Cover Story: Opportunities in cross-border real estate investment

This article first appeared in City & Country, The Edge Malaysia Weekly, on November 9, 2020 - November 15, 2020.

Familiarity with the London residential property market plays a key role in supporting transaction levels from Malaysian investors, says Heaton-Watson

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The Covid-19 pandemic, which has caused many countries to shut their borders and impose travel bans, has inevitably affected property market activities on both the domestic and international fronts.

CBRE | WTW group managing director Foo Gee Jen says that although enquiries on the ground are still coming in, the number of transactions that will be concluded in the coming quarters remains to be seen. “This is because investors are by and large in wait-and-see mode. They are likely to hold back on expansion or new acquisitions and pay more attention to managing existing portfolios. In hindsight, the market had been generally cautious prior to the Covid-19 outbreak, owing to the US-China trade war and fear of a cyclical crisis.”

JLL Property Services (M) Sdn Bhd country head YY Lau similarly observes a growing rise in cross-border capital flow throughout Asia-Pacific. “Malaysian investors are not exempt,” she notes.

According to Lau, local investors who venture into overseas properties usually already have satisfactory domestic investments. “In today’s trying times, we see investors increasing their efforts in managing and reducing risks via diversification, including by sectors and locations. Both yield-sensitive investors as well as those emphasising long-term appreciation and sustainability are looking to buy more properties, especially [since] the capital in play is higher than ever today. We can still observe varying strategies such as UEM Sunrise’s continued foray into the Australian market and Axis REIT’s preference for the local market, both having reported success in their ventures,” she says.

“As for private or individual investors, we have similarly recorded such sentiment from our clients, including buyers of properties located in the UK and Japan. These countries, alongside others such as Singapore and Australia, can be deemed safe havens with their [strong] fundamentals and sustainable property demand.”

Although Lau continues to observe interest from investors looking to put their money in Malaysia, she notes that the country can do more on a higher level in terms of reducing the risk of losing out to companies relocating to Southeast Asia. “Enablers and stimulus on a higher level play a significant role in increasing cross-border capital flow. We saw Indonesia’s continuous lobbying to capture the relocations of US and Japanese companies to Southeast Asia whereas, on the other end, Tokyo is offering incentives to Japanese companies to diversify from China to Southeast Asia.”

In terms of the residential property segment, Knight Frank Malaysia associate director of international project marketing Dominic Heaton-Watson has observed a release of pent-up demand in the surge of July and August transactions, with many taking advantage of UK developer incentives, stamp duty savings and new launches of developments with key transport catalysts — a favoured characteristic for investors. “As we all adapt to the ‘new normal’, confidence and sentiment have returned to pre-pandemic levels for UK residential properties after a period of reflection,” he says.

According to Heaton-Watson, many Malaysia-based clients spent their time carrying out more property searches, utilising virtual viewings and having greater levels of interaction with their professional advisers for guidance and clarity during the Movement Control Order period. “For parents of young children, the UK remains firmly at the top of the list for world-class higher education, and property investment in London therefore goes hand in hand as the perfect synergy,” he remarks.

“This trend has been evident for quite some time, but the marked increase in July and August known as the ‘lockdown lift-off’ saw plans to purchase UK property accelerate, thanks to fundamentals such as a hedge against inflation, transparent legal systems, undersupply, a currency advantage and the UK’s lifestyle, culture and heritage.”

Commenting on commercial real estate, Knight Frank Malaysia executive director of capital markets James Buckley says cross-border activity in the country was tremendously slow in the first half of the year. “Local transaction activity in 1H2020 was about 70% down year on year, with capital unable to be deployed because of widespread travel restrictions, quarantines and lockdowns, affecting investors’ ability to carry out due diligence. But, encouragingly, there was a pick-up in activity during the third quarter, with a number of offers received in August.”

Sydney is considered a safe-haven investment destination thanks to its strong fundamentals

According to Buckley, about 65% of the transactions have been acquisitions of development sites, with industrial properties also in demand. “Investors are also more open to considering alternative sectors such as education, hospitals and data centres, which are perceived to be more defensive strategies,” he says.

Buckley further notes that, unlike some overseas markets, bank lending to commercial real estate is still generally available and the overnight policy rate has dropped to 1.75% — the lowest since 2004. He says this will help support the local property market. “The majority of investors are optimistic about the mid to long-term prospects of real estate, and we expect a recovery in transaction levels by 2H2021, assuming a vaccine becomes available.”

 

Diversify, diversify

The key to successful real estate investing is diversifying and spreading the risk across sectors and locations. Buckley, however, notes that the local real estate market is relatively small. “So, for large local investors such as sovereign wealth funds, there are just not enough good-quality, investment-grade assets coming to market, which can allow you to construct a well-diversified real estate portfolio.”

On investing abroad, CBRE | WTW’s Foo considers interest and exchange rates and capital growth potential as conventional determinants of feasibility. While the differentials will continue to exist, he notes that the gap may converge because of the homogenous impact caused by the global-scale pandemic.

“At this juncture, apart from volatility in the stock and commodity markets, rising nationalism amid the Covid-19 crisis, political tensions between the US and China and the recent upheaval involving the global financial hub of Hong Kong are causes for concern, as they may result in trade retaliation and implicate foreign interest in local investment. Therefore, we think outbound investors may prefer credible assets in mature markets such as the economic powerhouses of the Americas and Europe, and developed Asian countries,” he says.

Taking into account the varying investment appetites and risk preferences, Foo notes that bullish investors could still be looking abroad as a means to diversify their investment portfolios, as they are expected to exercise more diligence in their undertakings, whereas conservative investors may seek security on their home ground or by sticking to their principal industry and assets.

