Report | Intelligent Investment

2023 Asia Pacific Real Estate Market Outlook Mid-Year Review

August 8, 2023 8 Minute Read

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Executive Summary

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Welcome to CBRE’s 2023 Asia Pacific Real Estate Market Outlook Mid-Year Review; a report in which we look back at the predictions we made at the beginning of the year and evaluate what we got right, and what we got wrong.

With the positive impact of mainland China’s re-opening having been far weaker than expected, CBRE has been forced to downgrade its forecasts across all sectors in this market and push back predictions for the expected timing of the recovery by six to 12 months.

Economy

Core inflation along with a stronger than expected employment market have reduced the likelihood of a hard landing in the U.S., with CBRE expecting mild negative growth to occur in Q4 2023 and Q1 2024. With the upward interest rate cycle having been prolonged, rates are likely to stay high for longer.

Investment

Asia Pacific commercial real estate investment volume is unlikely to recover before H1 2024 due to insufficient yield expansion and the higher cost of finance. Japan will remain attractive to investors on the back of low interest rates and positive carry, and hence will continue to outperform. Investment sentiment elsewhere is expected to improve once the cost of borrowing starts to come down. Korea, which was the first market to implement interest rate hikes in the current cycle, is now witnessing an increase in investment activity now that the cost of finance has begun to fall.

Office

While CBRE’s market forecast has been largely accurate, the recovery of office space demand has lagged office-based employment growth. Office occupiers retain a prudent attitude towards portfolio planning amid the challenging macroeconomic environment. Although flight to quality and a focus on green buildings remain key trends, expansionary sentiment has been subdued.

Logistics

Although logistics demand continues to gradually moderate from pandemic-era highs, regional rents displayed resilience in H1 2023, with performance bifurcating between tightly supplied markets, such as Singapore (prime) and the Pacific, and oversupplied locations. Rental growth in markets with a supply shortage will nevertheless lose momentum as demand tapers off.

Retail

The tight job market and resumption of international tourism underpinned strong consumer spending in H1 2023, boosting expansionary sentiment among retail occupiers.

Hotels

However, the slow return of mainland Chinese tourists continues to weigh on the recovery; a trend that is also impacting hotels, with the recent rise in room rates now showing signs of plateauing.



Economy


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Investment

Key changes to forecast

Revised yield forecast

  • Except for Japan and mainland China, increases in the cost of finance in Asia Pacific markets have outpaced the rate of yield expansion.
  • Of the markets to have implemented rate hikes, yield expansion in Seoul has been most aligned with the rise in financing costs. With borrowing rates having fallen from a peak of 7% to around 5% as of end-June, CBRE expects yield expansion in this market to stay within 20 bps in H2 2023.
  • Logistics and office yields in the Pacific have expanded the most (>100 bps) over the past 18 months, with rental growth compensating for the impact on capital values. CBRE forecasts further yield expansion (25-50 bps) to occur in the second half of the year.
  • Hong Kong SAR has seen only a limited shift in yields (<10 bps in 2H 2023) despite a steady rise in interest rates. However, the steep decline in capital values, which have fallen by nearly 40% since Q4 2019, is providing opportunities for bottom fishing.
  • Although Japan will retain its ultra-loose monetary policy, CBRE has slightly revised up its forecast for Tokyo office and logistics yield expansion by 5 bps to reflect investors’ more cautious attitude amid rising supply and slower rental growth.


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Office

Key changes to forecast

Upgraded

  • Tight availability and high pre-commitment rates in new projects in Seoul will result in rental gains.
  • Ongoing flight to quality and relocation to prime assets will continue to enable landlords to cut incentives. Effective rental growth in Perth, Brisbane and Auckland will remain robust.
  • Although the resilient performance of prime core assets in key Indian submarkets pushed up overall rents in H1 2023, momentum will slow in H2 2023.
  • The market is polarised in Vietnam, with landlords of CBD properties with low vacancy adopting a firmer stance towards rents but owners of ageing Grade A assets forced to cut rents to lure tenants.
  • The rental decline in Tokyo will slow thanks to steady upgrading demand and strong pre-leasing.

Downgraded

  • The Melbourne rental forecast has changed from positive to negative as landlords offer more competitive deals amid elevated vacancy and pressure from subleases.
  • Rents in mainland China tier I cities are set to decline further amid continued subdued demand. While leasing activity is expected to pick up in H2 2023, rents will not stabilise until 2024. The return of rental growth in Hong Kong SAR has been also delayed to 2025 due to historically high vacancy.


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Retail

Key changes to forecast

Upgraded

  • Capitalising on the influx of visitor arrivals, retailers in Tokyo (Ginza) will continue to expand in prime locations.
  • Rents in Vietnam CBDs have spiked amid an ongoing lack of prime retail units to accommodate expansionary demand from foreign retailers.
  • While the rental recovery in Australian CBDs has been milder than expected, largely due to weak demand from fashion retailers, prospects in the Melbourne CBD are improving as the return to the office accelerates.

Downgraded

  • Amid the slow recovery in retail sales, more landlords in mainland China have lowered asking rents to attract tenants. Rents for prime assets in core shopping districts, especially Shanghai, nevertheless remain resilient.
  • The rental correction in Taipei will continue as retailers display limited interest in high street locations. However, enquiries have improved recently, with rents now expected to bottom out in H2 2023.


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Logistics

Key changes to forecast

Upgraded

  • Singapore Prime and the Pacific remain strong landlord’s markets on the back of sub-1% vacancy. However, with demand now tapering off, rental growth momentum will slow in H2 2023.
  • Among emerging markets, rental growth in Vietnam (Southern Region) will be driven by the completion of well-located assets commanding higher rents. India, except Delhi-NCR, will continue to see growing demand from 3PLs and manufacturers keen to expand in modern logistics buildings.

Downgraded

  • The sluggish economy and muted global trading activity will continue to weigh on logistics occupier sentiment in mainland China. Rents in Beijing and Guangzhou will experience the strongest downward pressure due to the substantial pipeline due to come on stream in decentralised locations.
  • While the supply peak in Japan will weigh on logistics rents, the decline will be mild.


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Hotels

Note: Available seat kilometres are a measure of an airline's carrying capacity to generate revenue, taken from multiplying the available seats on any given aircraft by the number of kilometres flown on a given flight.


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