Top 3 real estate sectors that have piqued investors' interest for 2021

Investors expect to increase their exposure to logistics, living investment, and alternative asset classes.

The impact of COVID-19 has strengthened key investment themes that were already present prior to the onset of the pandemic. According ot JLL, while COVID-19 has clearly created short term uncertainty, key sectors and subsectors continue to emerge. JLL recently surveyed top investment leaders from 38 global and regional investors with a combined AUM of more than USD 1.8 trillion on how COVID-19 is impacting their strategic investment decisions and planning. The top three sectors in which survey respondents expect to increase their exposure by 2021 are:

1. Logistics

The logistics sector continues to present strong fundamentals and is expected to be resilient moving forward. Growing demand from the e-commerce and grocery industries are some of the key drivers, supported by short term demand from critical suppliers such as medical devices, products and pharmaceuticals.

Given the strong underlying drivers for logistics real estate, around 81% of survey respondents plan on increasing their exposure to this sector by the end of 2021. And those that plan on increasing their exposure to logistics will also have a greater focus on platform and entity levels deals. This will allow investors to quickly gain scale, an important investment consideration for investors in logistics real estate.

2. Living investment sector

Around 58% of survey respondents plan on increasing their exposure to the living sector in Asia Pacific by the end of 2021. While still a very small sector in Asia Pacific outside of Japan, institutional interest is rising rapidly. And while Japan remains the key target for regional and global institutional capital, there are nascent living sectors in Australia, South Korea, and China.

While most investors plan on increasing their exposure to the living sector, capital from Europe and North America is more bullish on the sector (66% plan on increasing their exposure). Multi-family is an established sector in North America and across many parts of Europe, and many global General Partners have existing investment management experience in multi-family to leverage from in their Asia Pacific investments.

3. Alternatives

Relatively low lot sizes and superior returns make alternative asset classes such as data centres, purpose built student accommodation, and health and aged care assets, amongst others, an attractive investment option for many investors. According to the survey, around 44% of respondents plan on increasing their exposure to the alternatives sector by the end of 2021. Around one third of survey respondents do not have exposure to alternatives at present, and thus we can expect further broadening in the capital base for alternative assets.

While investors are expected to increase their focus to these sectors, commitment to investing in traditional core sectors remains. The investment grade office sector we expect to remain a central and strategic asset class for many investors. Office is a cornerstone for many global and regional investment strategies, and according to the survey results, will remain one of the most active investment asset classes in 2020 and 2021.

Retail is a sector that will likely to continue to be out of favour over the short term. Around 44% of survey respondents are looking to reduce their exposure to this sector by the end of 2021. Sentiment around bricks-and-mortar retail was already weak given the rise in e-commerce spend across the region. And with COVID-19 accelerating this switch from offline to online retail, the short term outlook for retail is relatively subdued.

Nonetheless, while the current acceleration in structural change is a major challenge for the industry, some segments will continue to outperform. Centres with a larger proportion of turnover in non-discretionary retail (e.g. neighbourhood type retail centres) will remain resilient beyond the current period, as well as large flagship centres that act as entertainment and social gathering places for communities. Retailers will also place a greater emphasis on creating stores with a unique offline offering and strengthen the omni-channel retail experience.

Hotels is another sector which has been deeply impacted short term by COVID-19. Of survey respondents who have some existing exposure to hotels, almost 46% plan on reducing their exposure by the end of 2021. Nonetheless, on the assumption that a COVID-19 vaccine is developed, we expect to see a strong continued commitment to this sector going forward. While reduced global travel is a short term headwind, the domestic travel market may pick up the slack, with domestic tourism expected to be a net beneficiary across many countries.

Investors will target large, traditional, core markets

In times of market volatility and uncertainty, investors have tended to focus on safe haven investment destinations. According to the survey, around 56% of respondents are planning to increase their exposure to Japan by the end of 2021 (6% want to reduce exposure, meaning a net result of 50%). Japan is considered a safe haven destination by many investors. Income and capital value returns are relatively more stable, providing more certainty in returns during periods of instability. Real estate market fundamentals are also positive on a relative basis. Tokyo office market (5-kus) vacancy is 0.7% (as at 2Q20), and demand (net absorption) is forecast to remain positive in 2020 and 2021. The outlook for the Tokyo logistics sector is similarly positive.

In addition to Japan, mainland China, Australia, South Korea, and Singapore were other major markets where survey respondents plan to increase their exposure. Around 51% of respondents want to increase their exposure to mainland China. While the domestic economy was slowing even before COVID-19, many investors are seeing through the short term headwinds, and looking to the longer term-growth potential of the market.

Half of survey respondents plan on increasing their exposure to Australia by the end of 2021. Australia is highly transparent (ranked 3rd globally for real estate transparency according to JLL’s Global Real Estate Transparency Index), and provides broadly higher yields. It is also a relatively liquid market with high levels of cross border investment. Between 2015 and 1H20, offshore investors accounted for 36% of transaction volumes, the highest proportion across the core markets in the region.

Survey respondents identified South Korea as another key market where they plan to increase their exposure (44% plan to increase their exposure by the end of 2021). While South Korea has historically been a highly domestic market (82% of transactions between 2015 and 1H20 were executed by domestic investors), domestic groups may see increased competition from offshore capital. The expansion of Korea’s REIT market may also lead to further opening of the real estate market to offshore groups. Korea is home to seven REITS, four of which went public in 2018 and 2019. A number of listings and potential listings are planned in 2020.

Finally, Singapore remains a key destination for investors. Around 44% of respondents plan to increase their exposure by the end of 2021. Similar to Australia, offshore capital accounts for a large proportion of investment activity. As a key financial gateway city in Asia Pacific, it will likely remain an attractive investment destination for many global and regional investors.

On the other side of the ledger, around 18% of survey respondents plan to reduce their exposure to Hong Kong, although on a positive note, 78% plan to maintain their exposure. A relatively weak income and capital value return outlook over the next 12-24 months, coupled with a subdued domestic economy and social unrest, are weighing on offshore investor sentiment towards Hong Kong. Nonetheless, despite being a key global financial hub, the real estate market remains firmly domestic (76% of transactions between 2015 and 1H20 were executed by domestic groups). This may help to balance the sentiment from global and regional investors.

Domestic and mainland Chinese groups very much underpin the strength of the market, and the confidence of many of these groups on their local market remains broadly intact. For example, Sun Hung Kai Properties is leading one of the largest ever investments in Hong Kong with the acquisition of a commercial site atop the High Speed Rail terminus. With Ping An Life Insurance as a strategic investor in the venture, total investment of up to USD 10.0 billion is expected for the 3.2 million square-foot property. It is expected to be completed by 2025 at the earliest.