A survey by the Urban Land Institute and PwC saw Singapore emerge as the top-ranking Asia Pacific city in terms of investment prospects (Picture: Albert Chua/The Edge Singapore)
SINGAPORE (EDGEPROP) - 2022 marks a year of strengthening recovery for Asia Pacific (Apac) economies, as most countries in the region shook off Covid-19 restrictions, prompting an economic rebound. However, macroeconomic headwinds, including stubborn inflation, interest rate hikes and a global economic slowdown, have prompted growing recession concerns in recent months.
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This, in turn, has resulted in a more cautious sentiment, especially within the real estate market. According to research organisation Urban Land Institute (ULI), investors have adopted a wait-and-see approach in the face of growing uncertainty. “Investors can see that risks are now higher, but have little clarity on the extent of the headwinds and how the market will be impacted,” ULI says in its Emerging Trends in Real Estate Asia Pacific 2023 report.
To that end, real estate transaction volumes in Apac have plummeted as investors enter a holding pattern and hold off decision-making. ULI’s report, which was published jointly with PwC, cites MSCI data showing that Apac real estate transaction volumes fell 38% y-o-y in 3Q2022 to US$32.6 billion ($44 billion) — the lowest 3Q total in a decade. Unsurprisingly, among Apac markets, China saw the biggest decline of 23% y-o-y, underpinned by Covid-19 restrictions that have hampered investment activity.
Nonetheless, while several Apac economies are expected to see growth normalise in the coming months, others are anticipated to buck the trend. This includes China and Hong Kong, where Covid-19 restrictions are easing— a step towards the long-anticipated recovery. In addition, Knight Frank projects recovering demand in domestic-oriented economies such as India and emerging Southeast Asian countries to further support growth. “Asia Pacific will remain the world’s fastest-growing region,” the consultancy states in its Asia Pacific Outlook Report 2023.
This bodes well for the Apac real estate market where market fundamentals remain strong, notes Henry Chin, CBRE’s global head of investor thought leadership and head of research. As investors weather the “increasingly choppy waters” anticipated in the short term, investment strategies are being fine-tuned to leverage opportunities present in the market, Chin adds. Chris Pilgrim, director, global capital markets, at Colliers, concurs. “In Asia Pacific, now is the time for investors to pick their markets and assets,” he says.
Separate surveys conducted by ULI and Colliers show that interest rates are the top concern among Apac real estate investors. Since March, the US Federal Reserve has instituted a series of increasingly aggressive rate hikes, with the latest being a 50 basis-point increase announced on Dec 14. This brings the US benchmark rate to a targeted range of between 4.25% and 4.5%, the highest in 15 years.
The Fed’s rate hikes have cascaded throughout most of Apac, with the exception of China, which has been trimming rates, and Japan, where rates remain ultra-low. Within this evolving environment, investors have grown apprehensive as financing gets more challenging to obtain and deals harder to underwrite.
Having said that, Colliers anticipates the real estate market to start stabilising by mid-2023, as more certainty emerges around the interest rate outlook. “Similar to 2022, 2023 will be a game of two halves with the difference being that transaction momentum will gain in the second half of the year as the market adapts to a pricing reset,” says Joanne Henderson, Colliers’ national director, research for Australia.
David Faulkner, president of ULI Asia Pacific, agrees that a repricing of assets may be on the horizon. “Rising interest rates and the slowing global economy are beginning to impact regional asset valuations and changing the way investors assess potential deals,” he says.
Capitalisation (cap) rates, which are used to value properties, are anticipated to increase in Apac, reversing from the compressed levels established in the last decade and following an expansion that is already well underway in the US and Europe. “Cap rates must move out if buyers are to maintain a meaningful spread over the cost of debt,” ULI sates in its report.
As investors navigate the volatility in the coming months, there will a preference for defensive assets that can serve as a hedge against inflation, notes Knight Frank. “Commercial real estate which exhibits income growth potential, diversification benefits and relative stability will see strengthened interest,” it states in its outlook.
Offices, by the far the largest asset class in Apac, are expected to see resilient demand despite economic headwinds posing uncertainty with regard to business expansion and leasing volumes. According to CBRE’s Chin, centrally located, good-quality office assets in major high-growth cities will provide the most viable opportunities, supported by a return to office by employees and an ongoing flight to quality. ULI adds that returns will be more resilient in markets where occupier conditions favour the landlord, such as in Seoul, Singapore and Sydney.
Similarly, the logistics segment will remain supported by a “seemingly bottomless” demand that has stayed healthy even as consumption and industrial output have stalled. Demand in key markets such as South Korea, China and Australia, continue to be driven by a lack of supply of modern logistics facilities, while a growing adoption of the “China plus one” strategy — where businesses seek to diversify manufacturing bases beyond China — is expected to drive investment flows to other markets.
ULI also highlights that new economy sub-sectors such as data centres, cold storage infrastructure, life science facilities and self-storage space are also expected to further boost logistics demand. Research by data company Preqin notes a total of US$16 billion was raised this year as of end-October — triple the amount raised in 2021— for such opportunistic strategies, illustrating the growing interest in such asset classes.
In the residential segment, multifamily properties, particularly in Japan, continue to be seen as an asset class that can provide long-term reliable income streams. Other niche residential properties such as senior living assets and student housing have also started to gain interest, with 51% and 43% of investors surveyed by ULI saying they have plans to be active within these sectors next year.
Among Apac markets, Singapore, Japan, Australia and South Korea stand out as destinations where transaction volumes and investor demand are expected to remain robust. According to Colliers’ real estate investor survey, the four markets topped investors’ picks across different asset classes, pointing to an “overwhelming” preference for established, larger cities that are more likely to deliver value during a pricing set.
For ULI, Singapore is the top-ranking city in terms of investment prospects, based on its survey. The organisation points out that the city-state also continues to benefit from a redirection of investment capital that would otherwise have been funnelled toward China. Offices, which underpinned deal flows in Singapore this year, are expected to continue drawing interest, supported by healthy rental growth forecasts, despite a slowdown in transactions in the last quarter.
In Japan, investor appetite has been bolstered by a weak yen and a lower inflation outlook. In addition, the accommodative monetary policy has resulted in cap rates remaining firm and in some instances further compressing, sparking interest from investors, notes ULI. Japan also remains attractive for its established multifamily segment which, CBRE highlights, offers the most attractive cash-on-cash yield among its global peers.
Australia is also expected to remain resilient, broadly supported by its office markets in Sydney and Melbourne, as well as the logistics sector, which has been a standout asset class for the country in recent years. In addition, the multifamily, student housing and senior housing segments have started gaining traction in the country. Meanwhile, South Korea has been fortified by a strong office market, buoyed by a return-to-office wave post-Covid-19 and record low unemployment, says Colliers. In Seoul, prime office rents surged 21.4% y-o-y in 3Q2022, reaching an all-time high, according to research by JLL.