Investors focus on data centers, hotels, and offices in Q1 2024 amid a cautious approach
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Despite the Federal Reserve signalling a potential easing of interest rate hikes late in 2023, investors remained selective in the first quarter of 2024. Stubbornly high inflation in recent months dashed expectations of imminent rate cuts, prompting a more cautious approach.
The year began with markets anticipating at least six rate cuts, which are expected to commence in March. However, the outlook has now been revised to just one potential rate cut, likely not occurring until the end of the year. Despite inflation rates moderating from their peak, both headline and core inflation measures in 2024 have persistently exceeded the Federal Reserve's 2% annual target. This resilient inflationary environment has reshaped market expectations regarding the timing and magnitude of potential rate cuts.
The shift in market sentiment and the need to re-price expectations have weighed on the region's investment activity in the opening quarter of 2024. Commercial real estate investments totalled US$24.8 billion, marking a 21.1% year-on-year contraction.
Cross-border deals experienced an even sharper decline, falling 35.6% compared with a 31.1% drop in domestic transactions. This marks the third consecutive quarter of dwindling cross-border investment volumes.
The overall decline was largely driven by a pullback in intra-regional investments. However, despite these challenges, the region's long-term structural fundamentals remain intact, and pockets of strength have emerged as investors adopt a more selective approach.
AI wave entices US investors
Driven by the region's prospects and the strengthening US dollar, which has appreciated by an average of over 4% against major regional currencies in 2024, US investors marked a return to the region to seize opportunities.
US investors accounted for over 40% of cross-border investments, participating in transactions worth US$2.2 billion. This figure represents a one-third increase from the previous quarter and more than doubles the amount from the same period in 2023.
The AI investment wave and the strengthening US dollar have driven US investors to capitalize on opportunities in the Asia-Pacific region, particularly in the data center sector. While office fundamentals motivated sizable deals in Singapore and Tokyo, over half of the transactions involving US capital targeted logistics and data centers.
To meet the surging demand from cloud services, companies have ramped up data center investments across the region. Notably, Alphabet Inc. reportedly paid over US$100 million in Q1 2024 to convert a warehouse asset in Mumbai into a captive data center.
US private equity firms also participated in the Hillhouse-led acquisition of a 44% stake in GDS Holdings' data center assets outside mainland China, valued near US$1 billion. This portfolio spans several markets, including Malaysia, which Knight Frank identified as the most attractive destination for data center investment in Southeast Asia.
Pop culture moves hospitality
Interest in the region's hospitality assets remained sustained, fuelled by tourism revival and the scarcity of prime assets. The resurgence of visitor arrivals in South Korea sparked investors' interest in Seoul's hospitality assets, driven by the global popularity of Korean pop culture.
The competition to acquire Conrad Seoul, which ARA Korea ultimately snagged for US$ 318 million, was particularly intense as this was the first five-star hotel in Seoul to be available on the market in a long time.
Cross-border interest in Singapore, especially institutional capital, was also focused on the island’s hospitality assets. Initiatives, such as the China-Singapore 30-Day Mutual Visa Exemption, no doubt, have been conducive to raising occupancies, but they probably paled in comparison to “Swiftonomics.” As Taylor-mania swept the island, average room rates rose 14% year-on-year in March.
Characterised by an optimistic outlook and strengthening operational metrics, hospitality investments are poised to rise, underpinned by value-add opportunities and strategic joint ventures. Investors acquired three hospitality assets in Singapore – Citadines Mount Sophia, Hotel G, and Capri by Fraser at Changi City – for US$417 million, with plans for asset enhancements, rebranding, or repositioning. For instance, Hotel G will be repositioned under Lyf's co-living brand.
Korea and Japan prop up offices
While office investments have largely softened in the high-for-longer environment, investors remain conscious of the differing dynamics across the region. South Korea and Japan singlehandedly propped up the region’s office investment volumes to account for over half of the capital spent, as limited new supply and an office-centric culture drove investments.
Office transactions accounted for nearly half of Japan's total investment volume in the first quarter of 2024, doubling the figures from the previous quarter. The limited new supply in 2024 and healthy absorption of spaces completed in 2023 have fuelled this positive momentum among investors.
Seoul's office market has emerged as a global bright spot, with cap rate expansion driven by constrained supply, rising rents, and tight availabilities. Vacancy rates in Seoul offices have remained below 2% since mid-2022, contributing to a surge in office deals, which constituted nearly two-thirds of total investments – a sixfold increase from the same period in 2023.
In contrast to the previous quarter, when strategic investors acquired office buildings for self-occupancy, Korean institutional investors have begun ramping up office investments. Blackstone's sale of Arc Place to the Korean asset manager Koramco for US$593 million was the largest global office deal in Q1 2024.
The office sector has been a driving force behind investment activity, with investors capitalising on favourable market conditions, limited supply, and healthy demand across key markets such as Japan and South Korea.
Outlook: another sluggish quarter ahead
As the Federal Reserve reiterated its call for patience on easing during its May meeting, interest rates can be expected to remain at their current levels for much of the year. However, a weaker-than-expected jobs report in April has reignited hopes for an earlier rate cut.
The mixed signals emerging from the US are unlikely to favour investment activity in the region. The standoff between buyers and sellers will protract under the uncertainty, further dragging on investment activity. Investors will be expected to remain sidelined and hold back significant capital deployment, muting investment activity for another quarter before gradually picking up in the latter part of 2024.
While distressed assets will remain limited, opportunities to acquire bargains will support investment activity as motivated sellers explore capital recycling strategies. Price drops may have convinced Link REIT to acquire the remaining 50% interest in Shanghai Qibao Vanke Plaza, which it did at a double-digit discount compared to when it last transacted in 2021.
BlackRock is reportedly looking to offload a pair of Shanghai office buildings in the city's Putuo district at a 30% discount to the purchase price paid six years ago as the private equity powerhouse eyes other markets for capital deployment.