June 24, 2024

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Outlook 2024: Asia Pacific real estate will be shaped by new market realities | Alternatives

As the global economic situation continues to stabilise, a clearer picture of the 2024 real estate investment environment in Asia-Pacific is emerging for investors.

While investor focus remains on resilience, the search for value is starting to take hold as investors navigate a promising yet uncertain market. Even with careful scrutiny, the task is growing in complexity, according to Michael O’Brien, managing director from QIC Real Estate.

Successful investors will be those who can filter out distractions, recognise trends, and make thoughtful decisions that weigh risks against potential rewards.

Michael O’Brien,
QIC

“As valuations settle and sentiment improves, we are seeing capital markets grow in momentum with investors becoming more confident to act on new investment opportunities. Investment decisions will continue to be underpinned by perceived value, but investors may begin to move from what is currently a deep value opportunistic focus to also seek quality investment opportunities at attractive valuations,” O’Brien told AsianInvestor.

O’Brien’s view aligns with a market at a turning point, where investors seek quality and growth potential, particularly in healthcare and residential sectors.

Louise Kavanagh, chief investment officer and head of Asia Pacific real estate at Nuveen adds a cautious note, highlighting a delicate balance amid the current market optimism.

Louise Kavanagh,
Nuveen

“Even with interest rate cuts, financing costs are expected to stay elevated at decade high levels, which will continue to underpin an ongoing dislocation in pricing expectations between sellers and buyers, especially in structurally attractive sectors where competition has stayed strong,” Kavanagh told AsianInvestor.

This uneven investment landscape will also reflect many of the macro and geopolitical risks that have faced the region in 2023: a slowdown in China, sticky inflationary expectations, uncertain central bank policy outlooks, geopolitical tensions as well as capital-allocation uncertainty, considering valuation declines elsewhere globally.

“Overall, expect improved sentiment and a return of investment appetite into regional real estate in 2024 but only modestly, given the backdrop of still uncertain headwinds. Downward valuation adjustments will also continue in fundamentally less attractive sectors, on delayed pass-through of higher financing costs and higher risk premiums,” said Kavanagh.

RISKY ENVIRONMENT

A common thread investors seem to share is an acknowledgment that success in the new era will require more than capital and will demand insight, foresight, and the wisdom to read the tides of change.

James Kemp,
Macquarie Asset Management

A big investment risk for investors in 2024 will be not understanding different sub-market dynamics, according to James Kemp, head of Asia-Pacific real estate for Macquarie Asset Management. This includes paying attention to sub-market sectors such as living, logistics, data centres, which are forecast to continue to perform well.

“With macro fundamentals potentially softening in response to monetary policy and a number of countries having just gone through a reasonable period of increased supply in certain sectors, especially logistics, there is the potential to see meaningful variability between sub-market performance in occupancy and rental levels around the national mean,” Kemp told AsianInvestor.

Underscoring the importance of a detailed, nuanced approach, Kemp’s concerns extend to the careful balancing act required in monetary policy management.

“The big macro risk is that monetary policy timing is off… Tightening goes too far, which results in a sharp slowdown in global and regional growth impacting asset net operating incomes and whilst interest rates would be lowered in response, we see a period of cap rate expansion as a proxy for income uncertainty – pushing back any recovery in transactional markets and liquidity,” said Kemp.

ESG AND REGIONAL RISKS

Amélie Delaunay, senior director, research & professional standards at ANREV, a regional nonprofit that covers non-listed real estate, draws attention to environmental, social and governance (ESG) factors, which are now at the forefront of institutional investors’ minds.

“ESG factors are emerging as significant considerations and are supporting the brown to green investment theme,” Delaunay told AsianInvestor.

Amélie Delaunay,
ANREV

Climate risks “have the potential to impact property values and insurance costs both in the short and long term, adding an additional layer of complexity to investment decisions,” she added.

From a regional perspective, there are risks inherent in the recovery trajectory of China and the potential repercussions for APAC economies, according to Regina Lim, head of research APAC at M&G Real Estate.

“China’s economy is currently weighed down by challenges emanating from its large and substantially indebted property sector and muted domestic consumer spending growth,” Lim told AsianInvestor.

Recent policy stimulus, including interest rate cuts, the lifting of mortgage caps and removal of home purchase restrictions, did not seem to sufficiently restore confidence and improve consumer sentiment. The slowdown in the global tech cycle is also affecting its exports.

Meanwhile, Japan’s real estate sector could also be confronted with unexpected pressures.

“Japan’s interest rates and property cap rates may rise more than markets expect. While some real estate investors are pricing in mild increases in borrowing costs and property yields, the risk is that the pace and magnitude of these adjustments may be more dramatic, depending on inflation and economic conditions,” Lim said.

LIVING, LOGISTICS AND DEBT

In 2024, various sectors in Asia Pacific may provide golden opportunities for investors.  

Cuong Nguyen, head of Asia Pacific investment research at PGIM Real Estate, projected robust growth in logistics and office sectors while retail appears to lag. He emphasised the tug of demographics towards rental housing, buoyed by a cultural shift from owning to renting.

Cuong Nguyen,
PGIM

“The opportunity set remains broad, ranging from a mature residential market in Japan to co-living in Hong Kong and Singapore, and a fast-growing build-to-rent sector in Australia,” Nguyen told AsianInvestor.

Digital transformation is also a game-changer with vast investment potential in data centres, driven by the structural growth in demand for digital storage across the region, he said.  

He further notes that while logistics remains a favoured theme, investors are adopting a more selective approach, prioritising core submarkets.

Lim at M&G Real Estate, concurred with the bullish outlook on the living sector, foreseeing it as a scalable opportunity for the coming decades.

“City populations are growing as governments are drawing young workers, students to reinvigorate economies,” Lim said.

Regina Lim,
M&G Investments

“In Tokyo, Osaka and Fukuoka, the population continues to grow by up to 1% annually, bucking the overall trend in Japan. In addition, the structural trend of a growing number of smaller households in Japan, South Korea and Australia due to a decline in marriages, a rise in divorces and increased longevity, is expected to become more entrenched.”

Lim highlighted that despite economic slowdowns, the logistics sector remains resilient due to the persistent structural tailwinds of e-commerce and technological advancements, which are reshaping consumer behaviour and supply chain management.

Market watchers agreed on the promising prospects in Australia and South Korea. Nguyen signalled a cautious stance towards Japan, with the exception of high street retail buoyed by tourism growth.

Lim further points out the ballooning cost of real estate debt, particularly in Australia and South Korea, hint at the potential for non-bank lending opportunities.

“While distress in APAC markets has so far remained at bay, it is likely a matter of time before we see forced sellers with refinancing due over the next couple of years. Hence, there are opportunities to acquire assets at attractive entry prices,” said Lim.

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