For FY 2018, direct commercial real estate investment volume for Asia Pacific totalled USD 160 billion, increasing from FY 2017’s figure of USD 149 billion.
Out of this growing allocation of capital to real estate, a clear preference for value-add investment strategies has emerged.
Figure 1 shows that core, core-plus and opportunistic strategies have remained relatively unchanged in terms of their dry powder over the six years ending December 2018.
Core and core-plus are characterised by lower risk and lower returns; generally Grade A office buildings in core locations of major cities, with diversified tenant mixes and stable occupancy rates.
Opportunistic, on the other hand, is higher risk and higher return, focusing on buildings that generally require significant enhancement or redevelopment.
Figure 1: Changes in dry powder by strategy
Source: Preqin, JLL
Value-add, however, characterised by medium-to-high risk in tandem with medium-to-high return, has been winning the popularity contest over the same period. Typical value-add categorisations would involve the purchase of an asset which is encountering operational issues or could benefit from refurbishment, then modifying and effectively repositioning and stabilising the property, before selling it at a favourable point in time with a higher valuation (usually holding for 4-10 years) to maximise return.
Lack of availability of core product
With a lack of availability of core product, investors are finding it increasingly difficult to deploy capital to core assets in central locations and are looking to source suitable product in more fringe locations.
In addition, existing owners of core assets are more reluctant to sell in the current market as re-entry and securing new assets is becoming…