In global real estate investment markets, one consequence of the Covid-19 pandemic has been a drop in cross-border transactions as lockdowns and travel restrictions impede deal-making. Countries whose property markets are heavily dependent on sources of foreign capital have suffered the most.
In Asia, Singapore has been at the sharp end of the decline in cross-border investment. As one of the markets most reliant on overseas investment, the city state experienced a 60 per cent year-on-year drop in transaction volumes in the first three quarters of this year, data from JLL shows.
This contrasts markedly with investment activity in China, one of the markets in the region that has held up well due to the stronger role of domestic capital in property deals.
Yet, while Singapore has been at a disadvantage domestically compared with China, Singaporean investors overtook their Chinese counterparts as the region’s main source of outbound real estate investment as far back as 2018, and have tightened their grip on Asian cross-border capital since Covid-19 erupted.
While Singapore accounted for slightly less than one-fifth of Asian outbound investment in 2016-17 – when China was the region’s most active buyer overseas – its share stood at a remarkable 42 per cent in the first three quarters of this year, data from JLL shows.
In the past few weeks alone, buyers from the city state have bought a suburban office building in Sydney, pulled off the largest transaction in Britain this year by acquiring a prominent office block in the City of London and announced a joint venture with a local partner to develop multifamily housing in Austin, Texas.
Their appetite for overseas acquisitions – although not as strong in volume terms as in 2018-19 – remains undimmed despite the pandemic. Singaporean investors were the largest foreign purchasers in China in the third quarter of this year, the third-largest in the US, and the top buyers in the office market in South Korea and Australia, data from JLL shows.
Indeed, the global expansion of Singaporean buyers encapsulates many key drivers of Asian cross-border real estate investment.
First, the Covid-19 crisis has brought about an even sharper decline in borrowing costs. The global stock of negative-yielding debt swelled to an all-time high last Thursday, according to Bloomberg, with the yield on the benchmark 10-year US Treasury bond remaining below 1 per cent. This is lowering the cost of capital for Singaporean investors, bolstering their financial firepower.
In markets and sectors where rental yields are still relatively high, spreads have become even more attractive. A case in point is the purchase in September of an office complex in suburban Sydney by Keppel Reit, one of Singapore’s largest real estate investment trusts, at a yield of 5.25 per cent, which was financed with Australian dollar-denominated debt at a yield of just 1.3 per cent, delivering higher returns for Keppel Reit’s sponsor and unit holders.
Second, the small size of Singapore’s real estate market acts as a catalyst for international expansion. Most Reits in Singapore – which in the past 10-15 years has gone from being a predominantly local market to a global listing hub for Reits – have some or all of their assets outside the city state.
Given Singapore’s tightly held property market, where assets are rarely traded and office yields are already among the lowest in Asia, “there’s a real push for Reits to diversify internationally”, says Tim Graham, head of capital strategies for Asia-Pacific at JLL in Singapore.
The absence of a meaningful correction in real estate prices since the pandemic began has increased Singaporean investors’ appetite for higher-yielding assets, providing impetus to new strategies to deploy capital more effectively.
Third, buyers from the city state – which also include private investors, asset managers and, crucially, sovereign wealth funds GIC and Temasek Holdings – are among the savviest cross-border investors. Not only have they blazed a trail for Asian capital in Europe by investing in sectors and markets previously the preserve of their European rivals, they have bought into companies and platforms to accelerate their expansion.
Having a strong local presence in many countries has given Singaporean investors an edge during the pandemic. A good example is the partnership formed in July 2019 between fund manager ARA and British asset manager Dunedin Property, which has allowed subsidiaries of ARA to make their maiden acquisitions in the UK this year.
Still, Singaporean buyers face stiff competition, especially in their own region where US and European investors have become much more active and more sophisticated in structuring transactions over the past several years. As I argued previously, US and Canadian private equity funds have recently pulled off some of the biggest cross-border property deals, particularly in India.
Within Asia, however, Singapore remains the leading source of outbound investment, and is a force to be reckoned with on the global stage.