partner content

Which markets and sectors in APAC are poised to drive real estate investment in 2023?

Presenting key findings and potential real estate investment strategies from CBRE’s 2023 Asia Pacific Investor Intentions Survey.
Which markets and sectors in APAC are poised to drive real estate investment in 2023?

After a relatively muted Q1 2023, the latter half of the year is likely to see a surge in commercial real estate activity across Asia Pacific. This is among the key takeaways from CBRE’s 2023 Asia Pacific Investor Intentions Survey. The report offers a deep dive into the sectors and geographies that are likely to thrive, as well as some of the challenges that need to be navigated.

Read on for a deeper insight into some of the most significant findings, with perspectives from Henry Chin, global head of investor thought leadership and head of research, Asia Pacific; and Greg Hyland, head of capital markets, Asia Pacific, at CBRE.

The top markets for cross border investment include a resurgent China and beneficiaries of the ‘China plus one’ strategy

CBRE estimates dry powder of at least $65 billion, taking into consideration only closed-end private equity funds. Chin said, “If we add institutional and developer money, that sum should be far more significant, but is virtually impossible to estimate, which is why we are using private equity dry powder as a proxy.”

Japan, Singapore, and Australia will be among the key beneficiaries of cross-border investments in real estate. Buoyed by the relaxation of travel restrictions, Hong Kong SAR is back in consideration, shooting up to fifth place. Chin anticipated an increase in investor interest in mainland China and said, “While most major economies are expected to contract, China is moving into a recovery mode. Economists have forecast 4.5% to 5% GDP growth this year. The office and retail pricing particularly for Beijing and Shanghai has been corrected by 15% from the previous peak (2018) and there will be a return for demand in real estate.”

In addition, ‘the China plus one’ strategy is likely to have a salubrious effect on many countries across Asia. Vietnam has emerged as the most direct beneficiary. Explaining the presence of Hanoi and Ho Chi Minh city in the top markets for cross border investment, Chin said, “Vietnam is closer to China and it’s easy to move infrastructure. On the occupier side, it is a free market in Southeast Asia. Investors have been focusing on “VIP” — Vietnam, Indonesia, and the Philippines — with Vietnam number one on the agenda.”

India stands to be another beneficiary of China plus one. Hyland said, “There's been increasing investor interest and some large announcements regarding manufacturing moving from China to India. India has a lot of the same attributes in terms of scalability and labour supply. It was always a large outsourcing location, which led to significant demand for office space. We've noticed an increasing interest to put more money to work in India over the last couple of years.”

Speaking about the most preferred sectors, Chin said, “Everyone is looking at industrial and logistics, and offices. We notice more investors looking at residentials — multi-families in Japan and build to rent in mainland China and Australia.”

This is borne out by figures from the investor sentiment survey. After a slight dip through 2022, assets in the industrial and logistics space account for nearly 40% of investments, while office space is the second largest category.

Digging a little deeper, one finds a flight to quality across commercial real estate, for office spaces located in central business districts that are ESG compliant. Prime located Grade A offices find favour with over half the respondents who picked office space as a category. Location trumps other considerations since 40% of respondents pick prime located Grade B assets as well. A previous report from CBRE  says that 75% of office workers are satisfied with centrally located workplaces in a city.

This extends to retail with prime shopping malls and high street shops remaining the most popular.

Logistics has been pushed by a surge in e-commerce and fast delivery. Prime locations play a vital role for this sector as well. Nearly 70% of investors are aiming to acquire modern logistics facilities. Speaking about the reasons for the increased interest in logistics, Hyland said, “In many markets, the trend is driven by a structural undersupply of modern warehousing, with an element of catch-up. The belief is that cash flows will grow over time.”

In the residential sector, multifamily is a clear leader, picked by 84% of investors. Another emerging sector is co-living or shared accommodation, with 40% of Gen Z across APAC preferring such an arrangement. Demand is expected to be strong in Hong Kong SAR and Singapore where housing affordability has been a challenge.   

