Singapore was ranked as the best Asia Pacific city for investment potential in a poll by the Urban Land Institute and PwC
2022 will be the year of a stronger growth for Asia Pacific (Apac) economies as the majority of countries in the region eased off the restrictions of Covid-19, triggering an economic revival. However, macroeconomic challenges that have been causing a lot of concern, such as stubborn rates of inflation, hikes in interest rates and a global slowdown that have caused a rise in worries about a recession in recent times.
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This is what has led to a more cautious attitude, particularly in the real estate industry. According to research institute Urban Land Institute (ULI) investors have taken a wait-and-see strategy in the face of increasing uncertainty. “Investors are aware that the risks are increasing but aren’t clear on the severity of the headwinds as well as how markets is likely to be affected,” ULI says in its Emerging Trends in Real Estate Asia Pacific 2023 report.
In this regard it is evident that real estate transactions in Apac have plummeted since investors shift into a holding pattern and delay making decisions. ULI’s report, released jointly with PwC and PwC, provides MSCI figures that show the Apac real estate transactions decreased by 38% from a year ago in the range of US$32.6 billion ($44 billion) -the lowest total for 3Q for a decade. It is not surprising that, of the Apac market, China saw the biggest drop of 23% in a year, which was aided by the Covid-19 restrictions which have hindered investment.
Yet, while some Apac economies are likely to see growth increase in the coming months other economies are expected to defy the trend. It is the case for China as well as Hong Kong, where Covid-19 restrictions are being relaxedin the direction of the long-anticipated growth. Furthermore, Knight Frank projects recovering demand for domestic-oriented economies like India and the emerging Southeast Asian countries to further boost growth. “Asia Pacific will continue to be the fastest-growing region in the world,” the consultancy states in its Asia Pacific Outlook Report 2023.
This could be a positive sign for this Apac housing market, where the fundamentals of the market remain solid as noted by Henry Chin, CBRE’s global head of thought leadership for investors as well as head of research. As investors face the “increasingly turbulent waters” predicted in the short future the investment strategies are being refined to capitalize on opportunities that are present within the marketplace, Chin adds. Chris Pilgrim, director, global capital markets at Colliers agrees. “In Asia Pacific, now is the best time for investors to select their assets and markets,” he says.
Rate hikes are now clear and will bring back momentum in transactions
Surveys carried out through ULI and Colliers indicate how interest rate hikes are the main issue for Apac real property investors. Since March this year, the US Federal Reserve has instituted an increasing number of rate hikes, the most recent being a 50-basis-point increase that was announced on December 14. The increase brings an increase in the US standard rate down to interval of somewhere between 4.25% and 4.5% and is the highest level since the past 15 years.
The Fed’s rate increases have swept across the majority of Apac however, except for China and Taiwan, which have reduced rates, as well as Japan in which rates are extremely low. In this changing environment the investors are more hesitant because financing is becoming more difficult to acquire and deals are more difficult to secure.
But, Colliers anticipates the real property market to stabilize around mid-2023, when more certainty develops about the outlook for interest rates. “Similar as 2022 and 2023, the 2023 year is an equal-sizer but the difference is that momentum for transactions will grow in the second quarter of the year, as the market adjusts to a price reset,” says Joanne Henderson, Colliers’ national director research for Australia.
David Faulkner, president of ULI Asia Pacific, agrees that the possibility of a repricing of assets could be coming up. “Rising rates of interest and the slowing of the global economy are starting to affect regional asset valuations , and are changing the way investors look at possible transactions,” he says.
Cap (cap) rates that are used to determine the value of properties and are expected to rise in Apac in the coming years, changing from the sluggish levels set over the last decade and in the wake of an expansion which is taking place across both the US in the US and Europe. “Cap rates have to rise in order for buyers to maintain an appropriate spread over the price of debt,” ULI sates in its report.
Defensive assets
When investors are navigating the volatility over the next few months, they will seek out defensive investments that could be used to protection against rising inflation says Knight Frank. “Commercial real estate that has the potential for income growth along with diversification benefits, and relative stability will experience a surge in interest,” it states in its outlook.
Offices, by vast majority of the asset classes in Apac is expected to enjoy a robust demand despite the current economic conditions that are causing uncertainties in growth in business and leasing. According CBRE’s Chin centrally-located offices that are of high-quality in cities with high growth potential are likely to provide the best opportunities, which are backed by the return to work from employees and a continuous shift to high-quality. ULI states that the returns are more stable in areas where occupant conditions favor landlords like the cities of Seoul, Singapore and Sydney.
The logistics industry will continue to be bolstered by the “seemingly inexhaustible” market that’s remained steady even though production and consumption are stagnating. Demand in the key markets, like South Korea, China and Australia remain caused by the lack of the availability with modern logistic facilities and a growing use of “China and one” strategy which allows businesses to diversify their manufacturing base outside of China is expected to spur investment flows into other markets.
ULI is also highlighting that the sub-sectors of the new economy such as cold storage, data centres, infrastructure life science facilities, and self-storage spaces are predicted to increase the demand for logistics. The research conducted by the data company Preqin reports that a total of $16 billion in funds raised in the year to October’s end, which is more than triple the amount that was raised in 2021– to fund these opportunistic strategies, which demonstrates the growing interest in these assets.
In the residential sector multifamily properties especially in Japan are considered an investment option that is able to generate long-term stable streams of income. Other residential properties like senior living and student housing have gained attention in the last few years, with 51% and 43% of% as well as 43% of investors polled by ULI having plans to invest in these segments in the next year.
Top markets
Within the Apac regions, Singapore, Japan, Australia and South Korea stand out as areas where transaction volumes and demand from investors are expected to remain strong. According to Colliers real estate investor survey, these four markets in the survey topped investors’ choices across different categories of assets, suggesting the “overwhelming” desire for cities that are established and larger which are more likely provide value in a price established.
According to ULI, Singapore is the most ranked city for potential investment opportunities, according to the survey conducted by ULI. ULI points out that the city-state continues to reap the benefits of the redirection of capital that otherwise would be directed towards China. Offices, which facilitated the flow of deals within Singapore in the past, is predicted to continue to draw attention, as evidenced by the healthy rental growth forecasts, despite the decrease in transactions during the past quarter.
In Japan investors’ enthusiasm has increased due to an easing of the yen and an improved inflation outlook. Additionally, the accommodative policies of the monetary authorities have resulted in caps remaining steady and in some instances shrinking, attracting an interest from investors, according to ULI. Japan is also appealing due to its multifamily sector, which, CBRE highlights, offers the highest cash-on-cash yield in the world.
Australia is predicted to be resilient, supported in large part by market for office space located in Sydney and Melbourne in addition to the logistics industry that is a notable asset sector for the nation in recent times. Additionally the multifamily student housing, senior and multifamily housing segments are beginning to gain popularity within the country. Additionally, South Korea has been strengthened by a robust office market, boosted by a surge in office rents following the Covid-19 and record-low unemployment, claims Colliers. In Seoul prime office rents increased 21.4% y-o-y in 3Q2022 and reached an all-time high in the research of JLL.