APREA Market Flash (January 2024)

What are some key trends likely to shape outlook in 2024?

The Federal Reserve has signaled we are nearing an inflection point in the monetary policy cycle. Barring a reversal in the fight against inflation, the United States can expect its first rate cuts before mid-year 2024. The markets have internalized the Fed’s most recent messaging aggressively, pushing longer-term rates off their recent peaks. But in its laggardly response to monetary policy, the economy is projected to grow at a subdued pace in the coming year, flirting on occasion with recession. The labor market, which has shown remarkable resilience in recent years, will likely continue to lose momentum.

Even as the beginnings of rate relief appear on the horizon, property owners beset with maturing loans will struggle in 2024. Apart from higher borrowing costs than their expiring obligations, the convergence of weaker property fundamentals, lower valuations, and tighter underwriting has engendered gaps in the capital stack that will prove insurmountable for the weakest in the herd. Distress opportunities will be more numerous, both for debt and equity investors, and especially in the office sector.

While mixed economic indicators and distress will capture their fair share of the market’s attention, 2024 will also see greater investment in the reimagining of functionally and competitively obsolete real estate. Our rapidly changing relationship to the built environment will come into clearer view, opening the door for more meaningful innovation in spaces and places. In parallel, a widening recognition of climate risk will roil property insurance markets, but will also hasten investment in building decarbonization and sustainability initiatives.

DR. SAM CHANDAN

Director
NYU Stern Chao-Hon Chen Institute for Global Real Estate Finance

What are some key trends likely to shape outlook in 2024?

To say 2023 was a challenging year for commercial real estate would be an understatement. 2024 should bring more positivity along with green shoots of a recovery, but a lot will ride on three key factors: uncertainty, pricing expectations, and income growth.

Uncertainty was a dominant theme throughout 2023, evidenced by stock market volatility and plummeting real estate transaction volumes. While the year ended on a brighter note with the US Federal Reserve’s pivot, the other consequence was the resolution of one key source of uncertainty – rate hikes. Plateauing interest rates should bring greater clarity to deal underwriting and accelerate price discovery for most global markets in the coming months.

As the rest of the world kicks back into gear, however, two new sources of uncertainty are emerging in Asia Pacific. Japan, the one booming market for most of the past 2 years, is at a similar crossroads faced by other major economies 18 months ago, with the introduction of yield curve control. China’s own pivot to structurally reform its economy, meanwhile, has ignited new debates about the adequacy of policy support measures for its ailing property market. Until the dust settles on these fronts, a region-wide recovery will be unlikely.

Elsewhere, a 2024 recovery in activity and performance will largely be dictated by the pace of price discovery. Even before the Fed’s change of tune, the gap between buyer and seller expectations had been significant for many major markets across the globe, given the dramatic variation in the magnitude of price corrections across the globe. For some markets like US multifamily and UK industrial, sharp declines merely restored prices back to their longer-term growth trend. Only in a few cases have prices fallen below pre-pandemic levels, such as for US offices, Australia regional centres, and South Korea cold storage, each of which face their share of challenges.

The good news is that the brighter outlook should help to narrow the expectations gap. The bad news is that a brighter outlook is simply that – an outlook – and it could still be some months before interest rates actually fall. Until that happens, near-term investment trends point to investors targeting sectors with income growth and supply constraints. Interest in Asia Pacific’s alternatives sectors has remained remarkably resilient up to this point, in particular Asia Pacific’s living sectors and Tier 1 data centre markets. Even within the traditional asset classes, there are also specific markets that stand out, such as Seoul and Brisbane offices, as well as Singapore retail.

BENJAMIN CHOW

Head of Real Assets Research, Asia
MSCI

What are some key trends likely to shape outlook in 2024?

In 2024, the Asia Pacific real estate industry is undergoing significant transformations. Technology integration, including AI, big data, blockchain, cloud computing, and 5G, enhances efficiency and facilitates innovative business models. Sustainability becomes critical, with green buildings and practices like net-zero carbon emissions gaining traction. Urbanization dynamics shift post-pandemic preferences, leading to increased demand for flexible solutions such as co-living spaces in cities.

