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Between 2018 and 2022, Asia will host three consecutive Olympic Games: the recently-completed Winter Games in Pyeongchang,

South Korea; Tokyo in summer 2020; and Beijing in winter 2022. That’s an impressive hat trick for the region, but what real estate investment opportunities do the Olympics present, and what does this mean for Asia’s place in institutional property portfolios?

The Asia Pacific region has certainly matured over the past decade as a destination for global real estate investors, says Marc-André Flageole, global portfolio manager and head of the invest-ment team for Presima. Indeed, Tokyo and Seoul are already core real estate investment targets for many institutional investors, and Bei-jing is becoming a potential core city for some

investors, as well, says Takuya Yamada, CEO of IDERA Capital Management in Tokyo.

The Asia Pacific real estate market has expe-rienced constant growth since the global financial crisis (see “Direct commercial real estate invest-ment, 2008–H1 2018”, page 18). At the end of first half 2018, investment volumes in the region were about 35 percent higher compared with the same period five years ago, says Jonathan Hsu, head of research, Asia for M&G Real Estate. “This is in line with the increasing number of foreign investor–backed real estate funds targeting Asia Pacific core and value-add opportunities,” adds Hsu.

The fact a country has been chosen to host the Olympics means its economy is mature enough to weather the economic cost to prepare such a

Asia will host multiple Olympics over the next few years. Do these global mega-events provide golden opportunities for investors?

by Mard Naman

Spectator sport

ASIA PACIFIC | 17 | DECEMBER 2018

mega-event, adds Kyung Paik, managing director, head of funds management for IGIS Asset Manage-ment in Seoul. He notes the GDP growth rates for China, Japan and South Korea have become much less volatile than in the past, and all three countries are projected to enjoy stable growth for the next several years, according to the International Monetary Fund (see “Real GDP growth rate, 1980–2022f”, page 19).

The amount of money expected to be invested in Asia Pacific property markets will increase an estimated 26 percent by 2020, with US$53 billion of real estate private equity deployed, CBRE fore-casts. This expanding interest — especially in core markets such as Japan, Australia, Hong Kong, South Korea and Singapore — is partially a reflection of increased transparency, notes Hsu. All of these locations enjoyed improvements in their transpar-ency scores in 2018 compared with 2016, according to JLL’s Global Real Estate Transparency Index.

But these positive economic developments do not necessarily translate to the Olympics themselves creating good, new opportunities for long-term investors. Although they will provide great visibil-ity for the hosting cities and countries, they should not materially change the stance of institutional property owners toward Asia, explains Flageole. Most real estate investors have relatively-long-term investment mindsets and horizons, and the Olym-pics have more short- to mid-term impacts, he believes. As such, they might not influence long-term allocations toward Asian real estate.

That said, in the short to medium term, the hospitality and retail sectors would typically benefit

from such global mega-events, says Hsu. In the lead-up, local governments generally invest to make Olympic cities more tourist-friendly, improv-ing multilingual signage and connectivity to make it easier for visitors to get around. And Hsu believes these events and the improvements help raise city profiles and the growth of inbound tourism over the long term, as well.

Long-term forecasts suggest inbound tourism to Japan and South Korea will grow, backed by rising income levels within the region, particularly from China and other emerging markets, notes Hsu. The Japanese government is targeting 60 mil-lion overseas visitors by 2030, supported by various measures, including the development of integrated resorts. The relaxation of visa requirements and intensive marketing are other measures the Japa-nese and South Korean governments have taken to encourage more tourists to visit.

Infrastructure improvements can also lead to increased foreign investment. Enhanced connectiv-ity allows more-efficient transportation networks and will likely benefit investments into the logistics sector, indicates Hsu. And Tokyo Bay’s and Shibuya’s urban transformation in Japan could result in new or enhanced business and living hubs, which could improve underlying asset values.

