director of research for CBRE Asia Pacific. He added that more investors are also being motivated by geographical diversification.

The most preferred cross-border investment destinations include Australia, Japan, and China, whilst interest in Vietnam registered significant growth due to its strong macro fundamentals and higher initial leads. Outbound investment remains strong, but CBRE sees Asia Pacific investors focussing on their own region due to policy uncertainties in the United States and Europe.