New Cycle, Sustained Fundamentals
Globally, challenges persist in the macro environment, marked by a prolonged hiking cycle and further complicated by ongoing geopolitical tensions.
8 minutes to read
Despite a cautious global economic outlook with significant downside risks, projections from the International Monetary Fund's World Economic Outlook affirm Asia-Pacific's position as the fastest-growing region in the world in 2024.
Growth in over two-thirds of the region's major economies is expected to remain stable or exceed 2023 levels. The widely expected interest rate cuts in 2024 are set to initiate a fresh property cycle in the region, supported by its long-term structural strengths. Despite the global real estate landscape being influenced by higher-for-longer interest rates, resulting in a projected dip in global commercial property investments in 2023, Asia-Pacific stands out with a comparatively milder contraction. This contrast is evident as Asia-Pacific experiences a decline of less than 50 per cent, distinguishing itself from other regions facing more substantial contractions.
Although 2024 may not usher in a significant turnaround, the region's real estate markets are poised to maintain their resilience. While yields are expected to expand, the pace is unlikely to match that observed in the United States or Europe. This phenomenon is rooted in many factors, underscoring the enduring strength of the region's property markets, and the slower pace of yield expansion. This suggests that while yields are expected to grow more slowly compared with the United States or Europe, the corresponding decline in asset values is likely less pronounced, offering stability for property owners.
In the key demographic and economic drivers essential to propel real estate fundamentals, the statistics overwhelmingly favour Asia-Pacific. Significant room for urbanisation and a rising middle class have played significant roles in supporting valuations. Furthermore, supply imbalances, primarily in prime logistics, continue to underpin rental and price growth.
With new dynamics settling in, we expect the following themes to be prominent in 2024:
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Focus on ESG and quality to drive further polarisation in the office market
Amid a persistently restrictive financing environment, the demand for top-notch office spaces in the region is expected to intensify. The 'flight-to-quality' trend, which involves investors' preference for high-quality assets, is expected to strengthen in the region's office market, as the limited availability of financing makes it harder to fund the acquisition of lower-quality assets. The widening divergence in rentals between prime and secondary stock indicates an increasing preference for best-in-class assets driven by a focus on ESG initiatives.
Asia-Pacific's less mature office markets have an edge because a greater proportion of their office stock in urban centers is relatively new, unlike in more developed markets where many buildings are older and at risk of becoming obsolete due to poor environmental performance. This dynamic has gone some way in preserving the value of the region's offices and reducing the occurrence of stranded assets. In North American markets, where values have experienced significant corrections, nearly two-thirds of its offices were completed before 1980.
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Synchronisation in prices and rental growth
The prolonged low-interest rates following the 2008 financial crisis have consistently raised concerns about property prices outpacing fundamental indicators. With higher funding costs curbing asset price inflation, the gap between these factors has narrowed. As markets adapt to the extended period of higher interest rates, investment activity will align more closely to leasing fundamentals, such as demand and asset quality. Long-term rental income growth will take on heightened importance, critical in sustaining returns and safeguarding asset value.
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Opportunities in private credit
As traditional lenders turn restrictive in an uncertain global economy, financing gaps emerging in the higher-for-longer environment have created favourable conditions for the region's private credit market to grow. Expanding private credit opportunities – a crucial segment in the real estate investment ecosystem – will further develop real estate capital markets in the region.
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China – a wildcard for Asia-Pacific
China, bearing the weight of slowing economic momentum, is a wildcard for the region. A consistent factor in each real estate sector is the subdued outlook of the Chinese mainland market, further compounded by a vast supply pipeline in 2024. A substantial recovery hinges on an economic revival and resolution of the credit crisis. Still, China's real estate market cannot be painted with a broad brush; there will be ample opportunities across the risk spectrum, approved sectors, and within private credit. With the Chinese government's recent shift towards a more accommodative stance, amid a rollout of policies to kickstart growth, any pickup in economic momentum will likely lead to a swift change in its trajectory.
Asia-Pacific Real Estate Outlook 2024
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Prime Residential: Unfazed by elevated interest rates
In the wake of interest rate hikes, home sales in the region have experienced a reversal, resulting in pockets of price corrections. However, the anticipated drop in magnitude was much smaller than previous crises, registering just a 0.5 per cent year-on-year (YoY) fall in 2023. Any signs of a slowdown in central banks' activity were a green light for buyers, reflecting pent-up demand. Coupled with a shortage of construction labour, residential prices in key gateway markets maintained their strength. The lack of new supply and strong demand has created an environment where prices are resilient.
