June 24, 2024

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From Singapore to South Korea, commercial property deals falter

SINGAPORE — From Singapore to South Korea, investors are shying away from property deals involving office buildings, malls and other commercial assets, fearing that interest rate increases and geopolitical turmoil could threaten global growth.

A November report by commercial real estate and investment management company JLL showed that commercial real estate investment activity in the Asia-Pacific region fell 22%, year-on-year, in the July to September period, representing the lowest quarterly total since the second quarter of 2010.

Market data provider MSCI Real Assets said commercial property deals in the Asia-Pacific fell 37% compared with the third quarter of 2022, marking a sixth consecutive quarter of year-on-year declines. The share of Asia-Pacific acquisitions by global investors approached all-time lows of 6%.

“The narrative of ‘higher for longer’ interest rates that emerged recently quashed any hopes of an early recovery,” said Benjamin Chow, head of Asia real assets research at MSCI. “Coming into this downturn, Asia-Pacific lagged the rest of the world in terms of price discovery. But the gloomier third quarter outlook appears to have given price expectations a nudge, with further corrections in many key sectors across the region.”

MSCI tracks commercial properties and portfolios worth $10 million or more, while JLL monitors deal values above $5 million, with both outfits showing a slowdown in real estate transactions.

The tone was highlighted in November when Singapore-based real estate investment group Metro announced it would buy a 20% stake in a prime commercial property called VisionCrest Commercial along Singapore’s main shopping street, Orchard Road, for up to $40 million Singapore dollars ($29.8 million).

Metro pitched the attractions of the 11-story complex, but its Chairman Winston Choo sounded a note of caution, portraying the investment as a defensive move.

“Amidst macro headwinds, it is imperative that Metro maintains a diversified, quality portfolio in resilient sectors,” he said. “Metro continues to position ourselves for resilience during these challenging times.”

According to U.S. commercial property services company CBRE, an October poll of its roughly 100 senior brokers and appraisers covering Asia-Pacific markets showed that only 12% of respondents observed an improvement in investment activity so far this year, compared with 2022. An earlier survey in April was more upbeat with 73% of real estate investors expecting deals to bounce back this year.

“A recovery in investment activity is not expected until mid-2024,” said Henry Chin, head of research for the Asia-Pacific at CBRE, although he saw bright spots in some markets.

The report highlighted both weak risk appetite among investors and limited expectations for interest rate cuts in the first half of next year, factors that are raising pressure for investors in most Asia-Pacific markets to offload assets rather than buy them.

The JLL report showed that during the third quarter of this year, South Korea recorded $4.2 billion worth of transactions, down 35% on the year, with domestic institutional investors “selectively reviewing core office assets.”

Myeongdong shopping district in Seoul: During the third quarter of this year, South Korea logged $4.2 billion in transactions, falling 35%, year-on-year, according to JLL.

In Singapore, it said commercial property investment volume declined 11%, year-on-year, to $2 billion during the same period, highlighting that continued economic uncertainty is weighing on tenant demand and prime office rents.

“The high cost of debt, particularly higher interest rates, will erode risk-adjusted returns for some investors, who find it more difficult to underwrite deals,” said Pamela Ambler, head of investor intelligence for the Asia-Pacific at JLL.

“The challenge of an economic slowdown, specifically weaker global demand and softness in China, and in turn other trading partners, may also deter investor appetite towards real estate to a certain extent,” she added.

Market watchers have noticed a few bright spots in the cloudy market, though. “India is having stronger buying intentions, while Japan’s low interest rate still attracts international capital,” said CBRE’s Chin.

JLL’s Ambler had a similar view, noting that the South Asian economy was “a major beneficiary” of the current derisking trend, with global investors reducing their exposure in China to build resilient supply chains across the region.

India’s strong economic fundamentals are enticing foreign investors to invest in offices, manufacturing facilities and infrastructure projects, she said.

As for Japan, Ambler pointed out how domestically, the low-interest rate environment, which she called “a global anomaly,” offers currency hedging opportunities for real estate investments.

MSCI Real Assets, in a November report, said Japan was the biggest Asia-Pacific commercial real estate market over the first nine months of the year for both deal volume and deal count, with $1.9 billion of industrial deals in the third quarter pushing year-to-date investments to $6 billion, a record for the nine months since MSCI began collecting data in 2007.

India, meanwhile, had a “strong quarter,” the report said, with volume helped by Brookfield India Real Estate Trust’s sale of a 50% stake in an office portfolio to Singapore sovereign wealth fund GIC for $683 million.

MSCI noted that the South Asian market’s third quarter investment volume this year was over 50% higher than the five-year average for the same quarter before the COVID-19 pandemic.

Looking ahead, investment manager Colliers counts itself among a handful in the industry that expect commercial property deals to increase steadily across the Asia-Pacific next year, as “gaps between buyers and sellers narrow and more investors move to deploy capital,” it said in a November assessment.

Next year “definitely looks more positive than 2023, with a lot of pent-up equity which is looking to find a home,” said Chris Pilgrim, Colliers’ managing director of global capital markets for the Asia-Pacific. “The depth of capital in most Asian markets has to diversify.”