Global inflation has reached its highest levels in more than 20 years and most central banks in the Asia-Pacific region are in the process of tightening monetary policies to stave off inflation which will inevitably slow growth in the coming year.
But what will this mean for real estate in the region?
“Even as the market slows, opportunities will remain in commercial real estate. Rising interest rates have put upward pressure on cap rates and corresponding downward pressure on values—while this is not the preferred dynamic, there are reasons for measured optimism,” Louise Kavanagh, chief investment officer and head of Asia Pacific real estate at Nuveen told AsianInvestor.
As APAC’s monetary authorities are compelled to keep pace with the Fed's hiking cycle, and walk the fine line between growth and inflation, Kavanagh and other industry insiders believe the region's interest rates will approach multi-year highs in 2023.
Despite the ongoing market tensions, the economies in the APAC region are in a better position than the US and Europe, where milder inflation and more robust GDP growth will continue to support real estate markets, according to Kavanagh.
“Significant capital appreciation has fuelled outsized returns over the last few years, but many investors allocate to private real estate for the consistent income yield, often borrowing allocation from their fixed income portfolios to increase their exposure to real estate,” she said. “On this measure, real estate is well positioned, with healthy fundamentals to support stable income in 2023.”
There are several key trends that will define investment decision-making in 2023, most of which can be seen as a continuation of the trends witnessed over the past 24 months, according to David Asplin, deputy managing director and head of funds management at QIC Global Real Estate.
“While bond yields have risen significantly over the past year, and we expect that they will continue to place some upward pressure on real estate capitalisation rates over the short term, inflation pressures are expected to gradually ease over 2023,” Asplin told AsianInvestor.
The tail-end of Covid-19 will also continue to influence the behaviour of Australian consumers, and of particular note is the trend towards retail and localisation, he said.
“Accelerated by the pandemic, we are increasingly seeing a desire for consumers to live, shop and work more locally – driving visitation and sales at our regional and neighbourhood shopping centres,” said Asplin.
“Retail real estate also continues to provide diversification benefits within an investment portfolio, with differing macroeconomic drivers to other asset classes and real estate sectors. The depth and diversity of businesses and mix of uses, including exposure to tenants in the non-discretionary spend category, underpins relatively lower volatility and risk than may be evident in other asset classes or real estate sectors with more concentrated tenant profiles and less diversity of uses,” he said.
Retail as a sector will be gaining traction more broadly in Asia in 2023 too, in light of recent large deals in Singapore, Japan and Australia, according to John Howald, executive director, head of international capital, Asia Pacific, Colliers.
“Retail reflects broader economic demand and activity. The late reopening of borders in some markets – Japan, Korea, Hong Kong and China – has caused pent-up demand. Asia Pacific doesn’t have as severe a forecast as the European or North American regions so it’s expected retail activity will not abate or be heavily impacted in most markets in this region,” Howald told AsianInvestor.
The reopening of all major tourism and business markets across Asia Pacific will also likely see a return of “robust activity” in the hotels sector, said Howald.
Howald also believes that other prominent trends throughout the peak of Covid will continue, namely the pursuit of the “three Ls”— logistics, living and life sciences.
STRUCTURAL GROWTH DRIVERS
Structural growth drivers connected to the major forces changing society - demographics, digitization and decarbonization – will be key to capturing positive real growth in Asia-Pacific over the long-term, according to Benett Theseira, managing director and head of Asia Pacific at PGIM Real Estate.
Digitalisation is changing businesses everywhere, demand is driving growth for logistics and hyperscale data centers, he told AsianInvestor.
“This is on the back of very strong business and consumer migration to the cloud due to the accelerated adoption and pace of e-commerce, online entertainment, communications, social media and smart devices, which will no doubt continue to be a trend,” said Theseira.
From the demographic perspective, the opportunities are two-pronged—on the one hand, a young population and a growing middle class are driving demand for residential housing, in particular rental housing due to the high cost of home ownership in major cities.
On the other hand, the growing ageing population will boost demand for senior housing, which is very much under-supplied in major markets in the region, he said.
“As for decarbonisation, more businesses and end users are shifting their thinking and preferences towards green buildings, which is driving the continued demand for properties with better ESG credentials. In turn, this is expected to provide more opportunities for upgrading older building stock and finding new ways to create higher value, green assets,” said Theseira.
Most buyers will also have to take a position on the debt in the market. If investors are getting debt today at high interest rates, they will have to look at purchasing with the view to refinancing in the future, according to Colliers’ Howald.
“Once interest rates are seen to level out and more certainty emerges around the interest rate outlook, many investors will see this as a green light to resume to normal property investment activity,” he said.
Every investor will take their own view on what will happen with interest rates which is the main reason for a lot of pause in investments across Asia Pacific now, said Howald.
“However, the risk here is if inflation stays stubbornly high and this leads to a higher interest rate in a lot of markets that we’re used to. This could potentially cause pricing dislocation. There is a risk of interest rates staying higher for longer than most investors and economists are currently projecting,” he said.
PGIM’s Theseira agrees that the Asia Pacific region is not spared from the effects of slowing global growth, pressure on regional currencies, supply-led inflation and rising policy rates.
“However, government, corporate and household balance sheets were strong heading into the pandemic, and inflation is more moderate, which should limit the negative impact,” said Theseira.
The key for investors in navigating the challenges ahead is to be selective and focus on long-term investment opportunities in sectors and markets that will be supported by strong occupier demand and rental growth, he said.
“Against the current market backdrop, asset class, stock and market selection are much more critical because this market is not going to support all sectors and geographies.”