Demographic influences play a crucial role, as an aging population fuels demand in certain markets for senior housing, healthcare, and retirement facilities. Meanwhile, young and affluent consumers driving growth in co-living and experiential retail spaces.

Simultaneously, global finance faces challenges, with reduced liquidity and geopolitical tensions. Approximately $2.4 trillion (circa 177 billion in APAC) of real estate loans globally will mature over the next few years posing some serious financial challenges. We will notice some favoring new loan origination, private credit opportunities in distressed sectors, and strategic exploitation of opportunities in residential, logistics, data center sectors and some other niche asset classes such as student housing, self-storage, life sciences, senior housing, affordable housing etc.

PRAKASH KHAREL

Head of Real Assets Product – APAC
Apex Group Ltd

What are some key trends likely to shape outlook in 2024?

The outlook for real estate private funds in APAC stands at the crossroads of promising opportunities and dynamic challenges, marked by a resurgence in investor confidence and a market rebound. The region, encompassing diverse markets such as China, India, Australia, Japan, Hong Kong, South Korea and Southeast Asia, is positioned for growth as economic conditions stabilize and opportunities emerge. These markets offer a spectrum of opportunities across residential, commercial and industrial sectors.

One key trend shaping the landscape is the increasing emphasis on diversification and sustainable investments. Investors are seeking a balanced portfolio that not only delivers financial returns but also aligns with environmental, social and governance (ESG) principles. This is driving fund managers to explore innovative strategies that integrate ESG considerations into their investment decisions, reflecting a broader global trend toward responsible investing.

Regulatory dynamics are also playing a crucial role in shaping the strategies of real estate private funds. As governments implement measures to ensure market stability and protect investor interests, fund managers are adapting to evolving compliance requirements. Transparency is set to become a defining feature of successful real estate private funds. Investors are increasingly demanding clarity on fund performance, fees, and the environmental and social impact of their investments. Meeting these expectations will be key for fund managers looking to attract and retain investors in this competitive environment.

Technology remains a cornerstone of the industry’s evolution, and in 2024, PropTech innovations will shape the operational landscape of real estate private funds. From data analytics for informed decision-making to artificial intelligence-driven asset management, technology is enabling greater efficiency and risk mitigation.

In summary, the 2024 outlook for real estate private funds in APAC is characterized by a confluence of factors – increased investor confidence, strategic diversification, adherence to ESG principles, regulatory adjustments, and technological advancements. Fund managers navigating this landscape with agility and foresight are likely to capitalize on emerging opportunities, contributing to the continued growth and resilience of the real estate investment sector.

NEIL SYNNOTT

Chief Commercial Officer, APAC
IQ-EQ

What are some key trends likely to shape outlook in 2024?

Market Sentiment Drivers:
The REIT market in 2024 is likely to be influenced by bullish sentiment driven by declining bond yields due to disinflation and potential defensive posturing in the face of an economic slowdown. The drop in forward swap rates introduces uncertainty regarding the timing of DPU growth depending on hedging strategy for managing interest rate risk, extending projections into late 2024 and beyond.

The choice of the data center and industrial sectors reflects a strategy of risk mitigation, as these segments have shown stability, and a growth-focused approach, capitalizing on the increasing demand for Artificial Intelligence and modern warehouses with a tight market. Additionally, targeted acquisitions within these sectors could further enhance the overall portfolio resilience and strategic positioning.

Transaction Activity:
A resurgence in acquisitions and equity raising is anticipated in the REIT landscape in 2024 after a dip in activity throughout 2023, driven by the potential for lower financing costs. Certain REITs may reach levels triggering acquisitions with equity raising or mergers and acquisitions, indicative of dynamic growth and consolidation strategies. These strategic moves reflect a proactive response to presenting opportunities for REITs to enhance their portfolios.

Persistent concerns revolve around potential cap rate expansion in terms of portfolio valuation, particularly for office sectors, despite an overall drop in interest rates. Therefore, REITs with high gearing continue to be expected to engage in asset recycling, indicating strategic adjustments to optimize portfolio performance.

