5 key demand drivers for asset repurposing in APAC

Investors are focused on newer assets, and older ones are being driven to obsolescence.

Asset owners and landlords are making ‘massive’ moves to upgrade and update commercial properties around the world, according to new research published by Knight Frank Asia Pacific. As COVID-19 induced lockdowns expose the weaknesses of income-producing properties, some two-tier markets have formed. 

Christine Li, Head of Research, Asia-Pacific, said, “The pandemic has ushered in a period that can be described as the ‘Great Asset Repurposing of the Decade’. Investors are increasingly gravitating towards newer assets that are less than 20 years old, indicating the pool of buyers for older assets is shrinking. With demographic and consumer trends accelerating property obsolescence, there hasn’t been a greater impetus for asset owners in the last 10 years to really examine their portfolios and bring properties into modernity, pivot their purpose, and cater to occupiers’ rapidly changing requirements.”

According to Knight Frank analysis, in 2018, the proportion of all transacted properties that are 20 years and older across Asia-Pacific stood at 46%, though this has come down to 37% in 2020. In Singapore and Hong Kong, the office market inventories have gradually shifted towards a greater proportion of Grade-A assets, rising from 22% to 33% in Singapore and 64% to 65% in Hong Kong from 2016 to 2020.

Across sectors, there are bifurcations in the capital returns as well. Australian annual rolling capital returns for industrial assets have risen to 7.9% by end 2020, while the retail sector struggled amid the pandemic, falling 13.9% in the same period. This has prompted owners to repurpose their assets and “bring them to relevance”.

Li added, “Despite the scale of the challenge, there are significant advantages of moving towards asset repurposing instead of redevelopment. Key benefits include acquiring assets at a discount, reduced competition from investors who are only interested in passive strategies, and speed-to-market, which allows a return to optimised usage within a shorter time frame.”

The research highlights five factors driving demand for asset repurposing, which are:

1. Uncertainties around occupier demand over the medium to long-term;

2. E-Commerce disruption rendering retail assets obsolete;

3. Prolonged weak international tourism impacting hospitality assets;

4. The growing importance of Environmental, Social and Governance (ESG); and

5. The emergence of sectors with structural tailwinds.

“Like many sectors, real estate is undergoing a seismic shift, driven by consumer behaviour and global demographic trends. The onset of the pandemic has accelerated these changes. Most acute of all is the rapid adoption and proliferation of e-commerce, driving growth in the industrial, logistics and data centre markets while simultaneously contributing to the steep decline in physical retail,” said Neil Brookes, Head of Capital Markets, Asia Pacific. 

“It is unlikely that offices will remain unchanged following the events of the past 18 months,” Brookes added. “As office workers adapt to hybrid working models, many will demand spaces that prioritise quality over quantity. The focus on best-in-class products, flexibility, ESG, and talent-attraction will be critical considerations.”

Download the full report here.