Although 2022 saw most Asia Pacific (APAC) markets, with the exception of China, begin to shake off the effects of regional COVID restrictions, as investors look to 2023 they find themselves confronted with a different, but no less dangerous, set of threats: high inflation, rising interest rates, unsustainable levels of public- and private-sector debt, and an impending global recession.
This 17th edition of Emerging Trends in Real Estate, a joint undertaking between PwC and the Urban Land Institute (ULI), aims to shed light on real estate investment and development trends, and other issues within APAC.
Years of cheap and easy liquidity have had a predictable effect on real estate, causing asset prices to soar and yields to compress. But as rising interest rates now begin to revert to mean, property yields must rise with them in order to maintain a spread over the cost of debt. This process has so far been slow to occur in APAC markets, although both Australia and South Korea are beginning to see a degree of cap rate expansion. In the end, though, many interviewees expect regional cap rates will rise an average of 100 to 150 basis points in 2023. One exception may be Japan, which is expected to maintain its ultra-low interest rate environment, Japanese cap rates should therefore remain relatively stable, making Tokyo a magnet for foreign investment funds.
Investors have begun re-aligning strategies in favour of more defensive property types, focusing in particular on features such as rent indexation, shorter lease terms that can be revised upwards more easily, and reliable recurrent income. The “bed space”, including subtypes such as multifamily, hotels, senior living, and student housing, is one such sector. Logistics, where structural undersupply will continue to underpin demand, and where rent typically is a relatively smaller part of the overall cost of business, is another. Specialist asset classes such as data centres, cold storage, and life sciences, meanwhile, have “sticky” qualities as well as long index-linked leases and generally high rents.
Build-to-core strategies became popular in recent years as a way to manufacture new product in an environment with an overall shortage of high-quality building stock. But with construction costs and interest rates rising and a weak outlook for occupier demand, many new projects have been put on hold.
Offices have always been the biggest recipients of regional investment capital, but questions over occupier demand, especially as remote-working practices continue, have eroded their popularity. Demand continues to be strong, however, for modern, high-quality buildings that are in demand by occupiers looking to lure staff back to the office. Investors are also rotating out of the retail sector and into new-economy themes such as logistics, although retail yields and values have re-rated to such an extent that a growing number of investors are looking at prime, well-located retail assets as contrarian plays.
Yeow Chee Keong
Real Estate and Hospitality Leader, PwC Singapore
Tel: +65 9018 1798