Compared to low or negative yields on government bonds and the possibility of falling dividend yields for equity markets, the yields offered by real estate assets in APAC markets look attractive.
Two key factors are impacting the values of APAC investments in general. The first is the COVID-19 recession, which should ease from now on. The second is interest rates, which have fallen to record lows. These factors have extended a long global bull market in government bonds, according to Colliers Research.
Among core APAC investment markets, government bond yields range from effectively zero for Japan at the low end, through 0.8%-0.9% for Australia, New Zealand and Singapore, to 2.8% for China at the high end. Dividend yields on major equity markets are higher, ranging from around 1.9% for the US S&P 500 to an unusually high 4.9% for Singapore. However, dividend yields are at risk from the recession’s hit to profits.
Compared to low or negative yields on government bonds and the possibility of falling dividend yields for equity markets, the yields offered by real estate assets in APAC markets look attractive. For instance, yields in the office sector in developed APAC markets range between 2.8% for prime grade Hong Kong offices at the low end and 5.8% for Auckland at the high end. Yields on Grade A office assets in emerging markets are higher, ranging up to about 9.0% for Indian cities.
In India, at an average cap rate of 8.5% on office assets, there is spread of over 3% compared to 10-year government bond, which makes the investment attractive in commercial core stabilised assets. This gap has only widened in the past 3 months with consistent decrease on policy interest rates.
India’s commercial real estate competitiveness continues to remain strong with availability of quality assets at less than one dollar per month per sq. ft. and availability of low-cost skilled labour and hence it’s decoupled of local economic issues to some extent. “There are limited core Grade A assets, and hence investor may find it opportune to invest at early stage, either equity or forward purchase and control the quality and specifications. Industrial/ warehousing is also similar trend with strong demand from institutional capital towards this asset class. The demand of cloud infrastructure is leading to various data centres and similar platforms coming in existence and this industry is taking a sizeable shape,” says Piyush Gupta, Managing Director, Capital Markets at Colliers International India.
Residential in India has been suffering over the past few years due to policy changes, liquidity stress, aggressive leveraging by developers and financiers. The opportunities for investors are available to acquire or fund against ready inventory and earn much higher returns. The risk return matrix in residential asset class is currently misplaced and any form of liquidity has a significant premium attached. The only meaningful liquidity is coming from SWAMIH Fund of Rs 25,000 crore. With market consolidating, supply reducing and significant amount of stress, asset prices are currently low and over a long term, investors will see an upside from the current levels.