The real estate industry in Asia Pacific (APAC) is seeing a substantial shift due to the US Federal Reserve’s sequence of swift interest rate hikes that have been in place since mid-2022, in a region where finance is readily available. While most Asia Pacific markets, with the exception of China, started to recover from the effects of regional COVID restrictions in 2022, investors now face a new set of threats in 2023 that are no less dangerous: high rates of inflation, rising interest rates, unmanageable levels of debt in both the public and private sectors, and an impending global recession.
A spike in interest rates in the first half of 2023 made bank funding difficult, which led to a 24% YoY drop in APAC commercial real estate investment transactions. With a startling 54% reduction worldwide, this decline was even more noticeable and reached its lowest point since 2010. Global market dynamics and lender confidence have been impacted by financial index volatility and growing loan expenses. Nonetheless, the liquidity of the debt market is still steady, with regional differences in loan availability. It is projected that APAC interest rates are nearing their high, following the US trend, and that rates will begin to drop in 2024.
Ultimately, however, investors must adjust to a new reality of the market that entails several important shifts:
Capitalisation rates will move out
Easy and cheap liquidity over the years has been projected to cause asset values to soar and real estate yields to contract. The scenario seems to be more favourable for a more riskier credit proposition as the property ROI are reaching break even points. The APAC property market is forecasting a lockstep climb in the interest rates). Although the Asia-Pacific markets have been slow to embrace this process, there are signs that cap rates are starting to rise in South Korea and Australia. On the other hand, a lot of respondents predicted that in 2023, regional cap rates would rise by an average of 100–150 basis points. Japan is expected to maintain its ultra-low interest rate environment for 2024.
Investors are shifting their portfolios to include more protective property types.
Investors are beginning to shift their focus towards more defensive property types, giving special emphasis to features like rent indexation, shorter lease terms that are easier to change, and reliable recurring income. One such industry is “bed space,” which includes hotels, multifamily, elder living, and student housing, among other subcategories. Logistics is one sector where investors are focusing as the rent typically accounts for a smaller fraction of overall operating costs. On the other hand, “persistent” attributes are present in specialised asset classes like data centres, cold storage, and life sciences, which have long index-linked leases and usually high rents.
Development projects are impacted by growing risk.
Recently, build-to-core strategies have become more and more popular as a way to create new products in an environment where there is a general shortage of high-quality building stock. However, a number of new projects have been postponed because of growing finance rates and construction costs, in addition to a dismal occupier demand prediction.
Standard assets start to lose appeal
Office leasing volumes have not yet completely recovered to pre-pandemic levels on a global scale. With the exception of Australia, developed APAC office markets have largely shown resilience to the trends towards remote work observed in Western markets. In H1 2023, the leasing volumes in the Asia Pacific area decreased by 4% YoY, surpassing the declines in leasing volumes in Europe by 25% and the US by 15%. The market is cautiously optimistic that China’s economic recovery will eventually result in a rise in demand for office leasing, notwithstanding the uncertainty surrounding it. Despite a decline in leasing demand from tech and financial tenants, the office leasing markets in Singapore and Seoul have held up well.
Logistics plays the part of being steady for investment.
There are distinct dynamics throughout the APAC area. E-commerce drives the logistics industry, and supply chain modernisation is still a potential development. E-commerce’s share of overall retail sales has changed in a number of APAC markets, mostly as a result of physical retail’s recovery from pandemic-related lows. It’s crucial to remember that e-commerce is still growing overall. There’s also indications of advanced manufacturing companies moving back to East Asian countries like Taiwan and Japan or moving to India altogether; Vietnam stands to gain a great deal from this trend.
Retail and residential markets across APAC
Retail markets are exhibiting moderate confidence and signs of recovery, as evidenced by higher foot traffic and retailer sales in prominent locations. According to a specific data analysis report, investments increased to 60% in 2020 but decreased to 20% in 2021. Resulting in a 10% and 5% mild increase in 2022 and 2023, respectively. Retail occupiers feel more expansionary as a result of this. After years of strain on the industry, retail real estate returns have increased due to the anticipation of rental growth in Singapore and Hong Kong.
Asia Pacific’s residential markets exhibit a range of dynamics, each driven by specific variables. While some areas struggle with a lack of supply and fewer development starts, others confront unique difficulties like China’s glut of incomplete projects and developer defaults. These variations, which represent the unique economic and market circumstances of each nation, have a variety of effects on rental growth and property assessments.
Hospitality gains traction
Similar to retail, the hospitality industry is expected to grow as a result of the rebound in travel. Performance metrics such as revenue per available room, average room prices, and hotel occupancy are all trending upward. Strong domestic travel demand supports market sentiment in nations like South Korea, Australia, and Japan. The market believes that the beneficial effects of mainland China becoming open to tourists will help the hospitality industry continue to grow in the future.
Growing influence of sovereign and private investors
The real estate investment paradigm is shifting as a result of the sharp reversal in the macroeconomic picture following more than ten years of abundant capital. Investors that are less dependent on debt will benefit in an environment where rates are rising. Private and sovereign investors are ready to act swiftly to acquire prime assets when there is less competition since they have longer time horizons and larger budgets.
A way ahead
In the APAC region, financing a firm successfully entails a complex strategy that takes market dynamics and regional quirks into account. Businesses may position themselves for success in this booming and constantly changing region by diversifying their funding sources, utilising technology, forming local relationships, and keeping up with government incentives. APAC has enormous potential that can be developed with the correct financial plans, which will promote economic expansion and wealth.
Blog by Tamanna Shaikh