JUNNOSUKE SHINKAWA

Chief Analyst
Sumitomo Mitsui DS Asset Management (Singapore)

How will you configure your portfolio’s exposure to APAC and the rest of the world in 2024?

Which countries and sectors are you targeting in APAC?

In Asia Pacific, KKR benefits from adopting a pan-regional investment strategy, including in real estate, which allows us to pivot to where we see opportunities. At this point, real estate cycles are unsynchronized globally, and we see divergent cycles in Asia Pacific. Across the region, real estate cycles have been relatively stable, especially compared to the US and Europe, which will help to add some balance to any global real estate portfolio.

From a macro perspective, we continue to be confident in Japan and Korea, and for different reasons:

• As Japan exits deflation, we are seeing rents rise and companies invest behind their businesses for the first time in two decades. Despite exiting deflation, policy rates have remained close to zero, and we expect the departure from a negative interest rate policy to translate an interest rate that is marginally below zero percent to one that is marginally above zero percent. With the Bank of Japan targeting two-percent inflation, Japan is likely to continue seeing negative real rates, unlike the US and Europe.
• In Korea, we continue to be attracted to the office sector with its favorable demand-supply dynamics. Unlike the US and Europe, vacancy rates have stayed at all-time lows, and the high interest rates have continued to restrict supply.
• We also see extremely tight markets in the residential sector generally across Asia, apart from China. Continued urbanization and strong population growth coupled with lack of construction through the pandemic and post pandemic, have resulted in tight housing markets across the region.

Thematically, we continue to like digitalization, logistics, and hospitality, even though cap rates have tightened in some countries. Ultimately, the underlying theme of a growing middle-income and upper middle-income population and urbanization continues to drive digital and spending trends supporting demand for datacenters, e-commerce and tourism.

FRANCES LIM

Managing Director & Head of Asia Pacific Macro
KKR

How will you configure your portfolio’s exposure to APAC and the rest of the world in 2024?

Which countries and sectors are you targeting in APAC?

2024 will present opportunities to secure assets that have been repriced or may have come to market at short notice. Moderate to low leverage strategies will have an advantage in an environment where interest expense remains high. In the first half of 2024, we target repriced opportunities in Australia industrial/logistics and non-discretionary retail, newly-constructed Japan multifamily and high quality industrial/logistics, stabilized industrial/logistics in Singapore as well as selective prime Korean office. We believe these sectors offer a good balance of income security, demand fundamentals, diversification as well as potential capital appreciation over the mid to long-term. We like opportunities that align with multi-year growth themes such as life science/healthcare, robust Asia Pacific consumer demand as well as the underserved living sector.

JASON LEE

Chief Investment Officer, Senior Portfolio Manager,
Head of Private Equity Asia
AEW

What are the themes that you find appealing and relevant to your overarching strategy in 2024?

Heading into the new year, investors are assessing the attractiveness of the region’s real estate sector between interest rates, market location, asset quality, economic growth, supply and demand factors. A bias towards cashflow stability and strong balance sheet credentials this year should help investors to minimise negative surprises.

All eyes are on the timing of the Federal Reserve’s first rate cut and whether base rates may eventually fall by around 75bps. The outlook for listed real estate will be impacted by market participant sentiment for the sector in general. With interest rates likely to peak out, listed real estate could draw more investor demand than in prior years.

For Hong Kong, listed real estate stocks could be seen as a bargain for long-term investors given their implied pricing and generally low leverage levels. The focus will be on factors that could trigger investor sentiment to shift toward recognising the deeper value that such stocks could eventually realise.

Over the coming months, investors will be closely tracking economic growth in Mainland China and the restructuring of the indebted property market. These headwinds can hopefully be managed without impacting Hong Kong’s banking sector given its deep connectivity with onshore markets.

In East Asia, Japan’s property market will be tested by the potential end of the Bank of Japan’s negative interest rate policy. This would herald the end of a prolonged cap rate compression cycle while investment demand from overseas buyers has become more muted in recent months. Expectations also remain limited around the potential upside for listed real estate stocks following the overhaul of the Nippon Individual Savings Account.