Looking ahead, average prices in the region are expected to return to mid-single-digit growth in 2024 as sentiments recover and investor confidence is restored. Immigration and limited supply of housing have helped to reverse sentiments dampened by higher mortgage rates in Sydney and Auckland, while Manila and Mumbai fly the flag for emerging markets, supported by strong employment growth. Across the four cities, prices are expected to rise by five to six per cent in 2024.
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Prime Office: Emphasis on newer and ESG-certified buildings
As a result of a stronger return-to-office trend and an ‘office-first’ hybrid strategy, office demand in Asia-Pacific has increased better than in United States and Europe. The ‘flight to quality’ trend is also supported by demand, driven by tenants' needs to facilitate work and to collaborate across multiple settings, adhere to Environmental, Social and Governance (ESG) targets as well as to encourage a return-to-office environment.
With the region still developing, the influx of new supply in 2024 is set to reach cyclical highs, with the 10 million square metres (sqm) pipeline adding close to six per cent in the region’s existing stock. This rise in supply is expected to mitigate significant rent growth, although there will be considerable variations among different markets. The outlook for regional prime office markets will be bifurcated along supply lines, with three-quarters of new supply concentrated in China and India.
Australia’s tight development pipeline will position the market for potential outperformance in 2024. While Brisbane and Perth are expected to shine as brighter spots, prime offices in Sydney’s and Melbourne’s Central Business Districts (CBDs) will continue to benefit from sustained demand upgrades by corporates. Meanwhile, Seoul presents resilient prospects, backed by a strong return-to-office trend and manageable pipeline, ensuring low vacancies.
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Prime Logistics: Geopolitics shaping the future of logistics
Despite a slowdown in global demand leading to caution among the region’s logistics occupiers, the sector continues to be supported by resilient demand across the region in 2024. Although new supply significantly increased the region’s stock by nearly half, rents are still expected to expand, albeit at a more moderate pace of two to four per cent.
The Pacific markets of Australia and New Zealand are expected to experience the strongest rental growth in the region, ranging between five and nine per cent. While the development pipeline remains substantial across Australia’s Eastern Seaboard, with approximately 3 million sqm set to be delivered. As the growth in e-commerce demand growth has slowed, it is essential to recognise that occupier demand growth in the logistics sector is not solely driven by online retail and the need for more distribution capacity. Disruptions stemming from geopolitical tensions, lingering concerns from the pandemic, and a growing emphasis on environmental themes are reshaping the region's logistics footprint.
Vietnam and India have emerged as the main beneficiaries of the ongoing trend towards decentralisation of manufacturing capacity from China. This shift necessitates additional investments in infrastructure and logistical capabilities, with both countries vital to building resilience across supply chains.
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Capital Markets: Multifamily comes of age
On a global scale, investors are increasing their exposure to the multifamily sector, drawn by its resilience against inflation, defensive attributes, and the potential for higher risk-adjusted returns. While the region may be diverse, common drivers are observed in growing multifamily markets: expanding cities, limited residential rental stock and declining housing affordability.
While Japan has been the region's dominant and sole developed market for multifamily investments, a transformative shift is anticipated within the decade. Changing mindsets and policy support are broadening the sector's scope in the region, with governments providing tax breaks to stimulate development.
The scheduled reduction in the managed investment trust withholding tax rates for build-to-rent (BTR) developments, halving from the current 30 per cent in mid-2024, removes a significant barrier and paves the way for significant growth in Australia's market. According to Knight Frank’s estimates, Australia's dedicated BTR stock is projected to expand by close to 20 per cent annually throughout the decade to reach an estimated 55,000 units by 2030 and becoming a crucial component of the housing supply mix.
Simultaneously, the multifamily sector in China, while still in its early stages, presents tremendous promise. With substantial policy support for rental housing, China’s multifamily sector has the potential to emerge as the world’s largest. Beyond the familiar superlatives associated with China’s vast population, projections are staggering. China’s International Capital Corporation, a state-owned entity, projects that by 2035, as many as 300 million Chinese could be engaged in rental housing.