A trio of powerhouses driving Asia-Pacific real estate growth
As we journey through 2024, the Asia-Pacific real estate market presents a mixed landscape. However, amidst the challenges, Singapore and Hong Kong SAR stand out as bright spots, offering unique opportunities for investors, as found in Knight Frank’s Horizon Report III – Look Beyond the Norm.
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Singapore: A magnet for private capital
Despite a generally subdued global real estate market, Singapore continues to attract significant investor interest, particularly from cross-border capital. While overall investment activity has been lacklustre due to weak market momentum, the proportion of international capital remains substantial, underscoring Singapore's enduring appeal.
In Q2 2024, cross-border investment volume reached US$756.8 million, largely driven by PAG's acquisition of Mapletree Anson for US$567.5 million. While this marked a quarterly decline of 29.7%, investment activity increased by 63.8% compared with the same period a year ago.
Singapore's attractiveness stems from its macroeconomic stability, business-friendly environment, and politically neutral stance, which instill confidence in investors seeking portfolio diversification and wealth preservation. As a result, Singapore is predicted to attract about 11% of cross-border capital in Asia-Pacific in 2024, placing it third in capital flow predictions.
The office sector is expected to benefit from gradually improving financing conditions and easing constraints on occupier capital expenditures, leading to a steady return of demand for office space.
The industrial sector remains a focal point for investors due to its relatively higher yields and positive long-term outlook, particularly for assets with value-add potential that cater to emerging industries like self-storage and data centers.
The retail sector, especially suburban malls in prime locations, continues to appeal to investors due to stable rents and steady foot traffic.
Additionally, the hotel sector presents value-add opportunities through strategic partnerships between investors and developers, driven by the government’s commitment to realizing the Tourism 2040 vision.
Despite the constraints of tight yield spreads and high borrowing costs, Singapore's real estate market continues to draw investors due to its safe-haven status, strong fundamentals, and consistent rental growth amidst a slowing economy. With a potential Federal Reserve rate cut in the second half of 2024, we anticipate a renewed surge of investor interest, further strengthening the market's attractiveness, particularly for private capital.
South Korea's appeal
South Korea is another bright spot in the Asia-Pacific real estate market. Undeterred by the higher cost of capital, overseas investors are actively acquiring office assets, leveraging the sector's solid fundamentals in the occupying space. Similarly, the hospitality and industrial sectors are experiencing increased activity as yield expansion starts to moderate.
As the Bank of Korea begins reducing interest rates in the second half of 2024, the bid-ask spread and liquidity are expected to improve. With an increasing number of assets entering the market and a favourable environment, transaction volume is anticipated to experience a notable uptick throughout the year.
On the other hand, the sharp repricing of office assets in the US and Europe has prompted Korean asset owners to assess various exit strategies, with a stronger preference for refinancing over divesting. This presents opportunities in the debt market as investors seek to capitalize on these dynamics.
Hong Kong SAR: pockets of opportunity
While Hong Kong's commercial real estate market faces challenges, particularly in the office sector, there are still pockets of opportunity for discerning investors. The office market has been hit hard by muted occupier demand and record supply levels that could take years to absorb, compounded by prolonged elevated interest rates. This has resulted in significant 'peak-to-trough' discount deals, sparking investor interest. For instance, the entire 29th floor of 9 Queen's Road Central, with 13,769 square feet, was sold for approximately HK$310 million (US$39.6 million) in May 2024. This marked a 63% discount compared to the peak unit price of HK$60,000 (US$10,159) per square foot back in 2018. Such discounts have incentivized investors to explore office market deals, leading to a surge in distressed sales, especially of en-bloc office buildings.
Despite these challenges, prime office assets with cutting-edge facilities and green credentials continue to attract investors, especially as valuations have declined by up to 35% from their peak. As investment sentiment improves, bolstered by the prospect of a potential US interest rate cut and a recovering stock market, there is likely to be a surge in demand for distressed assets, as investors seek undervalued opportunities to capitalize on market improvements.