In Australia, REITs will remain yield sensitive which will give direction to transactions, housing demand and cap rate movements whereby growth in select real estate niches is feasible. We see the Singaporean REIT market as a beneficiary of a lower yield environment as yield hunters return to the sector.

More broadly, the Indian real estate bull rally could extend into 2024 should housing demand remain strong. Market participants should be watching for positive spill over to other emerging markets like the Philippines.

DR. DANIEL FELDMANN

Senior Portfolio Manager, Real Estate, Asia Pacific
APG Asset Management

What are the themes that you find appealing and relevant to your overarching strategy in 2024?

Looking ahead at 2024, three structural shifts that are particularly important are:

1. The growing demand for logistics space: Pandemic has accelerated the growth of e-commerce, with consumer habits changing for good. We also observe rise in demand from friend-shoring/nearshoring, as companies look to move their supply chains closer to their production facilities. Although the 6-months rolling trend shows some slight decline due to softening economy, with few empty sheds available to be leased, and reduced supply underway, rents continue to grow and vacancy remains in the low 3% across Europe and 2.4% across the markets where we have presence in.
2. Flight to quality in the office space: The shift to hybrid working arrangement means people are more discerning in their working environment; they need a good reason to go to the office, and thus companies are now driven to provide office space that has modern amenities as well as sustainability features and high energy efficiency. Net zero carbon building demand outstrips supply by 3 to 1 according to a recent report by JLL. Current construction levels are not keeping up with the demand, so a potential supply gap is likely to be more pronounced from 2024. Market data for the office sector shows that most occupiers are focused only on the best quality space which is undersupplied, so polarisation between prime and secondary is accelerating. We see this impact in the markets where we have presence in, with overall market vacancy remaining at 8.8%, same as a quarter ago, versus the 30 bps fall in grade A vacancy to current 2.3% levels.
3. Higher interest rate, for longer than previously expected: The increase in interest rate has been unprecedented in its pace, and now people are settling into realisation that instead of going down, interest rate might need to stay elevated for longer due to many structural changes in the global economy. With European credit markets currently implying a 100-basis point rate cut by the ECB next year, we believe we are close to an inflection point for listed REITs. We remain focused on keeping gearing low to fund developments and protect balance sheet to ensure investor confidence and be ready to take advantage of the cycle upturn.

SIMON GARING

Chief Executive Officer and Executive Director
Cromwell EREIT Management

What are the themes that you find appealing and relevant to your overarching strategy in 2024?

Stay active, return to stability. We investors are increasingly favoring stability over speculative gains, seeking assets resilient to market volatility. Real estate, especially for industrial parks, logistics and warehousing, and affordable rental house, becomes a focal point for those navigating uncertain economic terrain. The emphasis is on properties with intrinsic value, steady cash flows, and the potential for long-term appreciation. As the economic landscape evolves, the trend towards well-grounded real estate investments reflects a strategic shift.

Extra emphasis on green building. The trend of green building in China is gaining momentum. With a heightened awareness of environmental sustainability, the construction industry is embracing eco-friendly practices. From energy-efficient designs to the use of sustainable materials, Chinese developers are prioritizing green initiatives. Government policies promoting eco-conscious construction further drive this shift. This trend reflects a collective commitment to sustainable development, positioning China at the forefront of the global movement towards more environmentally responsible and energy-efficient construction practices.

Aligned with the strategy of prioritizing stability in real estate investment amid economic fluctuations, SCGC Realty Capital has a belief in the potential to further explore cross-border collaboration with overseas capital. By emphasizing the stability and long-term growth potential of Chinese real estate assets, there is an opportunity to rekindle interest and foster increased investment from overseas sources, contributing to the continued development and sustainability of China’s real estate market.

KONG LINGYI

Managing Director and CIO
SCGC Realty Capital

What are the themes that you find appealing and relevant to your overarching strategy in 2024?

For me, the primary focus is on gaining stability and confidence, mastering the new directions of industrial sectors, and the warming of the transaction market are our concerns and expectations. After facing the challenges of 2023, we hope to have a more stable core and new breakthroughs in the coming year.