“Generally, we expect investment appetite — whether inbound or outbound — to be more sensitive, whereby factors such as asset type, location and tenants’ profiles will carry more weightage. In terms of source [of funds], real estate funds and institutional investors — including sovereign wealth funds, insurance firms and pension funds — [typically] display more positive investment intention,” he says.

As Foo anticipates that investments will moderate in the coming quarters both domestically and abroad, he suggests prioritising core investments with more focus on rental yield and less emphasis on capital gain, as well as quality assets in prime locations that can provide stable cash flow versus good secondary assets.

Investors who wish to achieve higher returns and who especially take a long-term view and possess large operational capacity could also deploy value-added strategies. “This may be relevant to the retail and hotel sectors as their recovery period is expected to stretch,” he says.

Foo anticipates more sale-and-leaseback arrangements. “Some businesses that are owner-occupiers may be encouraged to offload to maintain liquidity and then lease. This presents opportunities for investors to pick up reliable income-generating assets.”

Meanwhile, there could be pent-up demand for warehouses, he notes. “Owing to the erratic incidence of lockdowns around the world, causing unpredictable disruption to the supply chain, warehousing practices could revert to large inventories from the just-in-time principle.

“Industry Revolution 4.0 and thriving e-commerce could also promote interest in specialised sectors such as data centres and cold storage. The growth of these sectors would be gradual, however, owing to the lack of stock and niche demand.”

According to JLL’s Lau, emerging alternative sectors such as data centres are evident from the expansion of existing players such as AIMS and the addition of new players such as Microsoft Corp in Johor. “Just like any other investment, the underlying demand of a sector ensures its sustainability, and such is the case with logistics and selected alternative sectors in Malaysia, with increasing activity in e-commerce, remote working, virtual meetings and so on,” she says.

Knight Frank Malaysia’s Buckley notes that niche sectors such as ghost kitchens, which are cooking facilities that produce food only for delivery, are an interesting growth sector worth exploring, while anticipating that the hospitality and retail sectors are likely to see the biggest price corrections. “Core, stable income-generating properties, let to strong tenant covenants on long leases, remain in demand. During times of uncertainty and instability, investors are looking for safe-haven, defensive assets that can preserve their value over time,” he says.

 

Ghost kitchens, which are cooking facilities that produce food only for delivery, are an interesting growth sector worth exploring, says Buckley

Safe havens

Countries considered a safe haven for real estate investments are often supported by strong fundamentals.

“London is still regarded as a ‘safe haven’ location, with a wide spectrum of institutional quality investment opportunities; transparent property market, rule of law and political system; as well as good liquidity levels across different sectors and price bands. The market has deep pools of domestic capital, so pricing has been quite resilient,” says Buckley.

According to Knight Frank Malaysia’s Heaton-Watson, the UK, like many countries in the current climate, has a cheap and low interest rate environment that is likely to be around for the foreseeable future. “Loans for investors are of great value today and have helped spur further transaction levels. My advice often centres on transport and infrastructure projects that can act as a catalyst to capital growth values.”

According to him, Malaysia-based clients buying into the prime central London market are effectively enjoying a 23% discount on 2016 prices, based on currency advantage and price moderations. “This has given the traditional golden postcodes in London, such as Mayfair, renewed interest, improved affordability and hotspot status for capital growth.”

Meanwhile, interest in central London residential properties is expected to remain strong in the medium and long term, says Heaton-Watson. “Familiarity with the London residential property market plays a key role in supporting transaction levels from our Malaysia-based investors, and Central London is the preferred destination for higher education and many second-home purchasers.”

According to JLL’s Lau, the UK has proved to be a safe haven for investments, as units are usually tenanted quickly. “Even during the lockdown, all tenants renewed their agreements without requests for rental rebates or waivers,” she says.

Japan is another investment destination. “Safe havens like Japan continue to enjoy political stability, a defensive currency and a low vacancy rate. Investors also have little to no problem collecting rent during the peak of the pandemic,” says Lau.

In addition, cities such as Sydney, New York, Berlin and Lisbon are considered safe-haven destinations because of the good quality of life, political stability, transparent laws, a secure currency and excellent education system, in addition to being easily accessible in normal times, says Heaton-Watson.

He notes that in the Knight Frank Global Buyer Survey 2020, nearly two-thirds of respondents said they were more likely to work from home post-lockdown, which explains why 64% say a home office is now more important. “Our Malaysia-based clients who invested overseas have taken this into account when reviewing property criteria in safe-haven destinations such as London, where having a second bedroom as a flexible workspace has become very popular.”

According to him, 44% of Knight Frank Malaysia’s transactions for London properties in July and August involved 2-bedroom apartments.

Heaton-Watson also notes that ultra-high-net-worth individuals are now becoming more experience-oriented and eco-focused. “The demand trend suggests that purchasers are expecting branded residences to be far more holistic, with beautiful gardens, environmental and wellness [features], as well as being multi-generational.”

In a crowded market, wellness and lifestyle differentiating elements are creating hot spots, with an example being Crown Residences at One Barangaroo in Sydney, he says.

Lau and Heaton-Watson believe it is still a good time to invest abroad. “Investors definitely need to do a more comprehensive analysis before putting their money in, or appoint a specialist in the field for efficiency’s sake,” Lau suggests.

Heaton-Watson concurs. “It is definitely a great time to invest abroad, especially with expert advice … Every purchaser is different, so it is wise to have a partner in property rather than just an estate agent — one who understands and supports clients and accompanies them throughout the investment journey and cycle.”