European and Asian reactions to downturn different – so far

Although the economic downturn means the real estate business in Europe has significantly less confidence about the next year or so than previously, property firms are reluctant to reduce headcount because the general opinion is that for the next decade finding the right people would anyway be a challenge, said PwC’s global real estate leader Thomas Veith.

Veith was speaking at Real Asset Media’s recent Outlook 2023: Europe & Asia – Capital, ESG & Key Investment Drivers investment briefing, staged at Apex Group’s Singapore offices.

The recently published Emerging Trends in Real Estate Europe sentiment survey, produced by PwC in conjunction with the ULI, confirmed that current major concerns for Europe-based property professionals include inflation, interest rate movements and the wider economy. “There are some concerns too about the general economic outlook, more in especially in Europe, but also around the globe in the short term,” Veith said.

While the view of the global economy is a bit more relaxed in the long term, Veith said the European economy will definitely go through “significant transformation” this year. This will create problems but also opportunities he added.

If there is a recession, Emerging Trends respondents believed development activity would definitely stop. “Maybe we have seen that already in the last month,” Veith added.

Increased construction costs, investment volumes close to zero around the world, and availability of financing are also major preoccupations in Europe.

However, there is some grounds for optimism, Veith said. “I think there is so much dry powder in the existing funds that has to be invested, which gives me a bit of comfort for the future that transactions definitely will come back.”

Certain sectors are also more resilient. Life science real estate and data centres, for instance, although Veith points out that these are fairly niche segments.

The ‘beds and sheds’ sectors are also seen as more resilient asset classes, “but even there we have seen some operating businesses struggling”.

The session revealed that there are stark contrasts in the situations in Europe and Asia.

Although some of the same concerns are apparent in Asia, David Edwards, lead portfolio manager, real estate, Asia Pacific, DWS, noted that the sectoral focus is distinctly different.

“Beds and sheds is a theme, but in the residential markets in AsiaPac ex-Japan, multi-family really isn’t accessible, it’s a theoretical construct for most of the region,” he said.

“It’s being built in Australia and to some extent in New Zealand, Koreans are talking about it, Chinese are talking about it, but that’s opportunistic,” he added.

Obtaining debt for this type of property in the current market is a challenge and “if you want to buy a standing residential asset, Japan’s pretty much the only market.”

Edwards said that as interest rates have not risen in Japan it is still possible to get a good spread, “but it’s off low levels”. Residential yields in Japan are high twos or low threes, “so no one’s getting fat or rich off that sector”.

Nevertheless, Logistics has been a favourite which was a theme long before the pandemic or the war in Europe.

“That still has legs I think, but pricing has changed,” he said.

The office sector is also less challenged in Asia, Edwards said, because of a difference in culture. “If you work for a mid-sized Japanese company and you’re not in the office, you might not have a job anymore,” he said, which means physical occupancy levels are less affected.

Sharing know-how best way to tackle climate change

Climate change challenges are a global phenomenon and those involved with the built environment in particular must share information and best practices, said PwC’s ESG Legal Co-Leader, Christiane Conrads speaking at Real Asset Media’s recent, Outlook 2023: Europe & Asia – Capital, ESG & Key Investment Drivers, held in Singapore.

Conrads reviewed the progress with adopting ESG principles in Europe, particularly under the auspices of the European Union. But she emphasised, “when we’re speaking about ESG, it’s really important to keep in mind that it’s a global development, a global transition. The physical risks don’t stop at borders and regulations also have an impact on other regions around the world.”

She pointed out that there are those who think that there should be less focus on ESG because of the current crisis in Ukraine. “When the war started at the beginning of this year we had several discussions where it was ‘do we need to focus on the war, now the new uncertainty, and less on ESG?’ Eight months later I’m saying ‘no’.”

She added that the various crises are all interrelated and for Europe the war in the Ukraine is also a catalyst for renewable energy projects. Conrads also pointed out that in Germany energy independence is now one of the bigger concerns.

