ESG & net zero will continue to be an increasingly important factor for all real estate development and real estate investment fund managers, with Europe’s SFDR impacting APAC investors. Over 2022 banks tightened their lending standards and became increasingly more selective regarding borrowers, this is a trend we anticipate continuing into 2023. One interesting repercussion to this is an increased demand for non-bank lending marketplaces. The effects of inflation are causing real estate developers to feel the pinch, with implications such as increased material costs, creating a more cautious market.
2023 is shaping up to be an interesting year ahead. With some old trends showing no sign of decline and with some expected new ones changing real estate talent recruitment in interesting ways, we are excited to share with you our top three anticipated APAC trends for jobs in real estate investment in 2023:
ESG & Net Zero
For real estate investment, net zero carbon emissions has become a necessary aspect of many investment strategies. A report by PricewaterhouseCoopers (PwC) states that of the industry leaders interviewed, 93% said that “running an environmentally and socially sustainable business is the most important factor for successful organisational transformation in real estate over the next 20 years.”
Increasingly we are seeing that complying with regulation standards, particularly the European Union’s 2021 Sustainable Finance Disclosure Regulation (SFDR), is a key factor. For real estate, this means that fund managers must report how they have assessed sustainability risks regarding a building. Greystar has just appointed Philip Hirst as its new European Sustainability Director, which reflects the importance of this regulation.
Although SFDR is a European regulation, it applies to any APAC real estate fund with one or more European investors. In practice, this is most regional private-equity funds.
However, when considering ESG (Environmental, Social and Governance), it is environmental considerations that remain the most crucial ESG factor in the APAC market. According to Benett Theseira, Managing Director and Head of Asia Pacific at PGIM Real Estate:
“As for decarbonisation, more businesses and end users are shifting their thinking and preferences towards green buildings… this is expected to provide more opportunities for upgrading older building stock and finding new ways to create higher value, green assets.”
Until recently, attention was focused on a range of “green” concerns including material usage, water consumption and energy efficiency. However, while these are still important factors, we are seeing a shift in attention towards the concept of net zero.
In Hong Kong we have seen ESG jobs commanding salary premiums as companies strive to meet their net-zero targets. With a recent article by South China Morning Post citing a 30 percent increase for local talent when changing roles, while expats who relocate could expect an even larger salary increase. We have also seen an increased demand for Green Finance professionals and ESG Leaders.
While the concept of net zero has started to take precedence, we have seen Asia slow to take up this new factor in real estate investment, when compared to Europe. However, we hold the opinion that helping Asian cities achieve widespread net zero standards presents some challenges, particularly population density and high energy usage.
Banks are Tightening Terms
In the past cheap and easy loans have underpinned the strong performance of real estate investment, but as interest rates adjust globally, we anticipate that 2023 will see pricier, harder to get loans with more restrictive terms.
With a survey conducted by PwC confirming that real estate finance will not be as readily available as last year and that, generally, lending terms have tightened across the board.
Companies hoping for 70% leverage are finding it harder to obtain and this is especially true for borrowers who hold higher credit risk or for deals that are seen to hold more risk.
However, interest rates in China do not follow this trend. The government currently plans to ease rather than tighten its loans, making them both more accessible and cheaper. The Chinese government has also recently provided banks quotas regarding lending, forcing them to look for individuals looking to acquire capital.
Regarding Australia, it is worth noting that loans continue to be readily available to bigger and creditworthy borrowers, although borrowing costs are significantly higher. However, it has been suggested that the four major Australian banks are “quite selective”. For example Hines, the second largest global build-to-rent developer, owns two build-to-rent sites across Melbourne and has just filed plans for its third Melbourne project, with an anticipated cost of $130 million for the development.
Perhaps unsurprisingly, the tightening of lending terms by banks in 2022 has created a demand for a nonbank lending market. This, until recently, has been a mainly niche market. Private-equity investors are now exploring the possibilities of focusing their capital on providing real estate debt instead, an interesting prospect for many real estate developers looking for capital.
For example, Ares Management Corporation, who closed its Infrastructure Debt Fund V in December last year (believed to be the largest global infrastructure subordinated debt fund), is a leading global alternative investment manager.
It offers clients investment solutions across the credit, private equity, real estate and infrastructure asset classes, they also focus on providing flexible capital to support businesses. We expect solutions like this will become more prevalent, if banks continue to tighten their loan terms.
We have seen demand for roles in this sector increasing, with Corporate Finance specialists who are skilled at developing alternative capital sourcing strategies for real rate investment commanding high salaries.
Inflation Poses Risks for Real Estate Development
In recent years we have seen strategies employed by build-to-core developers to be popular. This has allowed the manufacture of new products in a market with too much investment capital and too little investable stock.
However, inflationary pressure on construction costs has created a larger risk for development. This is partly because raw materials are priced in US dollars, which as local currencies in Asia Pacific depreciate causes a rise in price for developers looking to purchase these materials.
In a report by PwC, one local real estate developer in Singapore pointed towards an increase in construction costs of “easily 15 percent” in 2022, citing material costs as a major factor.
There have also been a variety of other issues construction projects have had to contend with, including shortages of materials caused by supply chain delays, increased utilities costs, rising construction financing costs and, for many APAC markets, shortages in labour. A lack of manpower has led to delays and necessitated higher salaries for workers to attract talent.
Ignoring these more pragmatic issues, there has also been a lack of clarity for real estate developers regarding input costs and occupier demand. This has led to some real estate investors avoiding or delaying build-to-core development, particularly for larger, more costly constructions.
In response to this, we have seen real estate investors cutting the use of debt where possible and factoring in buffers as contingencies to mitigate further interest rate increases and higher operational costs. However, in our opinion, the effects of this new landscape benefits larger real estate developers who hold expertise in investment and development, and who have deep pockets.
2023 looks to be one of change for the real estate investment sector. With an increased focus on green regulations, we anticipate seeing a larger demand for green carbon offsetting products, such as carbon credits. This coupled with real estate developers facing a lack of certainty around material costs and borrowing costs, suggests that real estate investment will need to find new and inventive ways to solve these issues to maintain profitable builds across the year ahead.
If you are a company considering hiring, we welcome the opportunity to present our services and capabilities. If you are a candidate, please check our jobs page or contact us to discuss your background, skills, and future aspirations. We always look forward to staying connected and exchanging ideas, insights, and opinions.
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