Real estate's new normal will differ in many radical ways from what we used to know before. Brick-and-mortar retail is being remodelled; warehouses are on the rise to accommodate virtual supply chains; homes now function as venues for just about everything; and offices are turning into hybrid constructs of traditional and digital spaces.

In all these changes, the most salient feature of the budding post-pandemic world is how necessity and technology are pushing past vested interests, evolving instead to the benefit of the masses. Indeed, the long-overdue transition in the balance of power from the owners of real estate to its users represents the most positive shift for the industry in a generation or more.

With the sector now in rebound, real estate investors are moving to deploy a wall of dry powder that has been accumulating since the pandemic started. Asia Pacific alone has a pipeline of upcoming deals worth US$68 billion - more than double the figure just two years ago. But finding a new home for this growing glut of undeployed capital requires a fair amount of soul searching to sift markets for value and risk.

REITs show strength in post-pandemic recovery

Asia Pacific continues to see ever greater volumes of investment capital pointed at real estate investment trusts (REITs) that own and invest in properties throughout the region. According to the Asia Pacific Real Assets Association (APREA), capital raised by REITs could reach well over US$20 billion in 2022 as sentiment recovers and more investors become familiar with the asset class.

That being said, the rise in investment volumes has come largely at the hands of domestic investors since widespread travel embargoes have limited flows of cross-border capital. Based on data from MSCI's Real Capital Analytics (RCA), capital that originated from within the Asia Pacific region has outstripped purchasing by Europe and U.S. based funds for the first time since 2012.

Leading the way is none other than Singapore, which was the biggest source of outward investing into the Asia Pacific region, deploying some US$9.3 billion in the first nine months of 2021. Spending by local REITs accounted for nearly half that figure, who used access to cheap debt to sell assets from their home portfolios and bid aggressively for higher-yielding properties elsewhere, both regionally and globally.

The large volume of capital available for regional real estate purchases has also catalysed the creation of bigger investment vehicles via mergers of existing REIT platforms. Last year, one large merger took place in Singapore, and more consolidation via cross-border deals is likely for the country's many small, illiquid vehicles that specialise in currently highly prized logistics assets.

Meanwhile, momentum is building for REIT IPOs in the Asia Pacific, with 30 new REITs listed in 2021 which raised a combined total of more than $12 billion, the highest ever. This is because REITs are a catalyst for sustained urbanisation. In the case of China, for instance, the government launched nine infrastructure REITs (C-REITs) to promote economic revitalisation and rejuvenate growth.

While 2021 has clearly provided a supportive backdrop for REITs, investors should keep in mind however that not all subsectors in real estate are enjoying the same rebound. The brave new world of real estate is fraught with uncertainties, and in this volatile and unpredictable environment, unconventional strategies could offer more opportunity than ever, although risk is equally elevated.

Adapting for a brave new world in real estate

In the past, real estate investment was viewed more as a buy-and-hold exercise that functioned like a long-term bond; in other words, a vehicle for yield that involves an element of asset management. But with expected rising competition, a tightening liquidity environment, as well as inflationary pressures, a more proactive approach is essential going forward in 2022.

With yields continuing to compress and occupiers demanding more, real estate owners are looking to derive from improving their operational performance, beyond just the beta trade. In this context, returns are driven partly by rent and partly by operations, which means that investors need to assess both revenue streams separately to ensure that one business is not subsidising the other.

Given the extent of the changes underway, it is also clear that buildings that may have performed well in the past are likely to be inefficient in the future. With so much stock in need of repositioning, especially in the office and retail sectors, investing to renovate has become one way to arbitrage those inefficiencies, whether through use of technology or changing building use.

Another way of approaching value-add strategies is by investing in decentralisation. Traditionally, the most valuable commercial real estate has always been found in central business districts (CBDs), but this may not be as absolute now as in the past. With many employees now working at least part-time from their homes, secondary business hubs have emerged to provide workplaces closer to where they live.

Furthermore, the growing mandate for green buildings over the past decade has now leapfrogged from obscurity to claim top billing on investor agendas. The so-called 'green premium' for investors is very real, and perhaps within a couple of years - there might even be a point where a 'green penalty' will begin to apply as more occupiers increasingly require ESG-compliant buildings.

As ESG agendas become more prominent, owners are adopting technology to measure various aspects of building usage and efficiency, as well as creating a pathway to ESG viability during the hold period. Just as important, of course, is the analytics used to put that data into context, allowing investors to satisfy the all-important reporting requirements that prove buildings are performing to required standards.

Building a sustainable income from REITs with Maybank

2022 will be a year of continued competition for assets and more creative real estate strategies. Maybank is bullish that this will be another banner year for REIT IPOs, M&As and cross border acquisitions. With the recovery now underway in Southeast Asia, the quality of REITs and the strength of certain real estate subsegments, such as Logistics and Industrial REITs, stand to benefit from long-term structural tailwinds.

Looking to diversity your portfolio by investing in REITs and gaining exposure to the property market? Open an account now with Maybank Securities to start building a resilient REITs portfolio.