_Asia-Pacific real estate market remains resilient in 2024 despite macro headwinds

Logistics supply is set to hit a record 43.7% of current stock, offering relief for occupiers amid a recent surge in rental rates.

December 05, 2023

Singapore - According to global real estate consultancy Knight Frank's Horizon: Asia–Pacific Tomorrow outlook report, logistics supply in Asia-Pacific is expected to rise by a record 43.7% in 2024, easing the tight supply conditions in the region. However, average rent is still expected to trend upwards, albeit at a more moderate pace, supported by resilient demand.

The forecast is one of the key predictions in the real estate consultancy's flagship report, which provides predictions for the commercial, residential, and capital markets, including emerging trends, opportunities, and challenges.

Christine Li, head of research, Asia-Pacific, Knight Frank and report author, says, “The logistics development pipeline, which has remained limited, is now growing rapidly, with an influx of new supply expected in 2024. This influx will alleviate the region's tight supply conditions, particularly in the Chinese mainland markets such as Beijing and Shanghai, where over 17 million square metres of new supply are in the forecast. The region’s expanding options of logistics real estate continue to offer expansion prospects for businesses and investment opportunities for those seeking to capitalise on the region’s long-term growth dynamics.”

As the report suggests, despite the economic headwinds, the Asia-Pacific prime residential sector has proven remarkably resilient, with price corrections milder than anticipated.

Ms Li adds, “Prime Asia-Pacific housing prices experienced only a slight correction of 0.5% year-on-year (YoY) in 2023. The market's resilience reflects ongoing pent-up housing demand and a swift recovery when interest rate hikes were put on hold. The region is expected to return to mid-single-digit growth in 2024 as sentiments recover and investor confidence is restored. This indicates strong underlying demand for housing, which is expected to persist into 2024. The stability in the market underscores the overall economic performance, with growth projections remaining positive. While we still anticipate challenges, the prime residential sector is poised for a stable and potentially fruitful year, with a forecast of 2% to 7% in prices next year.”

Forecasts reaffirm the region as the fastest growing in 2024

For the broader economy, growth across over two-thirds of the region's major economies is expected to remain stable or to accelerate in 2024.

Kevin Coppel, managing director, Asia-Pacific, Knight Frank, says, “With favourable demographics, improvements in infrastructure, ongoing investments in technology, and its status as an economic powerhouse, the Asia-Pacific region offers immense potential across various geographies and asset classes. The dynamism of the Asia-Pacific real estate market, coupled with these powerful structural tailwinds, makes this an opportune moment to embrace its potential.”

Ms Li, adds, “As markets adjust to a higher-for-longer interest rate environment, investors are poised to realign their investment strategies with a focus on asset and property market fundamentals. The emphasis on long-term income visibility is recognised as vital for sustaining returns and navigating financing pressures. This strategic shift will highlight the enduring significance of the region's secular trends.”

A spotlight on megatrends that power real estate fundamentals

Megatrend 1: Continued urbanisation

The region's demographic challenges are well-known. A declining number of marriages and the resultant fall in birth rates – a consequence of rapid economic progress – will see population growth slow through the decades ahead. However, its urban population will continue to grow, fuelled by the ongoing rural-to-urban migration trend.

Megatrend 2: Magnet for foreign investment

Foreign direct investment (FDI) inflows from UNCTAD show a tectonic shift in investments towards Asia-Pacific following the pandemic. While inward FDI fell by 12.4% globally in 2022, those in the region have bucked the trend to rise by close to 8%. The region accounted for 55% of global inward FDI in 2022.

Megatrend 3: More than half of Asia-Pacific will be middle-class by 2024

According to World Data Lab, of the 113 million that will join the ranks of the global middle class, over 80% will be in Asia-Pacific. This development represents a historic turning point, as the proportion of the region's population living below the poverty line is poised to fall below 50% for the first time.

Megatrend 4: Largest working-age population

Paired with conducive policies, the young, fast-growing labour pools in South Asia and most parts of Southeast Asia are expected to fuel the region's competitive advantage continually. By 2025, about 68% of the population in the ASEAN region will be of working age. Unlike more mature countries, the region's working population surpasses its older dependents, spurring economic expansion, generous consumer and investment spending, and wealth accumulation.

SECTOR OUTLOOK

Residential

The region is expected to return to mid-single-digit growth in 2024 as sentiments recover and investor confidence is restored.
The slower-than-expected Chinese economic recovery has dampened market sentiment in the Chinese mainland and Hong Kong SAR. These markets have a mixed outlook but with potential value-buy opportunities.
The property market in South-East Asia is expected to remain stable in 2024. Manila is the most robust residential market, projecting a 5.9% growth in 2024, supported by strong employment growth in fintech and startups. In Singapore, investors remain on the sidelines after prices reached historic highs amid a subdued economic outlook.
The bright spots emerged in Australia, New Zealand, and India. In Australia and New Zealand, immigration and limited supply have helped to reverse the sentiments arising from higher mortgage rates. Auckland and Sydney are both poised for a further 5% growth in prices in 2024. Mumbai is expected to see a 5.5% increase in prime residential prices in 2024, driven by high demand and strong economic growth. Homebuyers are increasingly investing in India due to the favourable dynamics around the enhanced need for homeownership, stable mortgage rates, and increasing property prices.

Capital Markets

Private capital remains a driving force in the Asia-Pacific commercial real estate.
Amidst times of crisis, opportunities persist, enabling investors to access favorable assets that offer capital appreciation and positive rental reversions. Thematic sectors such as living spaces, life sciences, and data centers present promising prospects.
With substantial deals in the pipeline, the total Asia-Pacific multi-family investment volume for the year is set to surpass the previous high in 2020, with domestic activities dominating the scene.
Chinese mainland to be up and coming living sectors market. Although the sector is still in its formative stage, it holds significant growth opportunities owing to its vast population of 1.4 billion and the challenges that families and young professionals face when purchasing apartments.

Office

Emphasis on newer and ESG-certified buildings

Most occupiers in Asia-Pacific have adopted an ‘office-first hybrid’ strategy. In view of this new workplace equilibrium, the demand-supply dynamic in Asia-Pacific is in the best position to support occupiers.
Prominent emergence of a two-speed market with a bifurcation in the Asia-Pacific office sector, with occupiers with some financial capabilities taking advantage of the softening leasing market to relocate to newer and ESG-compliant buildings. On the other hand, occupiers are being financially prudent towards portfolio planning amidst the prevailing headwinds.
Overall, the market conditions for the Asia-Pacific prime office sector will continue to favour tenants in 2024, with the vacancy rate to trend upwards to 14.4% - 18.3% from the current 13.9%.
While the trends of ‘flight-to-quality’ and ‘flight-to-green’ persist, the enthusiasm for expansion will be restrained.

Logistics

While economic headwinds have induced caution in logistics occupier markets, prime logistics spaces remained supported by resilient demand. There remains strong competition for industrial development land, particularly in strategic locations close to major cities.
With the pandemic in the rearview, e-commerce demand growth has waned. However, ddisruptions from geopolitical tensions, lingering concerns from the pandemic and environmental themes are redefining the region’s logistics footprint, which can continue to fuel occupier demand.
Optimisation of the sector’s logistics footprint has driven demand for modern facilities. Preference for institutional-grade facilities in core areas and last-mile locations continued to fuel leasing activity in the region, while China+1 strategies also saw ongoing expansions by major manufacturers in SEA.

For more insights on Asia-Pacific property landscape, download Horizons: Asia-Pacific Tomorrow.