Commercial real estate has long had a place in the portfolios of wealthy investors, who see it as a useful diversification away from residential property and the more volatile assets such as stocks or bonds.
But lately, the trend has accelerated, in particular among Singaporean and other Asian investors, who are taking advantage of the strength of their currencies and the environment of low interest rates to increase their overseas investment in these physical assets.
Mr Joseph Poon, Head of Ultra High Net Worth, South Asia, at UBS Wealth Management in Singapore, said wealthy individuals “are already well invested with residential properties in different countries and they have shown some interest in diversifying further in commercial properties”.
He said he was seeing interest from clients in commercial property in London and Australia, as well as in distressed commercial property markets in Europe and the United States.
Ms Tan Su Shan, Head of Wealth Management at DBS, said: “Traditionally, ultra high-net-worth individuals have always invested in commercial properties to some extent, be it office, retail or hospitality, often depending on which business sector they have an operating business (in).”
“But the recent trend has been primarily driven by loose monetary policies globally, as you have very cheap money available everywhere.”
Ultra high-net-worth individuals generally refer to those with US$50 million (S$62 million) or more in investable assets.
Ms Tan noted that there had been particular interest from Asian buyers in the British commercial property market, based on the significant depreciation of the pound against many Asian currencies.
The pound has fallen about 5 per cent against the Singapore dollar in the past two years and 11 per cent against the Chinese yuan.
Other factors are that British common law is familiar, especially to clients in Singapore and Hong Kong, both former colonies, she said. Also, many Asian clients already own residential properties in Britain and thus understand the property market there, she noted.
She added there had also been investment flows into the property market in the US, but mainly through mortgage-backed securities rather than through the purchase of the physical assets.
According to property consultancy Jones Lang LaSalle (JLL), global direct investment into commercial real estate rose 2 per cent last year from the previous year to US$443 billion.
The company is forecasting that it could reach US$500 billion this year, driven by a strategic reallocation of funds into real estate by institutional investors.
Mr Alistair Meadows, Director, International Capital Group Asia-Pacific at JLL, said: “Inflows into Europe continued to dominate the capital moving around the globe last year.
“We saw net investment into Europe up 36 per cent, which was due in part to an 80 per cent increase from investors in Asia-Pacific taking advantage of opportunities.”
Ms Megan Walters, Head of Research for Asia-Pacific markets at JLL, said wealthy individuals “like buying in cities they know well, which means either home locations, or cities with family links, often where family members have been to school or university. They particularly like London, as a global city with ease of entry for foreign capital.”
With US$56.1 billion, London topped the list of commercial real estate by transaction volumes last year, she said, citing figures compiled by her company. “About 63 per cent of the buyers were from overseas,” she said.
She added that major markets would continue to do well as investors remained attracted to real estate for its yields, currently higher than can be achieved in many other asset classes.
“We see some upside potential in the secondary markets, which have remained subdued since the global financial crisis but are starting to witness greater investor interest, given their more attractive yields,” she said. “Countries to watch are Indonesia, Vietnam and India in Asia, and Mexico and Canada in the Americas.”
Mr Wilson Aw, Head of Private Banking at United Overseas Bank, noted that by casting their nets wide for commercial properties around the world, wealthy investors “are able to negate the downsides of differing property cycles in various markets and enjoy the benefits of diversification in their property portfolios”.
He added, however, that investors considering commercial properties were not always aware of all the associated risks.
“The cost of financing has dropped tremendously in the last three to four years, so clients see it as an opportunity to take advantage of the yield gap between the cost of funding and what they receive as a rental or income flow,” Mr Poon of UBS said.
“However, we’re in a very unusual low-interest environment. Investors are projecting the current low environment to infinity, while expecting a 7 to 8 per cent asset yield on their property. That pairing is not going to hold, and people need to know that.”
“We’re advising clients to be extremely careful and use our powerful analytical tools to see what the real world could become in a three- to five-year time frame,” he added.
Currency risk, too, can be a significant factor, especially if a foreign buyer intends to sell the property quickly to capture a gain in a local currency. Mr Poon took the case of a US dollar-based investor who was planning such a “flip” in Japan. With the US currency having surged against the yen in the past several months, “that could mean a big loss on your investment without the assets having done anything yet in terms of price appreciation”, he warned.
Mr Aw of UOB also warned that clients should remember the economic risks associated with commercial properties, which is different from that with residential properties.
“Even in a severe economic environment, shelter remains an essential need and people will still need a roof over their heads,” he said. “Investors renting out residential units will need to adjust rentals downwards until they find the point of demand.”
But unless a commercial property is in a top location, he said, “there may not be takers for shop units or offices for an extended period of time in an economic downturn”. “This will severely impact an investor’s ability to sell the property for a reasonable price,” he warned.
Source : Today – 7 June 2013