Pre-Olympic benefits and challengesGenerally speaking, however, the economic and real estate benefits of most Olympic Games come largely in the pre-Olympic build-up, according to PGIM Real Estate’s November 2016 report, Tokyo Olympics

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Impact: Economic and Real Estate Implications of the 2020 Tokyo Olympic Games. This includes the roughly five- to seven-year period from the time the host city wins the bid until the event itself. PGIM Real Estate reached this conclusion by examining previ-ous studies of earlier Olympic hosts, in addition to looking at the upcoming Tokyo Olympics.

In the pre-Olympic period, potential economic benefits include boosts to GDP and employment growth. Improved infrastructure and redevelop-ment projects can drive economic growth and help meet the long-term needs of the local economy. Host cities can also count on a predictable rise in tourism during the games.

Real estate markets potentially benefit from a temporary increase in commercial real estate demand in the pre-Olympic period, particularly for hotel and, to a lesser extent, retail and office assets. Host cities will experience a temporary increase in residential prices and rents, increased office-market investor sentiment and yield compression, and improved performance within specific submarkets targeted for redevelopment.

As positive as these factors may be, however, strong potential negative impacts exist, both to the economy and real estate in the build-up and aftermath. For the economy, these include labour shortages before, and an economic drag after, the Olympics because of a sudden drop in investment and the weight of public debt, which can be quite substantial. The loss of Olympic-related jobs imme-diately following the games can harm growth and consumption, and host cites can face a decline or sharp deceleration in international tourism growth in the post-Olympic period.

For real estate, potentially-negative impacts include overdevelopment, particularly in the hotel sector. This can cause occupancy rates and income growth to decline. Another risk is a pullback in office and residential values as investor exuberance fades.

Taking all this into consideration, the report says short-term investors may find good opportuni-ties in the pre-Olympic period, as investors ben-efit from temporary improvement in fundamentals and yield compression. But those looking to take

advantage of these should do so well in advance of the Olympics and consider an exit strategy one to two years before the event, the report recommends.

Playing the long game Strategically, all this implies, in general, inves-tors with long-term horizons would not pursue Olympic-related investment opportunities. “Poten-tial positive effects from the event on the real estate market are largely temporary and will not likely contribute to improved asset performance in the long run,” the PGIM Real Estate report concludes.

Exceptions to this could be assets in revitalised submarkets that do offer long-term growth potential. “However, note that Olympic redevelopment projects often fall short of expectations,” the report cautions.

Despite this, good long-term investment oppor-tunities certainly will be available in these countries. “For long-term investors, the final decision should be based on economic fundamentals, not a one-time event such as the Olympics,” says IDERA’s Yamada.

For core investments in any of the host coun-tries, investors should focus on assets with embed-ded long-term income growth and defensive income streams, says M&G Real Estate’s Hsu. This will require more attention to longer-term market fundamentals and a focus on relatively-more-prime submarkets. Urban areas being rejuvenated for the Olympics may present opportunities in the office, retail and hotel sectors, but returns may be highly compressed due to high prices and intense competition, cautions Hsu.

Although Yamada does not think the 2020 Tokyo Olympics will provide significant positive impacts to real estate, he believes the new infrastruc-ture in the Tokyo Bay area, including new roads and a new transportation system, will provide long-term benefits for sectors such as residential and retail.

The Olympic Village will be very close to Tokyo’s central business district. Along with infrastructure improvements, the government will convert the vil-lage to residential condos after the Olympics. “I think these residential units will become very popular due to their proximity to the CBD,” says Yamada.

Presima’s Flageole agrees the residential and retail assets located near the Olympic Village and near the sports-related infrastructure might enjoy the best long-term benefits. He recently visited resi-dential and retail projects under construction in the Shinonome and Ariake districts of Tokyo, located a few subway stations from the village, and several venues where events will take place. “We believe such areas might command a premium in the future, given their proximity to central Tokyo, but also because of the infrastructure that will last long after the games,” explains Flageole.

The retail space around the village should ben-efit from the influx of residents who will eventually occupy the units used by the athletes. “Being close to the centre of Tokyo and well connected by pub-lic transportation, these thousands of units should sell or lease well after the Olympics,” says Flageole.

