Despite Covid, Asia Pacific Corporate Real Estate Disposals Hit Record Highs in 2021

Despite Covid, Asia Pacific Corporate Real Estate Disposals Hit Record Highs in 2021

Commercial News » Shanghai Edition | By Michael Gerrity | May 24, 2022 9:06 AM ET

According to global property consultant CBRE, following a steady flow of sales in 2020, corporates across Asia Pacific increased their real estate disposal activity in 2021. 762 deals worth a combined total of $44.4 billion were completed as sellers capitalised on strong pricing to offload assets.

Pandemic accelerates selling activity

CBRE reports that while pandemic-related uncertainty led to Asia Pacific commercial real estate investment volume falling by 6.5% y-o-y in 2020, corporate sales activity accelerated by 53% y-o-y over the same period, with strong momentum continuing into 2021. This was mainly due to the pandemic prompting many corporates to strengthen their balance sheets in response to the significant disruption caused to their businesses by lockdowns and other measures to contain the spread of COVID-19.

Motivation for disposals differs compared to that for sale leasebacks

Around 73% of corporate sales activity in Asia Pacific in 2021 involved disposals (owner vacating). Deals generally saw corporates disposing of older assets that nevertheless commanded strong pricing thanks to upbeat market conditions, with buyers mostly investors undertaking value-add or development/opportunistic strategies.

Sale leaseback deals accounted for the remaining 27% of corporate sales in 2021, with companies adopting this strategy motivated by a need to enhance their balance sheet and reinvest into their core business. The buying parties in sale leaseback transactions were predominantly core funds and institutional investors, says CBRE.

Positive market conditions

Asia Pacific commercial real estate has performed well throughout the pandemic, with pricing across most geographies and sectors close to record highs as of Q4 2021. With almost every market in the region at or within 50 bps of the 20-year low yield, these upbeat pricing conditions are encouraging corporates to sell down their real estate assets.

Portfolio optimisation

The pandemic has prompted corporate real estate occupiers to review their operational footprint across leased and owned portfolios. Many corporates have subsequently implemented portfolio optimisation strategies, which has resulted in the identification of self-owned facilities, particularly in the industrial and manufacturing sectors, that are no longer fit for purpose. This has been the catalyst for corporates to plan strategic exits either via short-term leasebacks or vacant possession disposals.

Increasing liquidity

With yields remaining elevated across Asia Pacific, corporates have taken the opportunity to liquidate their real estate holdings to increase cash on hand for their core business. Corporates are recycling capital generated from asset monetisation as they are either seeing higher returns in their core business or require funds for M&A.

Enhancing profitability

Many corporates have identified opportunities to book a gain on sales via asset monetisation as an avenue to simultaneously raise capital and enhance reporting profits. While other debt solutions may be just as economical as asset monetisation, these traditional forms of debt do not enable corporates to enjoy the upside of profit enhancement. Even despite the latest lease accounting standards (IFRS16 & ASC 842), which require all corporates to record lease liabilities on their balance sheet, corporates increasingly view sale leasebacks as an alternative and more efficient way of raising capital while enhancing profits, says CBRE.

Asia Pacific Market Highlights Include:

  • Corporate real estate disposals surged to record highs in 2021
    • 762 deals worth $44.4 billion were completed, continuing strong momentum from 2020 as corporates sought to strengthen balance sheets during the global pandemic.
    • 73% of deals were disposals by corporates taking advantage of strong pricing while 27% were sale leasebacks by core funds and institutional investors
    • Reasons for selling include upbeat pricing conditions, portfolio optimisation by occupiers, growing liquidity for core business and M&As, and enhancing profitability.
  • Industrial real estate accounted for majority of transactions at 24% of disposals and 34% of sale leasebacks; this is the third consecutive year that the sector has outpaced offices in transaction activity.
  • Mainland China accounted for most $13.0 billion, of 40% of corporate disposals in Asia Pacific comprising development sites and older assets for redevelopment.
  • Japan led Asia Pacific sale leaseback activity in 2021, accounting for $5.8 billion out of Asia Pacific's $12.0 billion sale leaseback volume as corporates divested office properties.
  • Corporate asset monetisation is set to grow from 5-10% in 2022 as large volume of capital targets Asia Pacific real estate:
    • $104 billion raised by real estate private equity funds from 2017 to 2021, which represents a 60% increase from the previous five-year period.
    • Establishment of REITs in markets like mainland China and India provide additional exit opportunities and boost investment appetite for commercial real estate.

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