Wed. Jun 12th, 2024

The decline in commercial property transactions from Singapore to South Korea reflects the cautious approach of investors towards office buildings, retail malls, and other commercial assets. The hesitancy stems from concerns over potential future interest rate hikes and the existing geopolitical uncertainties that might jeopardise worldwide economic growth.

JLL, a prominent player in the commercial real estate and investment management sector, published data in November revealing a substantial 22% decrease in commercial real estate investment activity in the Asia-Pacific region for the period from July to September. The decline in this fall’s quarterly total, which is the lowest since the second quarter of 2010, indicates a substantial shift in market sentiment.

Market data source MSCI Real Assets has documented a significant decline of 37% in commercial real estate transactions in the Asia-Pacific area, as compared to the same period in 2022. Due to waning interest from global investors, this loss signifies the sixth consecutive quarter of year-on-year decreases in these transactions, resulting in the Asia-Pacific acquisitions reaching record lows of 6%.

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Regarding this decrease, Benjamin Chow, MSCI’s head of research for Asia real assets, said that the notion of persistently elevated interest rates, which has just developed, has extinguished any expectations of a rapid rebound. According to him, price discovery in the Asia-Pacific region has been slower compared to other parts of the world. The key industries in the region have had significant corrections due to the gloomy outlook for the third quarter, leading to a change in pricing expectations.

Real estate transactions for commercial buildings and portfolios with varying value criteria have seen a deceleration, as shown by statistics from both JLL and MSCI. Metro, a Singapore-based real estate investment business, has just announced the acquisition of a 20% stake in VisionCrest Commercial, a prominent commercial skyscraper situated on Orchard Road in Singapore.

This development serves as additional validation of the aforementioned perspective. Winston Choo, the Chairman of Metro, emphasised the defensive nature of this acquisition, despite the attractiveness of the 11-story building. He said that in the face of challenging economic conditions, it is crucial for Metro to maintain a diverse and high-quality portfolio in industries that are robust.

In October, CBRE, a well-known U.S. commercial property services organisation, conducted a study of prominent brokers and appraisers throughout the Asia-Pacific regions. Based on the results, just 12% of participants believed that investment activity had risen compared to the previous year.

In contrast, a previous survey conducted in April revealed that 73% of real estate investors anticipated an increase in transactions in 2023. Henry Chin, the director of research for CBRE’s Asia-Pacific region, predicts that a revival in investment activity is unlikely to occur until mid-2024, despite some positive signs in certain nations.

Investors now exhibit a risk-averse mindset and have little expectations of interest rate cuts in the near future. In most Asia-Pacific economies, this combination is compelling investors to divest assets rather than acquire new ones. South Korea had a reduction of 35% in transactions during the third quarter of this year, amounting to $4.2 billion.

This decrease may be attributed to the cautious approach of local institutional investors towards core office buildings. In Singapore, the volume of investments in commercial real estate decreased by 11% compared to the previous year, amounting to $2 billion. This decline may be attributed to the prevailing economic uncertainty, which affected premium office rents and tenant demand.

Pamela Ambler, the director of investor intelligence at JLL for the Asia-Pacific region, said that the elevated cost of debt, namely the increased interest rates, would diminish risk-adjusted returns for some investors, making it more difficult for them to evaluate and approve investment opportunities. She said that the economic downturn, characterised by a decrease in global demand and a decline in China’s economy, as well as its impact on other trade partners, would discourage investors from investing in real estate to some degree.

Despite these challenges, there are certain encouraging features of the sector. CBRE’s Chin said that India is now seeing increased purchasing aspirations, while Japan’s cheap interest rate continues to attract foreign money. JLL’s Ambler shares a similar viewpoint, highlighting the substantial impact of the derisking movement on the South Asian economy.

This trend has effectively reduced global investors’ reliance on China, enabling the establishment of strong supply networks across the region. India’s robust economic fundamentals are attracting foreign investments for various initiatives, such as the development of offices, industries, and infrastructure. Japan’s real estate market benefits from its low interest rate environment, since it provides opportunities for currency hedging and attracts overseas investors.

According to a research issued in November by MSCI Real Assets, Japan dominated the Asia-Pacific commercial real estate market over the first nine months of the year. Both the transaction count and volume corroborated this fact. The overall value of industrial acquisitions in the third quarter reached $1.9 billion, resulting in a cumulative investment of $6 billion for the year so far. This is the highest amount recorded in the nine months since MSCI began collecting data in 2007.

The successful quarter of the nation was notably bolstered by the sale of a 50% stake in an office complex by Brookfield India Real Estate Trust to Singapore sovereign wealth fund GIC for $683 million. Significantly, the investment volume in the South Asian market during the third quarter of this year exceeded the average volume for the same time in the five years before the COVID-19 pandemic.

Portfolio administration Colliers predicts a gradual increase in commercial real estate transactions in the Asia-Pacific area during the next year. Forecasts indicate that 2024 will seem more favourable than 2023 due to the diminishing gaps between buyers and sellers, and the increasing number of investors seeking to allocate funds.

“The upcoming year appears to be more promising than 2023, as there is a significant amount of accumulated equity that is seeking investment opportunities,” said Chris Pilgrim, the managing director of Colliers’ global capital markets for the Asia-Pacific area. Pilgrim underscores the need of diversification across the majority of Asian economies owing to the abundance of accessible money.

Overall, the Asia-Pacific commercial real estate market has challenges, although many segments remain robust and positive as a result of specific market dynamics, fundamental economic principles, and global trends. These indicators indicate potential investment opportunities in the next year.

 

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