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Hedge Fund Monthly
Asia-Pacific Real Estate in its Global Context
Peter Hobbs and Henry Chin, RREEF November 2006


The increasing appetite for real estate has fuelled strong performance over recent years, and has led to a sharp increase in cross-border investment activity. For a number of years, larger investors in Canada, Germany, Netherlands and the US have pursued active global real estate investment strategies. More recently there has been an increase in cross-border activity within the Asia-Pacific markets (Figure 1) and this has involved both global investors and an increasing number of regional investors such as those from Australia, Hong Kong, Japan and Singapore.

This increased interest in cross-border investing is occurring at a time of aggressive pricing of real estate assets in Asia Pacific and across the world. Within this context, this article addresses two major questions facing cross-border real estate investors. First, given the pricing of real estate around the world, what factors should be considered when deciding where to invest? Second, what are the major trends in the Asia-Pacific region, and the implications for different types of investment strategy.

Figure 1: Asia-Pacific Cross-Border Capital Flows are Increasing

Source: RREEF Research, JLL, DTZ
Click on the image for an enlarged preview

Global Market Insights: A Framework

The nature of investment strategies vary significantly according to the objectives of individual investors and, given the range of objectives, a simple framework is necessary to help identify different types of opportunity across Asia-Pacific. This framework helps understand the drivers of performance in two distinct dimensions. First, structural factors normally associated with the emergence of real estate markets, such as new real estate products, new geographic markets, or sale and leaseback opportunities (Figure 2).

Second, cyclical factors are also important in determining the attractiveness of markets. Real estate markets remain highly cyclical, with waves of undersupply tending to be followed by surges of new development. For this reason, investors need to assess the position of markets through their real estate cycles, both in terms of market fundamentals and performance.

Beyond the structural and cyclical drivers of performance, investors need to understand the risks associated with investing in different markets and product types. Based on these drivers, a simple framework has been developed such that the relative attractiveness of different global markets for different investment strategies can be established, as shown in Figure 2.

Figure 2: Schematic Representation of Real Estate Performance Drivers and Risks Determining Market Attractiveness

Source: RREEF Research
Click on the image for an enlarged preview

Asia-Pacific Market Prospects

Structural Opportunities

The fast pace at which the Asia-Pacific economies are growing coupled with the relative immaturity of real estate markets means the region is dominated by classic “emerging” real estate markets. The growth potential is strong, but it is also volatile and there are significant risks associated with investing in many of the Asia-Pacific markets.

In terms of structural prospects for performance, there are three key trends across the region: 1) the underlying pace of economic growth and shortage of modern real estate; 2) the high proportion of owner occupied space; and 3) the introduction of REIT-type structures across the region.

In terms of the first of these drivers, it is the fast pace of economic growth that lies at the heart of many real estate opportunities across the region. Current levels of wealth outside the mature economies are relatively low but the pace of consumer spending growth is high, and this is generating strong demand for better quality real estate, most particularly in terms of residential and retail space. Although the pace of growth is strong, the amount and quality of the real estate stock is relatively low, and the demand-supply imbalances are generating significant opportunities across the region.

Compared with the North America and European countries, levels of owner-occupation are relatively high, at around 80% of the investible stock. There are exceptions, such as in Hong Kong, Singapore and Australia, but across the region a large proportion of investment grade stock is controlled by owner occupiers. In recent years, there have been a number of significant sale and leaseback transactions, particularly in Singapore and Japan, and this trend is likely to spread across the region in the medium term.

A third major structural change involves the establishment of public-listed real estate vehicles (REITs) across the region and this has grown strongly over the past five years. The introduction of REIT structures is improving market transparency and increasing the institutionalisation of the real estate investment market. REIT-type structures have existed for many years in Australia where the LPT market amounts to over US$80 billion. By the middle of 2006, REIT structures had also been introduced in Japan, Singapore, South Korea, Taiwan, Malaysia and Thailand, with an overall market cap over US$ 40 billion. The pace of growth in a number of these markets has been phenomenal, with 800% growth in Singapore, 500% in Japan and over 1,000% in Hong Kong in the three years to end 2005. Given the relatively small scale of the local real estate market in Hong Kong and Singapore, both countries are increasingly acting as significant nodes for cross-border investing across the region, particularly in China and India, and this is set to continue over coming years.

Cyclical Outlook

The strength of economic growth means that cyclical prospects are relatively attractive across Asia Pacific, although there are significant variations (Figure 3). At one extreme are markets, including Beijing, Shanghai and Hong Kong, that are, or are about to become “ex-growth” due to the high levels of existing or potential supply. The current excess supply in Beijing is likely to be reduced due to the moratorium on new development during 2008, the year of the Olympics, and the demand-side benefits associated with the liberalisation of the local banking and insurance industries as well as the increased interest of multinational corporations in the city.  At the other extreme, strong leasing activity and demand, coupled with tight supply, mean double-digit rent growth is expected in 2006 and 2007 in both Singapore and Tokyo, and relatively good performance in Seoul and Sydney.

