Wealthy investors return to Asian property as retail, tourism climb

Has the retail property market finally bottomed out? Investor flows and industry experts suggest the sector could be set for a comeback.

June 27, 2023

A version of this story was first published in sister title, AsianInvestor.

Retail property has bucked the wider trend of quarterly falls for Asian property markets, with indications that investors are favouring the sectors’ low valuation, while high net worth individual (HNWI) sentiment indicates a possible bottom to the market. 

Some experts believe that insitutional investors could follow with a similar comeback to property.

Flows into retail property in the Asia Pacific increased from $4.2 billion in Q4 2022 to $7.3 billion in Q1 2023, according to the latest APAC Capital Trends, Q1 2023, published by MSCI Real Assets (formerly Real Capital Analytics) in early May.

The key to the returning appeal of retail property has been the value that investors see in the asset class.

Three years of neglect by investors has seen prices fall, with owners of retail assets – cognisant of the structural and short-term forces challenging valuations – prepared to sell assets at a loss, Ben Chow, vice president, head of real assets research, Asia for MSCI, told AsianInvestor.

“Having missed out on the rapid price increases for most other sectors back in 2021, retail came into this downturn at relatively more attractive pricing levels, and sellers have been more responsive to price adjustments,” he explained.

Over the same period, flows into the office sector fell from $15.8 billion to $10.6 billion and those into the industrial sector fell from $8.8 billion to $4.6 billion.

This is the first quarter since Q4 2019 that investors have favoured retail over industrial for total allocations.

Year-on-year, investor flows into APAC retail were the most resilient of any sector in Q1 2023, falling 26%, compared to a 52% fall for office flows and a 63% fall for industrial.

Asian HNWIs allocations to retail are set to increase further, according to figures published in Knight Frank’s annual Wealth Report in March.

The proportion of HNWIs planning to invest in retail either directly or via their family offices increased from 24% in 2022 to 68% this year. Over the same period those planning to invest in offices fell from 49% to 37%.

Asian HNWI demand for retail far exceeds those of European and North America.  In 2023, 33% of European HNWIs said they planned to invest in the sector, up from a 32% in 2022; in North America 38% said they planned to, up from 30% in 2022, according to the report.

Good value

Neil Brookes, global head of capital markets at Knight Frank agreed that low prices were the key to HNWI interest.

“The private investment sector has mainly been drawn towards the retail industry due to the relatively more attractive prices and returns on offer compared to other sectors,” he said.

MSCI's Chow pointed to two examples in Australia of sellers taking losses.

The first is the sale by Blackstone of Forest Hill Chase shopping centre in Melbourne, Australia at an 8.5% yield and a price lower than that it paid for the asset seven years ago.  The second is Jurong Point, the Singapore Mall, which Link REIT bought for less than what Mercatus/NTUC purchased it for 5.5 years ago.

Comfortable with the risk, retail investors are now willing to get out ahead of institutional investors in anticipation of a sector rebound, according to Brookes.

“With pandemic-related restrictions gradually being lifted, improved shopper traffic, increased tourist arrivals around the world and Chinese mainland reopening, investors are now considering prime, well-located retail assets as contrarian plays,” he said.

Some of the new flows seem likely to come from capital previously ear-marked for the industrial sector according to Chow, who pointed to the relative pricing of industrial and retail sectors.

Rebound hopes

In Japan and South Korea, retail yields – which move inversely to prices – bottomed out in Q1 2020, since when they have increased by 25 basis points (bps) in Japan and 40 bps in South Korea, according to MSCI Real Assets.

100 basis points is equivalent to one percentage point.

By contrast, Japan’s industrial yields are still 25 bps lower than they were in Q1 2020, while those in South Korea are 65 bps lower. Even in Australia, where retail yields have fallen since Q1 2022, they are down 55 bps, much less than the 1.05% fall in industrial yields.

The only other sector to record a quarterly increase in Q1 2023 was hospitality, up from $1.9 billion to $2.5 billion, according to MSCI.

Evelyn Yeo, head of investments, deputy CEO, Pictet Wealth Management Asia explained the greater interest by investors in terms of a resumption in retail and hospitality on the back of China’s reopening, steady GDP growth in the region, the low risk of recession and the strength of company balance sheets.

She pointed to the growing appeal of hospitality noting the responsiveness to inflationary pressures offered by the ability to adjust the cost of hotel rooms, for example, on a daily basis.

“Of course, they are still dependant on consumers accepting the prices set and we believe the recovery in hospitality will be uneven. But, with pent-up demand after two years of pandemic-related lockdowns and restrictions, some segments – particularly at the high end – should hold up well,” she said.

Yeo added that client flows were increasing into private real estate funds and real estate investment trusts (REITS). Client flows into REITs have increased six-fold since 2020, she said.

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