Debating debt: Optimism at MIPIM Japan

Asia’s investors were as shocked as the rest of the world by the UK’s decision in June to leave the EU, but for delegates at MIPIM Japan in Osaka the long-term outlook may be brighter than first feared.

“We made an investment just a few months ago, before Brexit happened,” said Stanley Ching, head of the Real Estate Group at CITIC Capital Holdings, who was among the delegates. “I was pretty nervous. No one knows what Brexit means; there is no detailed agenda and a lot of uncertainties. But when we were underwriting the risks, we still believed London will remain a metropolitan and important city. The fundamentals will not change overnight.”

Asian real estate investors discussing the impact of Brexit said there could be advantages. Many had found it difficult to find investment opportunities in London in recent months, but believe the uncertainty provided by Brexit works in favour of those with a longer-term outlook.

“From a Chinese investor’s view, we believe that there are buying opportunities, which is evident from a few recent transactions involving London commercial buildings,” said Ching. “Certainly, Chinese investors now have the opportunity to buy assets they were not able to buy before, because there are still quite a few funds trying to make disposals to get liquidity, while, at the same time, US and European investors are more cautious.”

Akihiro Tachibana, division head of investment and development at Takenaka Corporation, believes now is a good time to invest in the UK “if you are looking to the next 20 years”.

“There is still liquidity in the UK, with so many credits available. If you have long-term money, you should do it,” he said.

The property market has dipped post-Brexit, but is still likely to see more Asian investors commiting aggressively to the London market. Panellists thought that although more conservative corporates have stopped hiring during the current uncertainty – putting pressure on the office market – creative industries are still heading to London and demanding space.

“After the Lehman shock in 2009, everybody wanted a short-term lease, and that’s probably what will happen in the UK for the next few years,” said Tachibana. “The office market will be quite stable in the short term, but problems will probably come after the EU has shaped its future.”

For some, this new independence from Europe could be an asset.

“We feel relatively better about the UK [than the rest of Europe]. Europe is a very fragmented region and young people are very different nowadays, with a great opposition to globalisation, and asset prices are heading out of control,” said Collin Lau, founder of the alternative investment company BEI Capital Partners in Hong Kong.

OUTWARD BOUND

Closer to home, the shift towards cross-border investment within the Asia-Pacific region was on delegates minds, despite transaction volumes slowing in the face of aggressive real estate pricing. Panellists even predicted an increase in outbound investment from traditionally conservative Japanese investors.

One presentation cited statistics showing Asian investors are the biggest net exporters of domestic capital globally. Almost $80 billion of outbound investment came from Asia-Pacific last year with London the top destination, receiving 22 percent.

Among Asian countries, Singapore is among the most active, with GIC investing close to $18 billion abroad. Insurance companies from China and Hong Kong have also been pushing into international markets, with a particular focus on the US over the last 18 months.

“Investors are very focused on core,” said Frank Khoo, global head of Asia at AXA Investment Managers – Real Assets. “If you look at the fixed-income market, with the rate going negative, and people still putting money into negative bonds, it tells you precisely what the mentality of these investors is. They are just focusing on protecting capital and not worried about return … investments are really risk-off.”

Terence Tang, managing director, capital markets and investment services, at Colliers International Asia, predicts investors will be staying in the region. “I see 2017 as a year for Asian capital to go more intra-Asia rather than outer-Asia,” he said.

Indeed, cross-border investment across the region has been at its highest in the last decade, with investors becoming more comfortable with deploying capital in neighbouring countries. In the first quarter of 2016, Japanese offices were the most traded in Asia-Pacific, followed by offices in Hong Kong, Singapore, China and South Korea.

“In Japan, you are getting paid 1 percent domestically for 65 percent LTV loans. This is crazy. There is a bigger opportunity overseas. Even in the US, you get almost 50 percent more than what we get here,” said Ari Druker, head of global debt – hospitality finance department at Tokyo Star Bank.

“In the next five years you will definitely see a big increase in Japan’s outbound capital. You’ll see so many insurance companies and pension funds that are coming out to the market.”

Druker added that the older Japanese pension fund and corporate decision-makers are being replaced by a less cautious younger generation.

But whoever calls the shots, they will have to address the issue of Japanese REITs. Traditionally the biggest buyers in the market, they have started to rein in their activities over the past six months in the face of aggressive pricing.

“You either take some country risk or you go into asset classes like hotels and senior housing that are not very mainstream today. If you have the patience, maybe you will catch the opportunities,” said Axa’s Khoo, while Tang has identified two markets in particular.

“Emerging markets such as Indonesia and Malaysia can satisfy the desire for higher return for those Japanese investors,” he said. “It is hard to find enough return in mature markets like the US and Europe.”