Global investors have increased their exposure to Asia Pacific (APAC) real estate, but high interest rates, coupled with the evolving banking crisis, will likely impact global economic growth. 

Inflation is now widely predicted to fall throughout this year, with interest rates peaking, and then declining, as inflation is brought back under control. Yet the steep onslaught of interest rate rises over the past year has led to the re-pricing of transactions across real estate markets – impacting valuations, liquidity, capital formation and investment activity. 

However, there are reasons to remain confident, as we are still seeing increased investor interest in the Asia Pacific real estate sector. The public market has grown tremendously in size, with the overall market capitalisation of the APAC REIT market rising to US$355 billion from US$205 billion over the last decade according to S&P Capital IQ. Likewise, the private market has evolved exponentially with pan-Asia open-end core funds – these effectively did not exist 10 years ago, but now their aggregate market cap has grown to over US$25 billion. According to Preqin, in the last decade since 2003, around US$220 billion has also been deployed into build-to-core strategies (opportunistic capital) alone in the region.

This is down to a couple of key reasons. The first is the growth of unique real estate investment opportunities and strategies. The second reason is the rapid sophistication of investors who are seeking unconventional venues to gain access to the region’s real estate. This has in turn led to a dramatic rise in aggregate capital flowing into the region by global investors. Finally, the risk/return opportunities in APAC have undergone a significant change – at both an individual market and sector level. 

These factors have laid the groundwork for recapitalisation – which fundamentally refers to any material change in equity ownership to the underlying real estate investment – to emerge as a key trend in the market. 

Stages of recapitalisation in APAC

In APAC, the recapitalisation market is at varying stages of development and acceptance. Broadly speaking, real estate recapitalisation is split into two categories — asset level and portfolio/fund level. Over the last decade, each segment has gained traction rapidly among investors, evolving into a more common way for investors to get exposure to the real estate they are targeting and to rebalance their real estate portfolio. 

Asset-level recapitalisation 

Typically, the simplest form of the recapitalisation occurs at asset level. Larger investors have started to join forces and create joint venture (JV) agreements with like-minded investors and fund managers to acquire prime assets across the region. 

These arrangements allow investors to gain more manageable exposure, while sidestepping risks such as asset over-concentration and steep pre- and post-acquisition costs. According to JLL estimates, the joint venture market now accounts for 16% of the APAC investment market, and 32% of the market if large-size transactions at or above US$500 million are considered. 

We are expecting many of these JVs to be recapitalised over the next several years as many of these investors – such as pension funds, insurance companies, and sovereign wealth funds – are increasingly looking to facilitate earlier exits. 

Another catalyst for asset recapitalisation is a notable uptick in partial stake sales. Previously, partial stake opportunities were frowned upon as investors favoured having 100% ownership to manage an asset at their discretion. However, investors have recently become more open towards these schemes, especially into core asset opportunities, due to the lack of suitable opportunities and increased competition. Simultaneously, many real estate operating companies (REOC) and corporates have been refocusing their real estate portfolio and recycling capital from selling stakes in some of their trophy assets. 

Particularly in the more developed, transparent and liquid markets like Australia, Singapore and Japan, these recapitalisation opportunities have become more prevalent. We expect this trend to spread to other markets as well, such as South Korea and Hong Kong.

Fund-level recapitalisation

Similarly, fund-level recapitalisations are gaining popularity across APAC. At the centre of this is a two-decade long boom of ‘build-to-core’ strategies, where investors develop a project from the ground up and then hold the property for the long term – making it less impacted by market downturns or poor fund performance. 

Funded by larger global investors, many of these ventures have now become old vintages with their venture life drawing to a close. We believe that over half of the assets in these ventures have already stabilised and transformed into income-producing core assets, spanning from office and retail to logistics markets (and to a certain extent, residential too). 

This is driving some institutional investors to exit their positions — either fully or partially — to realise returns and re-deploy capital into other fast-growing sectors, such as living, data centres, life sciences, and cold storage. Some are attempting to re-allocate the redeemed capital into the maturing tourism/lodging industry or take advantage of value-added opportunities such as the office from a tactical allocation perspective.

Another driver behind fund recapitalisation is portfolio rebalancing, which could abruptly force investors to unwind their stake ahead of other co-investors. 

With these drivers in mind, we estimate roughly 25% of the prospective fund level sales could tap into recapitalisation market over the next five years, translating into a US$5-7 billion fund-level recapitalisation market per annum for the region.

Looking to the future 

In a nutshell, we expect the recapitalisation trend to grow across APAC because it offers interesting investment opportunities with different risk/return profiles. As recapitalisation requires specialist underwriting skills and expertise, investors must become more creative in finding good products and identifying the right partners to work with.

By Martijn VanEldik, Head of Equity Advisory, Asia Pacific, JLL.