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Abrdn, in a recent market analysis, identifies slowing economic growth, moderating inflation, and declining interest rates as the prominent near-term themes for the Asia-Pacific (APAC) real estate market.
According to the UK-based global investment company, peak US rates have always been a near-term positive for APAC commercial real estate (CRE) capital values. However, occupier fundamentals remain crucial, as per the asset manager. “With the overall vacancy rate in APAC still elevated, we expect the region’s near-term capital returns to remain under pressure,” opined Min-Chow Sai, Head of Asia & North America Real Estate Investment Strategy. He also expects yields to rise further as the repricing in APAC real estate falls behind other regions. As for the bank’s lending stance, Abrdn expects it to remain cautious and selective.
Generous yield gaps provide enough cushion against any rise in long-term rates in the Tokyo multifamily market, says Abrdn. The asset manager also informs that faster wage growth is enhancing the affordability for renters, further supporting rental upside.
As for Seoul offices, occupier market fundamentals remain solid, though vacancy rates are low. While a new supply pipeline is expected to gain pace in four to five years, the asset manager expects vacancy rates to remain tight as compared to past times.
In Australia, Abrdn expects record-low vacancy rates of 1% or less to continue in several capital cities. The asset manager also foresees expanding yields in the near term, leading to attractive entry points for investors.
Abrdn says that the rental declines for APAC’s offices accelerated to 3.7% year-on-year in the third quarter of 2023 compared to a 3.4% decline in the previous quarter. The declines were led by offices in Shenzhen, Tokyo’s Central 5 Wards, and Hong Kong. Surprisingly, with a year-on-year rental growth of 17.1% for the third quarter, Brisbane outpaced Seoul to clock in APAC’s fastest year-on-year.
“It appears the bifurcation in occupier market performance has grown for Australian central business district offices. This difference is not just between prime and secondary-grade offices but also between different cities,” stated Ilyas Mohd Ismail, Real Estate Research Analyst. At the same time, the average vacancy rate trended higher to 12.7%.
The asset manager highlights that the industrial/logistics occupier market outperformed other CRE sectors in APAC in the third quarter of 2023 despite a slowdown in the pace of year-on-year rental growth to 6.6% from 10% in the second quarter.
Further, the asset manager says that the tourist sector’s ongoing recovery from the pandemic continues to uplift APAC’s prime retail occupier performance. Tokyo, Singapore, and Hong Kong were the markets that contributed the most to the region’s overall rental growth during the quarter.
Abrdn says that macroeconomic drivers and geopolitical developments will have a larger impact on the near-term performance of APAC real estate. Within APAC, Australia’s inflation was sticky, and there was a risk of a further rate rise in the country. “This would have implications for property yields and capital values,” informed Sai.
Sai said about the risks, “We expect near-term capital returns to remain under pressure. But we have trimmed the projected decline to reflect the prospect of an earlier-than-expected start to rate cuts, led by the Fed.”
“We expect lower interest rates to therefore support better capital returns beyond the immediate 12-24 months. Higher property yields in the near term are likely to provide good opportunities for investors to pick-up grade A assets in core locations,” added the Real Estate analyst.