In terms of innovation, we have already felt the significant impact of advancements in artificial intelligence on our lives in 2023. We look forward to these breakthroughs being further integrated into the upgrade and management of our business in 2024. On another note, we hope that more scientific digital research will better assist us in making sound decisions and fostering innovation.

Moreover, sustainable development continues to be a key focus for our company and business. In the new year, we will continue to explore more opportunities for advancement in green and low-carbon practices within the commercial real estate sector, hoping to influence more people to join this noble endeavor.

ANGEL TANG

Deputy General Manager
China Overseas Commercial Properties CO., Ltd.

How can investors leverage on private credit opportunities or new asset classes in APAC?

CBRE believes investors should look into private credit strategies as 2024 will be a vintage for investors to deploy capital into this space.

Private credit exposure normally involves direct investment in debt secured by real estate or issued to companies that focus on real estate in the private market. During the rising interest rate environment, banks become selective when it comes to lending criteria, especially to development projects. Although distressed are yet to be seen in Asia Pacific, a debt funding gap of around US$6 billion is expected to emerge in the coming 2 years. By funding gap, we refer to the difference between the original debt amount of an investment and the amount available for refinancing when the loan matures.

Fund raising in credit strategies continue to soar as there is increasing demand for bridge and development loans in the region. Attractive returns may be found through credit solutions in strong markets like Australia and Korea, as well as restructurings in the resistant Chinese residential sector.

As financing costs remain elevated, investors anticipate further cap rate expansion across nearly all markets and sectors in Asia Pacific over the next six months. The slow repricing also prompts investors to explore alternative or niche sectors offering higher yields, with real estate debt gaining the most traction. For more investment strategies, click here to read our 2023 Asia Pacific Four Quadrants Report.

DR. HENRY CHIN

Global Head of Investor Thought Leadership & Head of Research, Asia Pacific
CBRE

How can investors leverage on private credit opportunities or new asset classes in APAC?

Capital raising, manager intent and deployment in the Asia Pacific private credit arena is now at a high. We are at a confluence where non-bank finance has been steadily creeping into the global consciousness with the prevailing markets of today where investors are struggling to make equity returns in real estate stack up.

Private credit may be attractively priced today, but very quickly with the weight of capital it may become fairly and potentially overpriced and what do investors do then? As this elevated window could be relatively short-lived, I’d be going to ask if I can continue to get scale with my partner – “lots of little cheques”, and short duration credit cycles would impact returns and multiples and may well require a lot of management time. I’m all for new relationships, but as the markets revert to a more favorable entry point for equity can that same partner or manager be with me for that journey?

In an environment whereby investors are cautious on taking equity risks and asset owners are looking to deleverage, quasi-equity or quasi-debt structures can provide investors with downside protection and equity upside potential, thereby bridging pricing gaps and delivering higher risk-adjusted returns.

This complexity across projects, changing asset capital stacks, and increased disintermediation of available debt capital, fueled by the growth of private credit, highlight the increasing need and relevance of quality advice to help design appropriately structured financing solutions. We are seeing through the Cushman & Wakefield APAC platform that there are clear performance return benefits for clients who are leveraging quality advice in structuring, sourcing, and executing these debt strategies across asset types.

GORDON MARSDEN

Head of Capital Markets, Asia Pacific
Cushman & Wakefield

How can investors leverage on private credit opportunities or new asset classes in APAC?

Global economic uncertainty and high interest rates will continue to weigh on investment activities through 2024, and conditions will likely improve towards the end of the year, where we expect rates to decline, but remain higher than history. Consequently, Asia-Pacific investment volume will unlikely rebound until some sort of stabilisation in rates is achieved and bid-ask spreads narrow.

Real estate investors in the Asia-Pacific region continue to possess substantial equity and are demonstrating increased flexibility in their investment approaches. Those who can adapt quickly have successfully broadened their investment strategies. They are now focusing on growth sectors and geographical areas within the real estate market, including living sectors and new economy assets.

As traditional lenders turn restrictive in an uncertain global economy, financing gaps emerging in the higher-for-longer environment has created favourable conditions for the region’s private credit market to grow. The expansion of private credit opportunities – among the four quadrants of real estate investing – will further develop real estate capital markets in the region. Further, regional diversification will remain a fundamental strategy for Asia-Pacific investors. Long-term fundamental growth engines will prolong resilience for the diverse Asia-Pacific region.

