APAC real estate investment volumes record softest quarter since 2016

The overall regional volume declined by almost 40% in Q1 2020 at US$117bn.

It has been a difficult year so far for the commercial real estate investment market. According to Cushman & Wakefield, the overall regional investment volume were down by almost 40% y-o-y in Q1 2020 at US$117bn – the softest quarter since Q1 2016 in which US$106bn of transactions was recorded. From early analysis of Q2 data, there appears to be mixed news.

On the positive side, volume picked up to approach US$150bn, however this is well below the three-year rolling quarterly average of US$205bn. The implication is that investment in 2020 is likely to fall well below last year’s totals (Figure 9). Deployment of capital, of which there remains an abundance, is likely to remain challenging.

Here's more from Cushman & Wakefield:

RETAIL VOLUMES DOWN SHARPLY, INDUSTRIAL STANDS FIRM
At the sector level, investment in all asset classes is well below rolling averages, though investment in the retail and hotel sectors have been hardest hit with both recording anaemic volumes in H1 2020 – down 58% and 51% y-o-y respectively. Office investment also weakened dramatically, down 49%, to $24bn.

In contrast, the defensive qualities of the industrial sector have sustained investor interest and while volume is down year-on-year, the decline has been less dramatic than in other sectors at 12% for H1 2020. Indeed, in Australia, Q2 2020 investment in industrial assets almost exceeded that of the office sector at AU$1.64bn and AU$1.67bn respectively. It has been a decade since these two figures have been so closely matched.

VALUES UNDER PRESSURE, BUT REMAINING STABLE FOR NOW
The uncertain economic outlook and lack of clarity of the short- and medium-term impacts of COVID-19 on occupier markets have made valuing assets substantially more difficult. In turn this has led many investors to sit on the sidelines, while for those more actively looking to trade there is an increasing divide between vendor and purchaser pricing expectations.

However, we have seen little change in capitalisation rates so far, though this is likely in part due to the limited number of assets trading as many owners are reluctant to sell and lock in potential losses. Similarly, there is little evidence of true distress in the market at the current time, but this may become more apparent if the outlook worsens or banks become more conservative on lending policies. With this, new leasing and tenant retention are paramount for landlords.

In time though, hospitality and retail asset values will come under closer scrutiny and the loss of income from lower occupancy and sales will inevitably be reflected in any valuation. The office sector to an extent and industrial sector should be more resilient, though average lease expiry and tenant covenants will influence pricing.

More broadly, with interest rates at or near record lows and very low hurdle rates, commercial real estate is likely to remain a preferred investment class on account of its higher risk-adjusted returns and longer-term growth prospects. Expect investors to actively seek opportunities all along the risk curve (Figure 10).