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Asia from space

The year has started on a promising note for Asian real estate, with a series of reports last month forecasting an investment rebound for the region.

Real estate services firm JLL expects a new cycle will emerge in Asia-Pacific this year, with investment volumes increasing 15-20 percent. Fellow property services firm CBRE is equally bullish about Asia dealflow, in part driven by at least $31 billion of assets expected to be brought to market between 2021 and 2022 due to the imminent expiration of several close-ended funds.

This optimism rests on strong post-pandemic economic growth in major Asian markets, including China, the epicenter of the covid-19 outbreak. As the first region to be ravaged by the health crisis, it is not surprising China is also the first to reach a meaningful stage of recovery. Barring the occasional spike in cases, markets like Singapore, South Korea and Hong Kong have also been more successful in executing an effective covid management strategy, including limited lockdown measures, widespread testing and strict compliance with mask-wearing. Apart from India, the countries currently witnessing the highest number of covid-19 cases are all in North America and Europe, with the US recording 22 million.

This could spur changes in the global economic pecking order. As the UK-based Center for Economics and Business Research pointed out in its annual economic league table in December, one impact of the pandemic has been to “redistribute economic momentum between countries, with Asia doing best.” It believes the Chinese economy would now overtake the US in 2028, five years earlier than initially forecast. The IMF has also predicted China would be the only country to post a positive growth rate in 2020.

And China's relative outperformance at a macro level has trickled down to other countries and their real estate industries. As “China's economic engine keeps going and growing, it is feeding off into the rest of Asia,” a Singaporebased manager told PERE in January. The manager did not have to revise its underwriting projections for valueadd assets in Singapore to factor in the covid-19 disruption. In fact, the net operating income of the fund's portfolio – which includes mixed-use investments in Singapore and Hong Kong – increased 12 percent in 2020, reflecting strong rental fundamentals.

Indeed, according to data provider Real Capital Analytics, AsiaPacific recorded the lowest drop in transaction volumes as of Q3 2020 among all regions, with a 17 percent year-on-year drop to $533 billion, including development deals. The Americas fared far worse, recording a 40 percent decline to $222 billion.

US and Europe lagging Last year's bearish sentiment for properties stateside appears to have extended to 2021. The annual Investor Intentions survey published last month by industry bodies ANREV, INREV and PREA reveals the crisis led 22 percent of all respondents to increase their planned investments in Asia-Pacific in 2021, higher than the US at 16 percent and Europe at 13 percent. The speed of the vaccine rollout could again alter the relative investment appetite for each region as the year progresses. But as the year starts, it is events in Asia that are driving the most positive investment sentiments – as well as the complexion of post-pandemic Source: CBRE Asia-Pacific Intentions Survey 2021 capital flows into private real estate.

CBRE Asia-Specific Intentions Survey 2021

Covid-19 The True Impact on Debt Markets will be Clearer in 2021

The surge in covid-19 cases across Europe and tighter controls imposed by countries to battle the virus has made the prospect of an early 2021 commercial property rebound more difficult to believe.

For real estate lenders, hopes of a revival in dealflow and clearer underwriting conditions are pinned on a successful rollout of vaccines across the continent. So far, progress has been slower than many had hoped.

This year may yet deliver a vaccine-enabled return to something resembling normal life. But if 2020 was the year the industry absorbed the initial shock of the pandemic, 2021 will be the one in which the longerterm consequences begin to be apparent.

For a start, the scale of the economic impact of covid is yet to be realized. In November, the European Commission forecast euro area unemployment of 9.4 percent for 2021, up from 7.5 percent in 2019. If there is a real estate recovery this year, it could be set against a dismal economic outlook.

Meanwhile, we are likely to see evidence of structural shifts in Europe's real estate finance sector, either caused, or exacerbated by the covid crisis. Here are some of our predictions for the year:

Debt will follow equity into alternative property sectors

Property owners will realign their portfolios from sectors undermined by the pandemic, such as retail and offices, towards those with more compelling stories – such as residential, particularly build-torent. Capital will also head towards niche sectors that have become more relevant in the past year – life sciences, healthcare, data centers and the like. In recent years, lenders have been moving into alternative sectors. They will spend much of their time in them during 2021.

More debt strategies will launch – but few will take undue risks

The further retrenchment of banks from the sector in 2020 meant alternative lenders gained access to relatively low-risk deals at higher pricing. Investors and managers will be attracted to European real estate debt in 2021, including new entrants to the market. But while there will be lots of non-bank capital available – ranging from senior, to mezzanine, to special situations debt – most parties will take a cautious approach. They will look for deals involving quality properties in tried and tested locations.

There will be strategic loan sales

Banks will offload new nonperforming loans this year. Some will also strategically divest subperforming or even performing loan books. The covid crisis will accelerate banks' realignment of their real estate portfolios, and some will be keen to remove higher-risk loans such as development facilities from their books to reduce their regulatory capital burden. That creates a huge opportunity for alternative lenders keen to scale their businesses by purchasing existing loans.

Time will be called on forbearance – but without a bloodbath

As the impact of covid on property values becomes clearer, lenders will aim to resolve distressed situations. That means covenant waivers and other forms of forbearance will be discontinued in the coming months. But the spirit of collaboration witnessed in 2020 is likely to continue, with lenders and borrowers working together to cure covenant breaches. Enforcement will be most prevalent in the retail space, though that was an inevitability for many assets that were already in trouble before the pandemic. Across the market, it may be debt fund managers that need to get tough – they have fund lives to honor and returns to make.

There will be more pressure to be sustainable

Environmental, social and governance factors will be crucial to property owners' decisions about how to redesign their portfolios for a post-pandemic world. They will demand that lenders support them by providing finance aligned to ESG objectives. In 2020, several lenders demonstrated that they kept their eyes on ESG. In 2021, pressure on those without defined sustainable lending products will grow.

Sources: CBRE Asia-Pacific Intentions Survey 2021