German-based asset manager DWS assesses the outlook for real estate investment in Asia Pacific and highlights investment opportunities in the region.
DWS believes that the
outlook for real estate investment in Asia Pacific remains mixed,
but there are opportunities for investors with a long-term
perspective.
According to the asset manager, Asia Pacific is facing headwinds
such as elevated inflationary pressures and weakening global
demand, causing subdued regional economic growth in the first
half of 2023. Monetary policies continue to diverge across the
region. Financial conditions remain tight, with senior loan rates
in Australia and South Korea remaining high. However, DWS
believes that the lack of development financing presents
investment opportunities.
Office leasing slowed down in the region in the first half
of 2023, due to a combination of macroeconomic uncertainty,
near-term supply waves, and rising vacancies, the firm said.
Nonetheless, long-term occupier demand in Asia Pacific remains
strong, particularly in North Asia, where there is a stronger
inclination towards office-based working. Tenants are
increasingly rationalising costs and recalibrating their
office space requirements, with larger occupiers preferring
high-quality developments with green credentials, efficient floor
layouts, and upgraded building facilities, the firm continued.
Prime logistics assets have benefited from strong rental trends
over the past 12 to 18 months, driven by resilient occupier
demand from e-commerce firms, third-party logistics providers
(3PLs), and omnichannel retailers. Logistics demand should
moderate in the near-term as global supply chains normalise
post-Covid. However, vacancy rates remain low across the region,
particularly in Australia and regional Japanese cities, which
continues to favour landlords over tenants in the long-term, DWS
said.
The speed of recovery in the APAC retail sector seems mixed
despite the rebound in international tourism and retail sales
across the region, the firm continued. Longer-term rental growth
trends should be modest at best and unspectacular due to
structural challenges such as e-commerce headwinds and
shifting consumer expectations.
DWS believes that the multi-family sector in Asia Pacific remains
a small investable market. Due to record-high prices for
condominiums, first-time home buyers are choosing to rent
instead. In Australia and New Zealand, high interest rates
contributed to worsening housing affordability, fuelling unabated
rental demand while rising construction costs have exacerbated
the lack of new supply. In addition, increasing immigration
numbers and relative rental affordability should help underpin
rental growth over the coming years, the firm said.
There was a limited number of Chinese tourists
arriving in the first four months of 2023, and overseas
tourist arrivals in Asia Pacific remained at about 60 per cent of
pre-Covid levels. The number of air travel passengers in the
region is expected to reach 80 per cent of 2019 levels by the end
of 2023, before surpassing that in 2024, which should boost the
hotel market recovery in the coming quarters.
DWS believes that the residential markets (multi-family,
built-to-rent) in certain locations such as Australia will
provide strong rental growth opportunities, particularly over the
next few years. Key logistics hubs in Australia, Singapore and
regional cities on North Asia are also expected to benefit from
strong rents, along with select office markets in Asia Pacific.
Investment Trends
Real estate investment in Asia Pacific has continued to slow
since the second half of 2022. Investment remains concentrated in
the core markets of China, Japan, Australia, and South Korea, DWS
continued. The high interest rates continue to weigh on
investors’ underwriting capabilities, with higher financing costs
leading to negative carry for investors reliant on external
financing. The disparity between reported asset valuations and
transacted pricing remains wide, and the investment risks are
increasingly high, particularly for discretionary retail assets.
Combining rental growth and yield forecasts over 10 years from
2023, the residential sector (Australia BTR) will be among the
top performers, with unlevered property-level total returns
frontloaded in the next few years, the firm said. Prime logistics
assets are also expected to outperform, delivering total returns
of between 7.5 per cent to 9 per cent per annum. Prime logistics
assets in key Australian cities (Sydney, Melbourne, Brisbane) and
Singapore remain attractive underpinned by the strong rental
growth outlook.
DWS said that there are underlying demand drivers for
multi-family housing, and the potential for tax concessions for
new residential built-to-rent (BTR) projects from 2024 onwards.
Strong rental growth should underpin investment returns, though
access to institutional quality stock may involve development
risk.
Long-term e-commerce tailwinds are driving leasing demand and
structural undersupply of modern warehouses across many cities in
the Asia Pacific region. Prime logistics assets in key Australian
cities and Singapore remain attractive with strong rental growth
outlook, while regional cities in South Korea and Japan present
first-mover investment opportunities, the firm continued.
Looking at debt strategies, DWS said that asset-based lending
yields have currently reached attractive levels, particularly for
construction financing debt. This provides an opportunity for
investors to step in amid less competition.
For value-add strategies, the firm believes that asset
enhancement initiatives, next-generation office features,
biophilic design, and collaboration spaces appeal strongly
to the Millennial worker. Redevelopment strategies, particularly
for stranded offices, can offer higher development margins,
although this comes attached with higher risks.
Overall, DWS believes that the outlook for real estate investment
in Asia Pacific remains mixed. However, there are opportunities
for investors with a long-term perspective who are willing to
carefully assess the market and target specific themes and
investment strategies.
The DWS Group has €859 billion ($933 billion) of assets
under management, operating in Germany, Europe, the Americas and
Asia.