Hospitality assets are likely to benefit from the revenge tourism phenomenon and the reopening of mainland China — a huge source of tourists across Asia Pacific.

In terms of alternative asset classes, interest in healthcare remains strong even post-pandemic. Chin explained, “The life sciences space — particularly early-stage R&D facilities in Asia Pacific — is driven by manufacturing. Given pandemic-related issues, all major governments are focusing on life sciences-related investments. Government involvement makes it a little harder to transact. But based on our thesis, Japan and Australia make the most sense as open, transparent, and mature markets.”

ESG is growing in importance for investors

The survey highlights an interesting trend — investors are unwilling to pay over a 5% markup for ESG certified properties. But the demand for these buildings has shown an uptake with the adoption rate standing at 63% as of November 2022.

Asked to explain this apparent dichotomy, Hyland said,We are in a period of transition. Perhaps Europe is more advanced in allocation of dollars towards sustainable investments, but Asia will catch up. The shift will be driven by demand for ESG compliant buildings, regulations from different governments, as well as investor appetites.” Evidence of this can already be seen in Australia and Singapore — the leading markets in the region when it comes to ESG — which have stringent building codes.

However, alongside ‘green premiums’, the sector is also likely to grow on the back of what Chin called the “brown discount” — being able to acquire a non-ESG compliant building at a lower price. He said, “Investors engage consultants on enhancing an office building for green certification. If we don’t do that, in the next few years, the brown discount will kick in.” Hyland added, “Designing green features while building a new property is cheaper than retrofitting existing assets. There will be a natural adoption of best practice.”

Recommendations for investors

Value added and opportunistic investors ought to focus on hospitality assets: The report recommends hospitality assets for investors based on the revenge tourism thesis. The geographies likely to work best for investors were those that relied on fly-to demand like Bali or Phuket, rather than geographies with a strong domestic tourism market. Hyland said, “Our view on hospitality is effectively repricing it every day. When the US and Europe reopened, hotel room rates increased dramatically. We expect the same phenomenon across Asia Pacific.” For instance, even without Chinese tourists who typically account for 18% to 20% of total room nights, the rates in Singapore have nearly doubled over the last two years.

The core segment should focus on office assets in gateway cities; logistic assets in Australia and regional Japan; multifamily assets in Japan and development opportunities in Mainland China: Explaining the rationale behind this recommendation Hyland said, “Logistics in Australia is primarily driven around rental growth. It's one of the best performing markets globally and that helps offset cap rate expansion. Regional Japan has some big changes in regulations with regards to driver delivery, that has led to expansion of demand for logistics footprint.”  

The stability, resilience and cash flow in Japan makes it an ideal market for multifamily assets. Hyland said, “At the moment Japan is probably one of the few markets — perhaps the only market at scale in Asia Pacific — where we'd get a high degree of multifamily exposure.”

The multifamily sector is also expected to develop in mainland China, following government policy changes. Hyland said, “The government is trying to improve housing affordability and the availability of quality rental stock. There will be a significant increase in investment opportunities.”

Opportunistic investors ought to consider making the most of the value gap between public and private markets: Hyland said,Many public markets are materially below where book values are and take a while to catch up to the physical market.” He recommended office markets as being the ones with the steepest discounts to book values.

There are other reasons for low levels of public market activity in Asia – for instance, the opaque nature of some public-private partnerships, with families or institutions as controlling shareholders. With its greater openness to public-private transactions and less family or institutional control, Australia is recommended as a good market for such transactions.

CBRE’s 2023 Asia Pacific Investor Intentions Survey reveals several more insights into investors’ net buying sentiment and preferred sectors, strategies and markets for investment. Click here to download the full report, and click here to further explore CBRE’s perspectives on Asia Pacific investor sentiment.


¬ Haymarket Media Limited. All rights reserved.