But now, as competition in the traditional gateway cities and major metropolitan markets grows more intense and current yields are compressed across all markets and asset types, stateside and foreign investors alike, Asia included, are turning increasingly to less-crowded secondary markets that provide the amenities and growth of the primary metropolitan statistical areas and opportunities for core-plus or value-added investments. Secondary cities such as Austin, Nashville, Raleigh and San Diego are a few of the markets with demographic and commercial characteristics capturing the attention of institutional capital.
What types of assets are most sought after by Asian investors? Sectors and specific assets that can provide stable cash flow and a shortened J-curve are particularly attractive. Multifamily and office properties are favored in locations that are suitable for long-term holds and most able to endure volatility through market cycles. Investors have also been focused on demographically driven sectors, including health-care-related facilities such as medical office and senior housing (more on this later). Opportunities to invest in these sectors will continue to be attractive strategies for investors.
Asian investors are even looking beyond the traditional targets that provide current yield and have generally become more comfortable with moving up the risk curve. As a result, they are also likely to consider assets that have potential for projected current yield, growth in revenue streams or capital appreciation.
Assets that benefit from a stable and growing economy, such as hotels, industrial and retail, are attractive and can be a successful strategy in all metropolitan statistical areas — top-tier and secondary markets alike. However, as investors look toward more complex properties globally — particularly senior housing, hotels and retail assets — partnership with an experienced investor and operator is critical as these property types require extensive hands-on asset management and oversight. Investment and operating experience in these asset types is critical to a successful investment outcome.
In the past few years, Asian investors have also been attracted to debt investments that provide stable cash flow and strong relative returns, which were bolstered in part by reduced sources of financing, and therefore alternative sources of debt came at a premium. However, as more traditional lenders come back to the market and values rise such that the debt-to-equity gap is reduced within the total capitalization, returns to investors in debt strategies will likely normalize.