Can Asian Frontier Markets Offer Adventurous U.S. CRE Investors Upside?

American investors have invested more than $20 billion in Asian commercial real estate (CRE) since 2015. Their investments cover the full spectrum of CRE, from multifamily apartment complexes to office space, retail, and industrial properties.

Asia’s economic growth has been phenomenal in recent years, and there are no signs of it stopping anytime soon. Additionally, countries in the region actively seek to collaborate with Westerners and break down barriers to cross-border investment. Now might be an excellent time to consider geographically diversifying your CRE portfolio.

Asia Pacific’s Post-Pandemic Recovery Is Strong

Real Capital Analytics reports that second-quarter CRE sales in Asia-Pacific reached US $40.3 billion. It’s the third consecutive quarter of growth and represents an 11% increase on the same period last year. Comparing the full first half of 2021, sales volumes are up 8%. If that doesn’t sound particularly impressive, remember that transaction volumes didn’t plummet here in 2020 the way they did elsewhere.

For the first time since Q2 2019, Asian investors spent more in the region than their European and American counterparts, which indicates those on the ground may be witnessing the recovery firsthand. Office space is still taking a back seat, but sales in the industrial sector hit a quarterly record, and retail is recovering.

The noticeable exception to this recovery is Japan, where national sales dropped to US$5.5 billion, a 47% year-on-year decline. However, Tokyo remains the most-invested city in the region, despite its 32% decline year-over-year.

Asia Provides Access to Frontier Markets

Within the Asia Pacific region, the different countries are at very different stages of economic development, and each offers different CRE opportunities. However, broadly speaking, the region is undergoing a massive shift toward urbanization, which bodes well for CRE. In China, for example, more than 600 million people have migrated to cities from the countryside in the last two to three decades. However, it’s the frontier markets that present some of the most significant opportunities, albeit also the riskiest.

Frontier markets are different than emerging markets in that they are less stable and less accessible. They may be characterized by political unrest and currency fluctuations, will definitely be less liquid, and typically won’t have developed stock exchanges. This makes it challenging for investors to identify and manage assets, but the upside can be enormous.

  1. Siem Reap, Cambodia

Being close to Angkor Watt and several other UNESCO World Heritage Sites, Cambodia’s second-largest city, Siem Reap, is a significant tourist hub. The larger province is home to more than a million people and saw a 10% growth in its GDP in 2019, largely contributed to by the hospitality and tourism industry. As a result, experts predict the city to experience a boom within the next few years. However, Chinese investors already heavily dominate the market, so Americans wishing to participate should act swiftly.

  • Manila, Philippines

The Philippine capital Manila is one of the most urbanized and densely populated cities in the world. Its economy is predicted to show strong growth, and last year, Knight Frank put expected growth in office space at 19%. Colliers sees this as very dependent on the rollout of vaccines, but that is progressing well so far. Colliers also points out that money from OFWs (overseas Filipino workers) in the U.S., Singapore, and Saudi Arabia accounted for 50% of remittances in January and February of this year. This money will keep demand for residential units high.

  • Ho Chi Minh City, Vietnam

Ho Chi Minh City, or Saigon, has a population of more than 10 million, making it Vietnam’s largest city. Property here has only been open to foreign investment since 2015, but now it’s possible to purchase property on a tourist visa as long as the building is at least 70% Vietnamese-owned.

The Ho Chi Minh City Stock Exchange has the largest total market capitalization of any Vietnamese exchange, and the city is home to many corporate headquarters, both national and international. It accounts for 20% of the country’s GDP and almost 30% of its industrial output. Economic activities are diverse, ranging from seafood processing to finance. The city is developing into a tech hub not just for Vietnam, but the whole Southeast Asia region.

  • Jakarta, Indonesia

Located on the island of Java, Indonesia’s capital, Jakarta, is a true megacity. The population of the metro region exceeds 35 million, making it the second-most populous urban area in the world after Tokyo. In 2017, Jakarta property investment jumped a massive 85%, and it continues to show strong demand. The region attracts both tourists and investors with an economy based on manufacturing and financial services. Indonesia’s economy has a relatively stable growth of around 5% annually, which is predicted to be 6% for 2021. Tourism revenue is predominantly from India, Japan, and Australia, and it contributes to that growth, so the COVID travel situation may impact numbers in the short term. Regardless, experts predict an Indonesian real estate boom in the coming years.

The upshot here is that Asian economies are booming, and the region has become a hotspot for real estate. These are long-term investments that could reward adventurous but patient investors looking to diversify their CRE portfolios.