With commercial real estate yields at their lowest in Asia, with yields for centrally located office buildings just 2.2% in Taipei, 2.8% in Hong Kong and 3.5% in Tokyo and Singapore, investors are taking on more risks, and even considering purchases outside of their regions. A new Wall Street Journal report titled Sinking Yields in Asia Spur a Property-Buying Shift examines the current international markets, and their hot spots. An excerpt follows:
Pension funds, sovereign-wealth funds and other institutional investors have been willing to accept such low returns because they look attractive in a low interest-rate environment. But it also means that buyers are exposed to a loss in value if interest rates rise and demand for such low yields cools.
Yields have fallen so far in Taiwan that financial regulators last year instituted a new rule that limits domestic insurance companies' investments to properties that offer a rental yield of 2.875% or above. Authorities also have allowed insurance companies to buy real estate outside the country's borders for the first time.
Investors are modifying their strategies. Terence Loh, executive director at China-focused investment fund CDH Investments, said he has been investing in development projects in cities such as Beijing, Hangzhou and Xi'an rather than buying existing buildings. "The risk-reward is more compelling," he said.
Also, if interest rates rise faster than inflation, owners could get squeezed, especially if they have floating-rate debt, experts say. "These tight [yield] rates will have a very small margin of error," said Nicholas Wilson, research manager for capital markets in Asia Pacific, at JLL.
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