Concrete Analysis | Investors should take a closer look at commercial property in Tokyo, Seoul and Melbourne
- Investors need to embrace an active strategy in the search for submarkets under transformation in selected cities
- Commercial property is worth a look in cities where active management and the repositioning of buildings can add value
The prolonged low interest rate environment has created challenges for investors in deploying money in financial markets, as higher return opportunities are hard to find. However, active real estate strategies can thrive under such circumstances and should play a more prominent role in investment portfolios.
Real-estate strategies can be broken down into three categories: core, value-added and opportunistic. Core strategies are relatively low risk, with returns mainly being generated by long-term leases. Opportunistic strategies are high-risk investments with the extensive use of leverage or the taking development risk and they have higher uncertainty on returns.
Value-added investors take the middle route. As in the opportunistic strategy, they aim to generate higher returns through stronger capital growth. Active management, such as leasing of vacant space, the optimisation of leases and repositioning buildings through refurbishments or renovations are typical characteristics of value-added strategies.
We believe value-added strategies are supported by both the macro environment and the specific trends in the real estate market. A successful investor should also adapt his or her strategies relative to the real estate cycle.
Prime Hong Kong office rents have seemed to defy the laws of gravity, especially in Central where monthly rents have increased from HK$20 (US$2.56) per square foot in 2003 to almost HK$140 per square foot. In the first quarter, rents were up 6 per cent from a year ago due to supply shortages.
