Navigating the reset of Asia Pacific’s real estate industry: A return to stability

Real estate is by no means immune to the volatility impacting capital markets. The current macro environment offers no shortage of reasons for investors to hesitate in pursuing opportunities. Many are confining capital to the sidelines, awaiting more clarity and for relative stability to return.

The good news is that a recalibration is underway. Our 2023 Global Investor Outlook Report found the global real estate market will start to stabilise by mid-2023 as more certainty emerges around the interest rate outlook. Investors must view recent trends not so much as a downturn, but as a return to relative rationality.

This is especially good news for Asia Pacific investors as they are more highly attuned to some advantages across asset classes, compared other major markets around the world.

So in a time where extreme caution is being exercised, guidance is gold. There are five main themes – specific to Asia Pacific – that investors must take note of.

Asia Pacific’s relative dynamism and diversity

From a global perspective, the Asia Pacific region’s relative optimism on growth stands out. The region is incredibly diverse in terms of the scale of its markets, pace of development, and even the direction of monetary policy.

There are several key forces accelerating across Asia Pacific. The most eminent is the flight to quality in the office sector. Companies are driving this trend by providing high-quality office environments to attract and retain employees, which also aligns with a growing emphasis on sustainability ratings.

Retail is also benefiting from this trend. Regional investors are showing a clear uptick in their intention to invest in CBD retail, in comparison to those in EMEA and the U.S.

Investors set to increase exposure across the region

Asia Pacific is expected to outperform all other markets in 2023 as a haven for property investments. There are significant headwinds in Europe and the U.S. with real risks of recession. As the debt markets stabilise and volatility fades, private equity is also expected to ramp up M&A activities this year.

Most of the western world pension funds or insurance capital and other sovereign wealth funds, are generally underweight in their exposure to the Asian markets. They're now becoming more aware of that, as they may be over-allocated to their local markets which are going to be potentially the most impacted by interest rate trends. A lot of European or North American funds will try hard to gain exposure to the Asian markets and allocate large amounts of capital here.

A spotlight on Japan, Australia, Singapore, and Korea

These markets are where transaction volumes remain healthy and investor appetite is strong.

In Japan, the demand for office space in cities including Tokyo is recovering even as some occupiers downsize with increased remote working. Rising e-commerce and supply chain reformation, and end-user demand for modern warehouses remains high, likely to continue beyond 2023. The hospitality sector is also active, in anticipation of occupancy levels soon reverting to pre-pandemic levels.

Australia is set to experience a shift in the flight to quality from being a trend to being a key driver for evolution in the retail and office sector, while the industrial sector will seek to leverage rents to safeguard capital values.

In Singapore, the search for high-quality and inflation-proof assets will intensify as the market braces for additional challenges, such as higher operating costs stemming from rising interest rates.

In Korea, data centres are becoming an independent asset class, in turn creating a burgeoning investment sector. Investors can expect stable operating income supported by increasing demand. Data centre dynamics also support long-term stable income as average lease terms are 10-20 years and lessees are highly likely to renew contracts due to the huge initial set-up costs and costs associated with relocation.

Diversity of opportunities across sectors

Office and industrial and logistics (I&L) sectors are the frontrunners when it comes to investor choice, followed by multifamily, which now notably outpaces retail and hotels.

In alternatives, investors are keen not just in data centres, but also life sciences and senior housing. This could be evidence of rising awareness and/or desire for assets with a strong connection to fundamental trends in a generally tough environment.

Alternative asset classes supported by strong population growth and demographic fundamentals currently offer a unique investment proposition that provides exposure to growth industries. They also support portfolio diversification and lower risk asset assets offering a long-term cash flow with reduced levels of rental downtime.

Action on environmental performance to increase

Investors are placing a big emphasis on environmental, social and governance (ESG) criteria and ratings in response to occupier demands and to balance out asset operational costs longer-term. It’s also known that ESG-compliant assets will command a premium in the future.

More Asia Pacific investors are expected to complete full asset assessments in terms of their energy efficiency and performance this year or integrate new ESG performance benchmarks. Non-compliant assets will increasingly be confined to discounted territory and targeted for redevelopment or disposal.

Heading into 2023, Asia Pacific will be a relative winner in the rebalancing of real estate values and overall return to relative rationality, as there still are investment opportunities within the context of today’s economic environment.