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M&G Real Estate invested in ESR’s Yatomi Distribution Centre near Nagoya, Japan last year

Australia, Japan and Singapore stand out as the top real estate investment locations in Asia Pacific this year considering the bright recovery prospects in these markets, said UK-based asset manager M&G Real Estate, which is focusing on the the logistics, office and residential sectors as it targets these markets.

Australia’s office market is geared for a cyclical recovery while the country’s logistics sector continues to benefit from a burgeoning e-commerce sector, said Eunice Khoo, manager of the Asia research team at M&G Real Estate, during an online briefing on Tuesday.

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In Asia, Khoo said Singapore’s favourable environment for innovation will continue to attract tech firms this year, while healthy demand for real estate in Japan’s major cities will drive growth in Asia’s second-largest economy.

The real estate division of UK fund manager M&G Investments, which manages $48 billion in assets globally, has shown its belief in its strategy through a series of recent deals including backing a pair of ESR warehouse deals in Japan last year. In September, the asset manager also bought a half stake in the 35-storey EY Centre at 200 George Street in Sydney for A$577 million (then $421million).

Top Investment Destinations

While it maintains a “cautiously optimistic” regional economic outlook for 2022, M&G sees the higher vaccination rates in its top target locations allowing office and retail assets to benefit from the return of white collar workers and foot traffic as Asia Pacific continues to battle COVID-19.

Richard van den Berg of M&G Real Estate

Richard van den Berg of M&G Real Estate

Khoo is predicting demand for office and logistics space in Australia will fuel the recovery, with the pandemic-induced e-commerce boom continuing to bolster the logistics segment, especially in major cities like Sydney and Melbourne. For the office market, the M&G executive is projecting rents will turn around this year and that the segment remain resilient to future risks and threats of inflation.

“In terms of ESG (environmental, social and governance), for instance in the office market, it’s something that’s pretty developed and advanced, landlords as well as developers have been factoring sustainability into the assets for a very long time already,” she said. “There are long leases and indexation of leases to inflation [as well], which then makes the asset even more resilient to potential rising inflation.”

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In Asia, Khoo noted that Singapore has become a preferred headquarters location for global tech firms, thanks in part to its commitment to innovation. That tech-centric approach has paid off in deals such as e-commerce titan Amazon’s expansion into a new three-storey office in Marina Bay late last year while China’s Tencent Holdings opened its first Singapore office in 2020.

In 2019 M&G Real Estate invested S$400 million (then $295 million) to forward fund Surbana Jurong’s new office campus in Singapore’s Jurong Innovation District, which will be the engineering and infrastructure consultancy firm’s new headquarters when it is completed this year.

“In Japan, the demand drivers in real estate fundamentals still count on the number of people occupying real estate space and Tokyo is the largest city that we have among the developed APAC markets,” Khoo said, adding that the country provides a great buffer against rising inflation and interest rates which can provide some shelter for real estate investors.

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José Pellicer, M&G’s global head of investment strategy

Aside from investing in ESR projects in Tokyo and Nagoya last year, the fund manager also paid $50 million to pick up two apartment blocks in Osaka as it continues to bank on Japan’s hot multi-family market. This follows a similar purchase three years earlier when it bought a portfolio of residential buildings in Chiba, Fukuoka, and Osaka for $83.7 million.

M&G Bets on Core, ESG Assets

While the region’s top investment destinations seemed to have been agreed upon, M&G Real Estate’s fund manager for Asia Richard van den Berg said logistics and residential sectors will likely continue recording strong value increases this year while the retail sector may see a soft rebound in income once restrictions are lifted.

Within these sectors the Singapore-based fund manager said that core strategies will remain the safest option for investors wary of inflation and interest rate risks over the next 12 months.

“[On the threats of] rising inflation and rising interest rates, I think that kind of backdrop is extremely attractive for core and low-risk investors,” van den Berg said in the same briefing. “That is where you would want to be in a period of uncertainty so if we’re moving in that uncertain period, I would see that the core and prime assets will be much more resilient than the more opportunistic or value-add type of strategies.”

For José Pellicer, the firm’s global head of investment strategy, the most promising strategy is to focus on assets that align with ESG standards, as such properties are more resilient to future climate and environmental risks.

“It is about the kind of capital expenditure that we need to plan as real estate investors over the next 10 years to make sure that our net zero commitments by 2050 are honored and that our assets don’t get stranded on the way, because stranded assets are not going to be in demand for tenants,” he said.

In its global outlook report released in November, the UK-based fund manager identified rising inflation, preparations for net zero carbon emissions and the potential for retail destinations providing engaging shopping experiences, as the three themes currently dominating real estate investment worldwide.

M&G Real Estate has $4.8 billion worth of investments across Australia, Japan, South Korea, Singapore and Hong Kong to date, with their portfolio focused on offices, logistics, retail and residential.

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