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This could also benefit investors in the large, listed development companies that are currently involved in the construction of the village, as these firms will collect sale proceeds once the athletes’ units are converted to residential purposes, adds Flageole.

The government also plans to improve airports before and after the Olympics to increase inbound tourist flow. “The impacts will be long term and provide many benefits to the hospitality business in Japan,” says Yamada.

For investors willing to move up the risk curve, value-add investments that require enhancement to upgrade or reposition assets may provide higher returns, suggests Hsu. This includes build-to-core investments, such as the development of modern logistics facilities to capitalise on improvements in transportation networks for the Olympics.

“Obviously the best opportunistic play is to buy land near new infrastructure before the Olympics and sell after the value increases,” states Yamada.

Going for gold in JapanWhen looking at long-term Olympic prospects, Savills sees golden opportunities in Japan. The company believes real estate markets in Japan’s key cities will see long-term benefits from the Olympics. “A series of nationwide infrastructure improvements and large-scale redevelopment proj-ects toward and beyond the 2020 Tokyo Olympics should have a positive influence on the real estate market in the long term,” predicts Savills’ April 2018 Spotlight report, Beyond Tokyo 2020: Prospects for the Japanese Real Estate Market.

Macroeconomic and demographic trends will continue to drive demand for real estate and encourage continued development, especially in key cities, states Savills. “The Olympics could be a stage to showcase a new Japan and set the country on a resilient growth track,” asserts the report. If history repeats itself, this might be true — Japan’s greatest economic boom after World War II started in 1965, right after the 1964 Tokyo Olympics. That boom made Japan the world’s second-largest econ-omy, notes Savills.

Hsu also sees some positives in Japan’s long-term fundamentals. While Japan on the whole is registering population decline, key regional cities, such as Tokyo, Nagoya and Fukuoka, are expected to grow in the medium to long term, says Hsu. Tokyo is also likely to remain one of the world’s largest cities in terms of population and GDP over the next couple of decades. “The positive macro fundamentals of these cities should help sustain demand for income-producing real estate, be it mul-tifamily residential, office or logistics,” predicts Hsu.

With interest rates expected to remain low, real estate should continue to attract a lot of attention from investors seeking stable, defensive income streams. On the downside, access to investible stock could remain challenging because of high competi-tion from foreign and domestic investors, warns Hsu.

South Korea’s remote possibilitiesWhile new infrastructure may be adding to Tokyo’s attractiveness for institutional investors, new infra-structure in more remote areas may not have the same effect, even if it is for the Olympics.

South Korea experienced major infrastructure developments prior to the 2018 Winter Games in Pyeongchang, notes IGIS Asset Management’s Paik. Incheon Airport’s Terminal 2 increased the air-port’s annual passenger capacity from 54 million to 72 million. The Seoul-Yangyang Expressway now connects Seoul to the east coast (including Pyeongchang), and the high-speed Korea Train Express now connects Incheon/Seoul to the east coast in only two hours.

These investments have helped connectivity to the east coast and boosted the tourism industry, says Paik. And land prices in Pyeongchang have risen steadily since the city was chosen in 2011 as the 2018 Olympic host. But even all this may not be enough to attract long-term institutional investors.

“We believe all of these positive improvements will not be sufficient to create interest for institu-tional investors looking to invest in commercial real estate in this region because the Winter Olympics were held in a mountain resort in the eastern rural area of Korea, and there is no liquidity for any insti-tutional investors,” explains Paik.

He thinks this is often the case for Winter Olympics sites, which tend to be held in more-remote mountain areas, whereas Summer Olym-pics can be held in big cities and, therefore, have more influence on real estate markets.

Yamada notes the new infrastructure the South Korean government completed before the Olym-pics — high-speed rail between Incheon and Seoul, and between Seoul and Pyeongchang — now faces weak domestic demand, as well as competition from road and bus systems. “Some services have already stopped, with no plans to resume services,” says Yamada. “New infrastructure does provide positive impacts to real estate, but we need to make sure it is sustainable.”

