The Asia-Pacific is undoubtedly experiencing the strongest growth as it catches up on the other larger, more developed regions, with the value of Asia-Pacific transactions in the first half (H1) of 2005 being 45 per cent higher than in H1, 2004. Europe remained the key destination for cross-border activity, being dominated by intra-regional purchase activity in H1, 2005. Notably, cross-border investment reached US$52 billion (a 21 per cent increase on H1, 2004) as all regions saw higher transaction volumes.

Guy Hollis, International Director in Jones Lang LaSalle’s International Capital Group explains, “Direct real estate investment continues to undergo rapid globalisation.

The prolonged low interest rate environment, improving property fundamentals, ageing populations and increasing pension savings are driving an unprecedented weight of capital, which in turn is compressing yields in many international property markets.”

“Pressure continues to mount to find higher returns wherever they become available. In the Asia-Pacific, the search for higher returns is likely to accelerate the growing volumes in emerging Asian nations, driving improvements in market transparency and liquidity.

Global investors are also, increasingly, exerting significant influence on local investment markets through competition with domestic and regional players. For this reason, investors cannot afford to disregard international investment opportunities which are increasingly providing relatively significant returns and strong diversification characteristics for property portfolios,” Mr Hollis adds.

Strong capital inflows

Amongst the Asia-Pacific economies, Japan which accounts for the largest amount of commercial real estate stock in the region, continues to dominate both total and cross-border transaction volumes. With the Japanese economy moving into a growing phase, we are witnessing strong net capital inflows by inter-regional investors (see chart below), with more than half of the investment in this country put into the industrial sector.

Mr Hollis says, “While Japan dominates today, India and China are both growing target destinations for investment and have the potential to be major destinations for global capital in the future. We believe that as property transfers between institutional players continue to build, capital inflow and outflow from these two investment hot spots will expand rapidly, creating further cross-border investment opportunities.”

Despite its low transparency, the value of Chinese transactions recorded in H1, 2005 is over two and a half times higher than the full-year 2004 total and based on current negotiations by foreign groups, total inter-regional transactions in 2005 could be as much as six or seven times the total deal flow in 2004. Most notable is the far wider geographic scope of Chinese transactions, with several joint ventures between foreign and local investors acquiring shopping malls across the country. Investing in new-found locations presents transparency challenges but allows investors to achieve significant scale quickly and to tap into the projected rapid growth in Chinese consumer spending.

Similar transaction volumes are expected to continue, increasing market penetrations and access in 2006 and beyond. With the emerging Real Estate Investment Trusts (REITs) sector in Asia, a number of countries are restructuring local property and tax regulations to accommodate increased cross-border flows, encouraging investments into and out of the region and driving liquidity and market transparency. Singapore, to date, has been the most aggressive country in encouraging REIT development, allowing wider geographic coverage than available to other Asian REITs, in addition to a zero tax rate on REIT dividends.

The first Hong Kong REIT will be listed shortly while other Asian countries have either relaxed or are considering REIT structures. The highly developed domestic Japanese REIT market continues to grow rapidly and expand its coverage beyond the Tokyo office sector. While many eyes are on China, transparency still has some way to improve before a domestic REIT market can emerge.

Cross-border players

Australian investors are expected to be very active cross-border players in H2 2005, particularly due to the highly liquid and large public real estate market in Australia, which provides a relatively cheap cost of capital. Major Australian listed and institutional investors are actively pursuing opportunities in major European and North American markets, as well as the emerging Asian markets.

A small domestic market, combined with an extensive and long-established compulsory retirement savings scheme, indicates that Australian investors will continue to be a major source of global capital. US, UK and France, the most traded markets — The relatively sizeable and transparent office markets of the US, UK and France were the most traded individual markets by global investors, with relatively balanced purchase and sales activity in both the US and the UK. In North America was again the dominant source of global capital accounting for 53 per cent of all transactions (of which 92 per cent were domestic) in H1 2005.

Investors from the Middle East, Germany, the UK and Singapore were also significant sources of global capital and all ‘net’ purchasers in H1 2005. Strong appetite for UK retail and hotel assets — Global investors also showed strong purchase activity in UK retail and hotel assets over H1 2005, recording more than 60 per cent of all cross-border hotel transactions. Intra-regional hotel investors were particularly active in the UK, led by significant investment by Irish interests. Intense competition for UK retail between domestic, regional and global investors continues to push yields even lower.

In France was a target for US and Middle Eastern money - France experienced an overall net inflow into the office sector driven by the US and Middle Eastern investors. Mr Hollis concludes, “We anticipate the frenzy of global real estate activity would continue to the end of the year, based on the strength we’ve seen so far, combined with the usual pattern of real estate transactions that tend to be skewed towards the second half of the calendar year.

“Looking ahead, investors still perceive that there are strong risk-adjusted returns to be made in commercial real estate over the next few years on the basis of improving leasing conditions and further yield compression driving performance.” Jones Lang LaSalle is one of world’s leading real estate services and money management firm, operating across more than 100 markets around the globe. The company provides comprehensive integrated expertise, including management services, implementation services and investment management services on a local, regional and global level to owners, occupiers and investors. Jones Lang LaSalle is also the industry leader in property and corporate facility management services, with a portfolio of 895 million square feet under management worldwide.   Source: Jones Lang LaSalle