Investors need to be patient and selective to find attractive risk-adjusted returns in Asia Pacific (Apac) commercial real estate in today’s market environment.
The prolonged interest rate hiking cycle, insufficient price corrections and a slower-than-expected recovery of mainland China have combined to create a difficult investment backdrop for many sectors in regional real estate, according to CBRE.
Amid such factors, the firm has revised its full-year forecast for Apac commercial real estate investment volume to a decline of 15%, with a recovery unlikely before the first half of 2024.
Yet CBRE still believes investors can capture cyclical investment opportunities as yields will continue to expand in the second half of 2023. “Investors’ firm stance towards pricing has resulted in a limited number of transactions. We expect the investment sentiment to improve once the cost of borrowing starts to stabilise or to come down,” said Dr Henry Chin, global head of investor thought leadership and head of research in Apac.
Australia is expected to see the most significant yield expansion and Japan should continue to outperform. Further, Korea is showing signs of green shoots, underpinned by the declining of cost of finance.
DWS is also relatively bullish on these three markets, eyeing residential built-to-rent (BTR) and prime logistics in Australia, as well as regional Japan and Korea, where vacancy remains very tight.
Cherry-picking growth sectors
Looking by sector, DWS expects prime logistics assets to outperform, delivering total returns of between 7.5% and 9% per annum. At the same time, long-term e-commerce tailwinds are driving leasing demand in regional logistics amid structural undersupply of modern warehouses across many cities in Apac.
For example, Sydney, Melbourne and Brisbane, as well as Singapore, look attractive in this space due to the strong rental growth outlook. Plus, regional cities in Korea and Japan present first-mover investment opportunities.
In terms of office leasing, although CBRE is forecasting a decline up to 5% due to weaker demand in mainland China, flight-to-high quality and green buildings will remain prominent trends.
“With vacancy rising to a 20-year high in the first half of 2023 and expected to further increase for the rest of the year, the market will continue to favour tenants, as they will have ample upgrading options to choose from,” explained Ada Choi, head of occupier research for CBRE in Apac.
More specifically in the office sector, DWS believes millennial workers will spur success in value-add strategies such as asset enhancement initiatives, next-generation office features, biophilic design and collaboration space.
The asset manager expects redevelopment strategies, especially for stranded offices, to offer higher development margins, though this comes with higher risks.
Meanwhile, DWS also backs multi-family housing as a small but notable investable market, bolstered by the potential for tax concessions for new residential BTR projects from 2024 onwards. Strong rental growth is likely to underpin investment returns, the firm added, though access to institutional quality stock may involve development risk.