The negligible Olympics impact notwith-standing, South Korea still has appeal for insti-tutional investors. South Korea’s economy is

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set to gradually mature and shift away from manufacturing to services, which should help buoy economic growth and create more service-sector jobs, believes Hsu. This bodes well for the office sector. Seoul is also expected to be one of the largest consumer cities by 2030, backed by the growth of middle-income households. “This should help the logistics sector, as e-commerce is likely to continue leading the growth of the retail market,” says Hsu.

Challenges to investing in South Korea include factoring in higher risk premiums to offset the risk of North Korea, and the fact a high proportion of the investible stock is tightly held by local conglom-erates, cautions Hsu.

China’s different approachChina is taking a decidedly-different approach to the 2022 Winter Olympics in Beijing than it did when it hosted the 2008 Summer Olympics in the same city. China spent an estimated US$42 billion for the 2008 Olympics and built showcase projects such as the Beijing National Stadium, which is vir-tually unused now. The country’s winning bid to host 2022 was less than US$4 billion, a mere 10 percent of the previous Beijing Olympics.

The more-modest approach is represented by the city of Chongli, which is about a three-hour drive from Beijing and will host the main skiing and snow-boarding events. After President Xi Jinping toured the area last year, local officials scaled back develop-ment plans for Olympic venues, cutting the number of resorts from 20 to eight, according to a February 2018 article in The Wall Street Journal. Changes are still happening, as hotels, restaurants and apartment projects are replacing farming areas at a faster rate than before the Olympic site was chosen.

But two months after Xi’s visit, Chongli imposed property controls to cool the Olympics-driven homebuying fever that had been fuelled by out-of-towners, according to The Wall Street Jour-nal. Indeed, home prices have doubled in Chongli since Beijing won the bid in July 2015. In addition

to other controls, building heights in Chongli have been set at a maximum 98 feet (29.87 metres) to prevent skyscraper projects. The idea is to lift the local economy but in a sustainable way.

In Beijing, instead of building many new are-nas for events taking place in the capital, the plan is to adapt and use 11 of the 12 facilities from the 2008 Olympics, The Wall Street Journal reports. This represents a scaled-back approach, but mas-sive developments are still in the works. South of Chongli, builders are transforming Zhangjiakou, a host city in Hebei province, into a megacity. Huge amounts are being spent on infrastructure, includ-ing a new US$9.3 billion high-speed rail scheduled to open in 2019 and reduce the trip from Beijing to Zhangjiakou to less than an hour.

According to government projections, the high-speed train and other Olympic benefits could boost the annual economic growth rate of Zhangjiakou to more than 10 percent for the next six years, com-pared with the 7 percent rate of growth in 2017, reports The Wall Street Journal.

After the 2008 Olympics, China’s structural pivot toward the service sector from manufacturing boded well for white-collar employment, middle-class formation and consumer spending. For Tier 1 cities such as Beijing and Shanghai, this trend should continue to support and bolster demand for commercial real estate assets, says Hsu.

Growth in white-collar employment sup-ports office demand, and the resulting income-led strengthening of domestic consumption supports retail, both online and offline. That said, risks con-cerning stringent controls on capital outflows and unclear policies around the renewal of leasehold land tenures need to be addressed, as these factors create uncertainties for both short-term and long-term foreign investment returns, explains Hsu.

Crossing the finish lineThe Olympics provide excitement and glitz, but long-term investors need to consider carefully before diving into the pool of Olympic-related real estate investments. Savvy investors will find good short- to medium-term opportunities in the pre-Olympic build-up, but longer-term investment decisions should be made on the basis of market fundamentals, not the mega-events themselves.

Increased relocation and reurbanisation, for example, are expected to be persistent long-term trends in Japan’s key cities, supporting demand for rental housing and making multifamily residential a good source of stable, defensive income returns. And the logistics sector in South Korea, one of the world’s largest, should continue to benefit from the maturing e-commerce market. Slow and steady investments such as these could help investors win their races in the long run. v

Mard Naman is a freelance writer based in Santa Cruz, California, USA.

The Beijing National Stadium, known as the “Bird’s Nest”, built for the 2008 Summer Olympics is virtually unused today.

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