Asian real estate market embraces hope amidst lackluster sentiments

David Faulkner, President of ULI Asia Pacific

The persistence of global economic inflationary trends, a recessionary economy, and deterioration of global indicators saw real estate investors opting to suspend buying until the fallout from synchronised global rate hikes becomes clearer, as a precautionary measure.

A dip in regional transaction volumes is apparent, with third-quarter deal count in the Asia Pacific falling 38% annually to $32.6 billion, recording the lowest third-quarter volumes for a decade. Mainland China accounts for the biggest decline with a fall of 23% year-on-year.

What are the top real estate market cities in Asia?

Singapore, Tokyo and Sydney continue to take top spots and rank as the top three market cities. With the ongoing liquidity crisis in Mainland China’s property sector and the persistent pandemic restrictions, Singapore has greatly benefited from the redirection of capital. This might otherwise have been placed in assets in Mainland China and Hong Kong SAR.

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 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 high-inflation recessionary environment.

David Faulkner, President of ULI Asia Pacific, said, “The rising interest rates, economic inflationary trends and the slowing global economy are beginning to impact regional asset valuations and changing the way real estate investors assess potential deals in the industry.”

“As a long-term inflation hedge, real estate will continue to draw capital, but the industry is also likely to undergo significant changes over the coming years, due to the evolving economic environment and changes in the ways that people generally use the built environment.” Faulkner further added. The top markets for investment prospects in the region were characterised and identified by deep, liquid markets and a flight-to-safety approach.

Stuart Porter, Asia Pacific Real Estate Tax Leader said, “The persistence of several fragmented market conditions has enabled Singapore and Tokyo retain their top spots as cities with the brightest investment prospects although factors augmenting each city do markedly differ.”

“When exploring opportunities, investors should take a more cautious approach on new asset purchases in some Asian markets. They should pivot their focus from conventional asset classes towards a variety of niche areas that offer brighter outlook. This include defensive havens and new-economy themes, which are likely to divert the attention away from mainstream assets such as the office and retail sector, that have traditionally been popular.”

What are the real estate investor strategies?

Investors in Asia have begun to realign their strategies towards defending properties more resilient to unusual economic pressures and challenges, and towards assets that can offer several features such as rent indexation, shorter lease term and reliable recurrent incomes. The multifamily, hotels, senior living, and logistics sectors are deemed as defensive havens.

Various new economy sub-sectors such as data centres, cold storage infrastructure, life science facilities, and the self-storage spaces have had steadilly increasing attention as recession-resistant investment vehicles for real estate investors. This is owing to a confluence of factors.

These include; growing 5G takeup, structural undersupply to meet demand, and the evolution of more sophisticated supply chains. With about US$16 billion in new capital raised for opportunistic strategies across these sub-sectors in Asia Pacific – more than three times the total raised for 2021 – logistics is likely to remain sticky for many investors going into 2023.

With the prevailing inflationary prices and interest rates heightening development risk, longer-dated development projects are being put on hold across the industry. Investors are now adapting their underwriting by making provisions for higher exit cap rates, trimming use of debt, purchasing materials in advance, and also employing a “value engineering” approach – seeking economies via a more rigorous analysis of all the design brief parameters.

The office sector reportedly and evidently remains the biggest asset class in the region. Prime assets in the business precincts and districts are invariably in short supply and are constantly the targets of regional core funds competing to place and invest capital. At the same time, wide pricing gaps between buyers and sellers are expected to persist for some good time.


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