Emerging Trends in Real Estate® Asia Pacific 2023

This stagflationary combination creates an environment for which there is no modern-day playbook, and led many real estate investors in the second half of 2022 to step away from the market and wait for events to play out. As a result, third-quarter Asia Pacific transactions fell 38 percent year-on-year to a 10-year low, according to analysts MSCI.

In the end, though, investors will have to adapt to a new market reality that brings with it a number of fundamental changes.

Key Trends

Cap rates will move out: Years of cheap and easy liquidity have had a predictable effect on real estate, causing asset prices to soar and yields to compress. But as rising interest rates now begin to revert to mean, property yields must rise with them in order to maintain a spread over the cost of debt. This process has so far been slow to occur in Asia Pacific markets, although both Australia and South Korea are beginning to see a degree of cap rate expansion. In the end, though, many interviewees expect regional cap rates will rise an average of 100 to 150 basis points in 2023. One exception may be Japan, which is expected to maintain its ultra-low interest rate environment—Japanese cap rates should therefore remain relatively stable, making Tokyo a magnet for foreign investment funds.

Investors seek defensive havens: Investors have begun realigning strategies in favour of more defensive property types, focusing in particular on features such as rent indexation, shorter lease terms that can be revised upwards more easily, and reliable recurrent income. The “bed space”—including subtypes such as multifamily, hotels, senior living, and student housing—is one such sector. Logistics, where structural undersupply will continue to underpin demand, and where rent typically is a relatively smaller part of the overall cost of business, is another. Specialist asset classes such as data centres, cold storage, and life sciences, meanwhile, have “sticky” qualities as well as long index-linked leases and generally high rents.

Rising risk hits development projects: Build-to-core strategies became popular in recent years as a way to manufacture new product in an environment with an overall shortage of high-quality building stock. But with construction costs and interest rates rising and a weak outlook for occupier demand, many new projects have been put on hold.

Mainstream assets become less popular: Offices have always been the biggest recipients of regional investment capital, but questions over occupier demand, especially as remote-working practices continue, have eroded their popularity. Demand continues to be strong, however, for modern, high-quality buildings that are in demand by occupiers looking to lure staff back to the office. Investors are also rotating out of the retail sector and into new-economy themes such as logistics, although retail yields and values have rerated to such an extent that a growing number of investors are looking at prime, well-located retail assets as contrarian plays.

Property Type Outlook 

While the Asia Pacific remained relatively isolated from the economic turmoil that swept global markets in 2022, concern over ongoing rate hikes, together with potential fallout from impending recessions, is prompting investors to protect themselves in two main ways. First, by stepping away from the plate and holding off on new asset purchases. Second, by pivoting away from conventional asset classes and rotating instead to new-economy and defensive themes that offer better protection during a period of economic retrenchment.

In terms of different sectors, office remains the biggest asset class in the region. In particular, prime assets in business precincts and districts are invariably in short supply and so, are constantly the targets of regional core funds competing to place capital. At the same time, wide pricing gaps have emerged between buyers and sellers that are expected to persist for some time. On the retail front, headwinds continue as capital rotates instead into logistics and other asset classes.

Markets to Watch

Mirroring the best performers from last year, 2023’s top markets for investment prospects in the region were characterised by deep, liquid markets and a flight-to-safety approach. Singapore, Tokyo and Sydney continue to rank as the top three markets. . With the ongoing liquidity crisis in China’s property sector, coupled with the persistent pandemic restrictions, Singapore has benefitted from the redirection of capital that might otherwise have been placed in assets in China and Hong Kong. Tokyo continues to enjoy a near-zero interest rate environment, which ensures lower borrowing costs and a more positive spread over the cost of debt. Despite the easing of COVID restrictions in Hong Kong, its status as the most expensive commercial and residential market in the Asia Pacific has made it vulnerable amidst the current high-inflation recessionary environment.