US multifamily specialist Greystar last year joined forces with MIRA Real Estate to form an APAC residential platform, which has since launched a China fund backed by Dutch investors APG Asset Management and Bouwinvest Real Estate Investors.

Urbanisation and a lack of affordability mean more people across the region are renting, while it is predicted that Asian Millennials who value flexibility will prefer to rent rather than own.

Australia, where the percentage of owner-occupiers has fallen due to rising house prices, is turning to apartment living and is seeing more multifamily blocks being developed.

However the largest current opportunity is in Japan, the only established multifamily market in the region, while China offers the greatest potential for growth.

Overseas investors pick Japan multifamily

“Japanese multifamily residential remains very popular with overseas investors,” says Tetsuya Kaneko, head of research & consultancy at Savills Japan. “In fact it might be the most popular sector.”

“At this late stage in the cycle, mid-market multifamily residential is seen as very stable and defensive. Even after the global financial crisis, both rent and occupancy fell by only 10%.”

In October, German insurer Allianz announced that it had bought a portfolio of 82 apartment buildings in Tokyo, Osaka, Nagoya and Fukuoka from Blackstone Group for $1.21bn. The acquisitions offer Allianz, “one of the highest stabilized yield spreads in the world,” says Rushabh Desai, Asia Pacific chief executive of Allianz Real Estate.

While Japan’s overall population is falling, the populations of Tokyo, Osaka, Nagoya and Fukuoka are rising due to migration from other parts of Japan. In Tokyo, where rental residential development has not kept up migration, yields are as low as 3%, rising to 4-5% for major regional cities.

Investing in the sector is challenging due to intense competition from foreign and domestic institutional investors, and high net worth individuals, as well as the small lot sizes on offer – averaging $20m, which makes it difficult to scale up.

However, Kaneko says: “There is still some potential for further yield compression, due to the weight of capital targeting the sector.”

Competing models for China multifamily

The multifamily residential sector is nascent in China, but has huge potential due to its 1.4bn population and the struggles that many families and young professionals have in buying apartments.

The government has pledged to back the sector, but the major obstacle remains the cost of land, which makes it almost impossible for developers to create for-rental projects which will generate an acceptable yield.

There are three alternative models for providing rental residential accommodation in China, explains James Macdonald, head of China research at Savills.

Shanghai and some other cities have designated certain land parcels for residential leasing. So far, these have mainly been acquired by state owned enterprises (SOEs) which will develop apartment blocks and lease them out. However, this model has not attracted much interest from either foreign or domestic developers.

“The plots tend to be in fringe areas and even with land costing as little as one-quarter of the normal price, the margins are low because potential tenants are price sensitive,” says Macdonald.

Rather than build afresh, some companies are acquiring buildings, often one-star hotels or low-grade office buildings and refurbishing them to provide apartments. Players in this segment include Nova, which has attracted investment from Warburg Pincus and GIC.

Finally, some operators are taking long leases on individual apartments and then leasing them to tenants, often with extra co-living services. This sector has already seen business failures. “The model is sound, but some businesses expanded too quickly and found they had built up huge lease liabilities,” says Macdonald.

Further reading:
Savills Japan – residential research

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Tetsuya Kaneko | James Macdonald