Three Indicators: Glimmer of Hope for APAC Real Estate Market, but Depending on China

• 28 July 2023
• International News
• 2024 Views

China’s reopening and the perception that interest rates are nearing their peak have led to brighter economic prospects in the region. However, Q1saw a dip in commercial real estate investment, plunging to its lowest level since 2010.

Commercial Real Estate Investment and Sector Analysis: The office sector continues to face pressure, primarily due to high supply levels. The retail and hospitality sectors, on the other hand, are expected to benefit from increased consumption and the gradual return of tourism in 2023. While logistics still rides on secular growth trends, certain markets face challenges of oversupply. Alternative asset types are also gaining attention from investors, although volume growth remains uneven.

China’s Accelerated Recovery and Impact on APAC: Mainland China’s relaxation of its zero-COVID-19 policy, coupled with the reopening of its borders, has accelerated the region’s recovery prospects. The Chinese economy experienced a robust rebound in Q1of 2023, particularly in March. While April’s economic data presented mixed outcomes, it is reasonable to expect real GDP growth in the range of 5%-7% for the year, with China serving as the driving force behind the recovery.

“We expect real GDP growth in a range of 5%-7% in 2023, with China playing a key role in driving the overall recovery,” explained an analyst from Schroders.

This positive momentum is expected to uplift the rest of the APAC region, ensuring that no major market sees negative growth in 2023.

Interest Rates and Financing Challenges: (1). Policy interest rates have seen significant increases across many APAC markets over the past year. (2). However, there are indications that global inflationary pressures are moderating, and (3). A growing perception suggests that US interest rates are reaching their peak as recession risks loom. These combination factors are expected to alleviate the pressure on APAC central banks to maintain high-interest rates. It is anticipated that interest rates in the region are also near their peak, with many economists predicting a decline over the course of 2024. China is expected to maintain stable or even lower interest rates in 2023, thanks to subdued inflation. Japan remains a wildcard, with a dominant view that the Bank of Japan will retain its zero-interest rate policy, although a minority predicts a rapid normalization of monetary policy due to rising inflation.

Commercial Real Estate Investment Performance: The rise in interest rates has made obtaining bank financing more challenging, resulting in a 50% year-on-year decline in commercial real estate investment transactions across APAC in Q1, totalling US$27.1 billion. This represents the lowest quarterly level since 2010. Notably, Hong Kong and Singapore were the only markets to show higher volumes in Q1, registering a 15% and 40% year-on-year increase, respectively. However, the growth in Hong Kong was superficial, primarily driven by large distressed asset deals, while Singapore’s increase was fuelled by three significant deals in the retail sector. Japan, despite experiencing a 40% decline in volumes, bucked the trend by being the only major market with a growing deal pipeline in Q1.

While the APAC region’s economic outlook is showing signs of improvement, the road to full market recovery may still be long. Rising property yields, which are starting to approach effective debt costs, indicate a shift in investor sentiment. However, it will take time for the market sentiment to fully recover and regain its pre-pandemic vigour. As the year progresses, industry players must stay attuned to changing market dynamics, adapting strategies to navigate the ever-evolving landscape of APAC’s real estate sector.

• Analysis