A major part of the solution to climate change and mitigating its effects will be provided by information sharing she said. “Collaboration is the new competition,” she added.“Many in the industry have started to acknowledge that and have begun to jointly develop environmental and social concepts.”

Conrads pointed to Singapore’s City in a Garden project and the biodiversity which that embraces. “We won’t have climate change mitigation without a high degree of biodiversity so that’s something which is necessary for climate protection, but also for climate change adaptation.”

One example is the intensely green facades now on some buildings. These help cool the facades of buildings which then need less energy for air-conditioning, and also have a beneficial impact on the environment in adjacent buildings.

Singapore also has roof gardens that are combined with photovoltaic power plants. “This increases the efficiency of photovoltaic power plants due to the lower temperatures.”

Sharing this kind of knowledge is key, Conrads said.

Asia attractive to capital as Europe battles ‘polycrisis’

The rash of economic difficulties that now confront the real estate business amount to a “polycrisis”, according to  Alex Jeffrey, the Singapore-based global chief executive of Savills Investment Management.

Speaking at Real Asset Media’s recent event, Outlook 2023: Europe & Asia – Capital, ESG & Key Investment Drivers, staged at Apex Group’s Singapore offices, he explained: “These are all individual crises but they are inter woven. It’s probably one of the most complex pictures that we’ve seen for many years” he said, referring in particular to inflation, interest rate rises, the energy crisis in Europe, and the war in Ukraine.

“As you try and forecast ahead and see what GDP growth is going to be, what inflation will be, it’s almost impossible. I think we should really be kind of humble and honest that it’s almost impossible to make those forecasts.”

“You could say that there’s going to be a recovery in the second half of next year, but we don’t really know, let’s face it. So our view is that investors should probably look at the long term and look at the aspects of real estate that have fundamental supply/demand dynamics.”

“I think there will be pain over the next couple of years that’s undoubtedly the case because equity real estate is generally negatively correlated to rising interest rates in terms of valuations and returns,” Jeffrey said.

Inter regional capital flows are similarly hard to predict but there have been distinct pre- and post-covid trends, according to Valérie Mantot-Groene, regional managing director – Asean Apex Group, Singapore. “The last two or three years have shown that there is more inbound capital, so more coming from outside Asia to Asia than the other way round.”

Inbound capital refers in particular to that from North America. “They are still the leaders in terms of injecting capital into real estate in Asia, they have been doing that for a few years and they just continue,” she said.

However, there has been a fall in the amount of capital originating in Europe, Mantot-Groene said. Furthermore, she said European capital is much more sector and geography specific because most of the capital coming from Europe is institutional capital with a slightly lower risk appetite than that of the pool of money coming from North America.

Geographically, it is the usual suspects benefiting from European Capital, Japan and Australia and no longer China.

North American capital has more diverse targets. “You will obviously see Japan, Australia and Korea but also India is becoming more and more interesting,” she said. India is starting to attract capital that was previously targeting China.

Eric Cheah, Head of Investment Management Asia Pacific Union Investment Real Estate gave the German investor’s perspective.

“We’re looking for more core investment so it’s the yield base is one point of difference and then the perspective of the geographic focus. To take a step back, if you put your money in the bank right now you’re actually getting an interest rate, if you buy a bond you’re actually getting more of a yield than you did before, so that idea of the reallocation of capital is actually taking place people have choices when they’re actually putting their money to use, so I think that kind of environment is really one distinctive change that’s taking place.”

Cheah said that looking at strategic reasons for investing in the Asia Pacific region, the idea of diversification remains valid. “The idea of having a lower correlation relative to your home market still exists, people want to take the benefit of that.”

He said that he believes that there is now more reason for optimism in the region. “It’s not that we are immune to inflationary depression, it’s just that we can be less exposed to the same pressures that are either in Europe or the US.”