Figure 3: Position of Major Asia-Pacific Office Markets in their Current Rental Cycle

Click on the image for an enlarged preview

In terms of the pricing of markets, Hong Kong is further through the cycle than most markets, with the increases in interest rates and the reduced prospects of further rental growth leading to upward pressure on cap rates. Although estimates of current levels of cap rate vary from source to source, most leading brokers are reporting a fairly sharp (15-20%) rise in cap rates during 2006, and this is set to continue into 2007. But Hong Kong is an exception to the general trend in Asia where stronger fundamentals mean that cap rates continue to compress or, at least, remain stable, certainly in the major markets of Tokyo, Seoul and Sydney.


Although providing a short and high level overview of the issues, this article provides important insights into prospects for real estate markets across the Asia-Pacific region. The framework explained at the outset provides a useful way of assessing the prospects, and risks, across the regional markets, and a summary of the implications for investment strategy are provided in Table 1.

In terms of the structural opportunities, the scale, variety and relative immaturity of real estate markets in Asia Pacific mean there are significant investment opportunities across the region. China and India are particularly attractive as emerging real estate markets given the pace of growth of these economies. But other countries, including Japan, Korea and even Australia, have significant potential for the development of new real estate types, whether industrial/logistics space in Japan or self-storage and hospitality in Australia, as well as sale and leaseback activity.

Table 1: Asia Pacific Real Estate Market Investment Strategy

Structural Prospects
Cyclical Prospects
Emerging Markets & Property Types
Sale and
Market Fundamentals
Capital Appreciation










S Korea

















Rest Asia


Source: RREEF Research

Note as for Table 1

In terms of the cyclical opportunities, many Asia-Pacific markets are benefiting from improving demand and relatively low levels of new supply such that rents have started to grow strongly. Certain markets, such as Hong Kong, are nearing the peak of their current cycle, and cap rates have started to rise suggesting limited scope for further capital appreciation. Other markets, such as those in Japan and South Korea, benefit from strong market fundamentals with further scope for cap rate compression. Between these extremes, many other markets provide a series of attractive cyclical opportunities.

The preceding summary demonstrates that cyclical and structural prospects remain attractive across much of the Asia-Pacific region. The implications vary according to investment strategy, with greatest potential for Opportunistic and Value Added strategies that involve providing new product in response to fast pace of economic and consumer spending growth. These implications are only indicative of the opportunities that exist across the Asia-Pacific markets. There is a range of additional opportunities, and risks, across the markets and more detailed analysis needs to be conducted in arriving at appropriate investment strategies. Despite these caveats, the article provides a series of important insights into the prospects for performance and investment implications in what is becoming an increasingly global market.

This is for informational purposes only is not the basis for any contract to deal in any security or instrument, or for Deutsche Bank AG (“DB”), any entity within the Deutsche Asset Management (“DeAM”) group, or their affiliates to enter into or arrange any type of transaction as a consequence of any information contained here. This shall not be construed as the making of any offer or invitation to anyone in any jurisdiction in which such offer is not authorised or in which the person making such offer is not qualified to do so or to anyone to whom it is unlawful to make such an offer.

The information in this presentation reflects prevailing market conditions and our judgment as of this date, which are subject to change. In preparing this presentation, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources. We consider the information in this update to be accurate, but we do not represent that it is complete and it should be construed as investment advice. This material is for informational purposes only and sets forth our views as of this date. The underlying assumptions and these views are subject to change without notice. Hypothetical figures are used for illustrative purposes and not indicative of the actual returns.

Certain information in this material may constitute forward-looking statements. Due to various risks, uncertainties and assumptions made in our analysis, actual events or results or the actual performance of the markets covered in this material may differ materially from those described. There can be no certainty that events will turn out as we have opined herein.

Investments are subject to risks, including possible loss of principal amount invested. Past performance or any prediction or forecast is not necessarily indicative of future performance. No assurance is given that the investment objective or the targets will be met. This document does not constitute investment advice or recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. Investors should study all relevant information and consider whether the investment is appropriate for them.

Past performance is not indicative of future results. No representation or warranty is made as to the efficacy of any particular strategy or the actual returns that may be achieved.

This presentation is the property and copyright of Deutsche Asset Management (Hong Kong) Limited. Further circulation is prohibited without written consent of Deutsche Asset Management (Hong Kong) Ltd. All rights reserved.
RREEF is the brand name of the real estate and infrastructure division for the asset management activities of Deutsche Bank AG. In the US this relates to the asset management activities of RREEF America L.L.C.; in Australia: Deutsche Asset Management Australia Limited (ABN 11 076 098 596) Australian financial services license holder; in Hong Kong: Deutsche Asset Management (Hong Kong) Limited (“DeAMHK”); in Japan: Deutsche Securities Inc.; and in the United Kingdom: RREEF Limited, DB Absolute Return Strategies Limited and DWS Investment Trust Managers Limited; in addition to other regional entities in the Deutsche Bank Group.

RREEF is a member of Asian Public Real Estate Association (APREA).


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