CHRISTINE LI

Head of Research, Asia Pacific
Knight Frank

How can investors leverage on private credit opportunities or new asset classes in APAC?

In Japan, new asset classes have been the topic of conversation of recent. As the title suggests, these nascent asset classes have yet to amess large market share, hence I feel they lend themselves better to qualitative analysis.

JLL was involved in some of the landmark new asset classes transactions in Japan in 2023, including the sale of a pharmaceutical laboratory building in Nagoya and a conversion of a large office building in Kanagawa into a Life Science/R&D campus. Additionally, we assisted in the sale of Ichigo’s Self Storage platform, Storage PLUS, and a large student housing property in Kansai. We were also involved in various transactions related to Data Center development land. Based on our involvement in these transactions and many conversations with investors, the following observations can be made:

• In contrast to other countries where the drive behind investments in new asset classes seems defensive in nature (Life Science/R&D requires people at the office/lab, self-storage is counter cyclical, Student housing is recession proof etc.), in Japan investments are driven by a search for higher yields.
• There are stark differences in demand drivers and tenants’ needs between Japan and other countries. Consequently, directly importing concepts from other markets may not be effective.
• The Japanese new asset classes market is in its infancy stage and as such:
  • Many of the opportunities lies in development and not in acquiring existing properties.
  • Vendors who develop domain expertise will have a first-mover advantage.
  • As these markets mature and more institutional capital flows into the space, we can expect risk premiums to compress.

* Please note that the opinions expressed here are my own and do not represent the official views of JLL.

SHAI GREENBERG

Senior Director, Co-lead – International, Japan Capital Markets
JLL

How can investors leverage on private credit opportunities or new asset classes in APAC?

A calmer interest rate environment has the potential to drive capital investments into real estate sector across the APAC region. Private credit deployment from both institutional as well as UHNI investor in established & growth markets within the APAC region is likely to remain active throughout 2024. With relatively strong return to office mandates across the APAC office market, especially India, the segment will constitute the bulk of real estate investments in 2024. Emerging core & non-core segments including warehousing, logistics and data centres will witness higher growth in investments led by positive regional economic growth and strong demand.

Notwithstanding fresh geopolitical tensions or emergence of newer strains of the virus, investments in retail and hospitality segments are also anticipated to be on the upswing. Moreover, there is an expanding acceptance that ESG is a key strategic element underlying investment decision-making for investors. Private credit opportunities will also increasingly conflate ESG synergies and critically evaluate impact of disruptive weather patterns across the globe.

Badal Yagnik

Chief Executive Officer
Colliers India

What are the themes that you find appealing and relevant to your overarching strategy in 2024?

Indian real estate sector offers a slew of opportunities for investors – be it in warehousing, commercial real estate or be it in lending to developers engaged in residential real estate.

A strong revival of the Indian manufacturing sector led by Make in India and PLI schemes, consumption boom and growth in third party logistics has created a large demand for warehousing spaces. Within the same, there is considerable interest in warehousing in Tier – II and III cities across India.

Commercial real estate is another lucrative sector which is coming out of a sluggish phase, as IT companies are increasingly pushing for greater attendance in offices – leading to increased demand for offices. Additionally, the Indian offices segment was historically very dependent on IT/ITES, which was a risk factor. However, the sector is now broader based with manufacturing and co-working spaces also driving demand.

Private credit in residential real estate has tapered down as state owned banks have turned more supportive, and developers are increasingly selling in greater velocities at project launch. This is driven by a favourable demand environment even as developers remain averse to debt given the unpleasant experience with leverage in the past decade. However, we believe that the risk aversion is a temporary phase. As developers gain confidence and seek to capitalise on growth opportunities presented by the sector, demand for private credit will increase again. This segment offers opportunities to deploy large sums of capital at healthy returns, and hence remains attractive in the longer run.

SHOBHIT AGARWAL

MD & CEO
ANAROCK Capital Advisors