Valued Insights: All Eyes on Cap Rates

Some cap rate decompression likely in H2 2022

U.S. commercial real estate has experienced aggressive cap rate compression over the past 18 months, with tightening among the strongest observed globally. The Q2 2022 valuation cycle has seen a pronounced change in view, however, with cap rates starting to move out and expected to move out further in Q3 2022.

CBRE’s investment brokers and valuation professionals in other regions have been watching the market closely for evidence of similar movement. In Asia Pacific, cap rates across all sectors remained largely stable in most countries between Q3 2021 and Q1 2022.

New pricing discovery indicates cap rate decompression commenced in Q2 2022. CBRE expects this trend to become more pronounced in Q3 2022, particularly in markets that have already begun to raise interest rates, led by Australia, New Zealand and potentially later Korea.

Cap rate decompression in Asia Pacific will nevertheless be considerably less aggressive than what is currently occurring in the U.S. as interest rates in this region will not rise as quickly.

Figure 1: Summary of indicative cap rates – Grade A Office

Owners anticipate higher operating expenses

Property owners and investors in Asia Pacific are considering the impact of higher expenses in 2023, with insurance and utilities expected to rise sharply versus last year. 

CBRE’s valuation team has advised clients to insert an extra line-item into budgets projecting a modest increase in outgoings now and increasing quarterly leading into the new budgeting period. The level of increases can be escalated or moderated as needed and can be adjusted accordingly if they fail to materialise.

Most owners are not as concerned about budget outgoings for office and logistics properties at present, as higher costs are typically passed through to tenants; however, excessive increases could impact rental growth rates.

Figure 2: Summary of indicative cap rates – Shopping Malls

Note: The survey was conducted from April 11 to April 29.
Source: Asia Pacific Cap Rate Survey, CBRE Research, May 2022

Australia likely to move out first

The view among CBRE’s valuation professionals and clients is that Australia will be the first Asia Pacific market to register cap rate decompression, with logistics yields showing signs of moving out already as the cost of debt rises.

With price discovery set to be a key theme both globally and regionally in Q3 2022, Australia’s stronger deal flow and higher visibility will provide data for valuers and investors, providing the basis for corporate expansion.

CBRE’s valuers anticipate office cap rates to move out by 10-15 bps in Q3 2022, with a movement of 25-50 bps possible over the next 12 months. Assets with long-dated leases are likely to see some re-pricing as inflation catches up with market rents, with these assets unlikely to have mark to market rents. Retail cap rates are expected to move out by 25-50 bps during the rate hike cycle. 

Figure 3: Summary table of indicative cap rates – Logistics

Note: The survey was conducted from April 11 to April 29.
Source: Asia Pacific Cap Rate Survey, CBRE Research, May 2022

Korea may follow

With Australian cap rates set to decompress first, Korea would logically be the next market to follow as it has also entered the upward interest rate cycle. Core debt in this market now stands at around 5%, with construction debt slightly higher.

Office investment opportunities in this market remain limited, however, with strong rent growth, zero incentives and limited supply over the next 24 months. Net effective rents have risen strongly in recent quarters, growing by 3.5% q-o-y in Q1 2022 alone, and are expected to rise by over 10% over full-year 2022.   

There are a number of logistics properties currently for sale that are likely to transact at cap rates slightly higher than expected, but likely still stronger than original underwriting.

Figure 4: Summary table of indicative cap rates – Data Centres

Note: The survey was conducted from April 11 to April 29.
Source: Asia Pacific Cap Rate Survey, CBRE Research, May 2022

U.S. capital pours into Japan

The weaker yen is attracting an influx of money into Japan from the U.S. and other markets, which is keeping cap rates stable. Sources of U.S. capital are broad-based and include several groups with existing exposure to Japan but who have mostly been inactive for some time.

While the cost of debt in Japan has moved up marginally, it remains cheap by regional standards as the all-in cost of finance remains below 1%. However, the lack of investible stock for sale will continue to impede transactions. While there has been a rise in corporate sale and leasebacks, which has freed up some stock, competitive is intense. Strong investment in multifamily is expected to drive cap rates lower.

Singapore and Southeast Asia

In emerging Southeast Asia, investors seeking opportunities in Vietnam, the Philippines and Jakarta, Indonesia, particularly for data centres and logistics, as well as for hospitality assets.

Activity in Thailand has been quiet amid rising local inflation although the Bank of Thailand’s announcement in July that it would maintain policy rates at 0.5% to support sustainable economic growth could spur some investment. The re-opening of the border is expected to boost investment demand for hotels.   

Singapore saw an increase in office transactions during H1 2022 as investors continued to be lured by the prospect of strong rental growth. Private capital is looking at future asset value instead of pure current yield plays. As a result, cap rates will remain relatively stable in the short term.

Figure 5: Summary of indicative cap rates – Hotels

Note: The survey was conducted from April 11 to April 29.
Source: Asia Pacific Cap Rate Survey, CBRE Research, May 2022