Capital Markets

Knight Frank’s Asia-Pacific Horizon: Look Beyond the Norm report uncovers emerging investment momentum and identifies top investment destinations, with private capital playing a crucial role.

Key highlights:

• Major trends driving real estate investments in APAC
• Projected impact of rate cuts on investments
• Deal flows in APAC signal recovery in H224
• 2024 is a great vintage for offices in Australia and Hong Kong
• Spotlight on Australia, Japan, Singapore, South Korea and Hong Kong SAR
• A return to inflation fires up Japanese real estate

The US Central Bank has lowered interest rates by half a percent for the first time in four years. Some markets across the Asia Pacific region have followed suit or are planning to do so in the coming quarter.

In Q3 2024, the office sector experienced the most movements in cap rates in the region, with 8 out of 18 cities covered in this report reporting changes.

Key Highlights in Q3 2024 

Office sector

• Australia has experienced an uptick in transaction activity, indicating a potential softening of yields.
• In Bangkok, the office sector has seen stable cap rates quarter over quarter. However, the growing supply of Grade A developments, coupled with limited new market entrants, may exert downward pressure on occupancy levels in the near term.
• Major cities in China, including Beijing and Shanghai experiencing a surge of new supply entering the market, which is putting pressure on rents and occupancy rates. The lack of substantial en bloc deals, often key indicators of market confidence, reinforces a prevailing sense of cautious among sentiment.
• Hong Kong’s high vacancy rates are presenting challenges for the office leasing market, leading to a decline in Grade A office rents and capital values. Cap rates have slightly decompressed, with investors remaining cautious regarding office assets.
• In India, technology occupiers are actively driving investment from both institutional and individual investors, significantly increasing capital flow into the office sector. Bengaluru recorded historic absorption in the past quarter, contributing to rental growth.
• Seoul is expected to remain a landlord-favored market due to limited supply despite, despite a slowdown in leasing activity.
• Prime office values should continue to be supported by healthy rents and lower interest rates, highlighting the stability of asset prices in Singapore.

Retail sector

• Retail spending in Auckland has stabilised and is expected to recover, supported by cuts to both interest and taxation rates.
• In Bangkok, the retail market remains stable, with both rent and occupancy rates unchanged and likely to stay consistent through the end of the year.
• Bengaluru’s organised retail segment has seen limited transactions driven by institutional capital, resulting in stable cap rates. There is a noticeable increase in demand for high street retail space within the city.
• In Hong Kong, high street shop rents beginning to show signs of recovery as tourism picks up at a faster pace, although local consumers’ outbound spending has somewhat restrained the rebound in retail sales. The cap rate has expanded as rental growth increases from a low base, with select retail asset sales during the quarter offering attractive yields for investors.
• Metro Manila is witnessing numerous renovations and expansions of malls, contributing to a rise in retail vacancy rates from 15% in 2023 to 17% in 2024. Rents remain stable and property values are expected to follow suit.
• Leasing activity in Grade A malls in Mumbai has remained robust, as retailers anticipated a boost in average transaction duration (ATD) during the upcoming festive season. Despite the increased supply in the city and limited capital chasing deals in this asset class, cap rates are expected to remain within the current range.

Industrial sector

• Cap rates for the industrial sector in Auckland are stabilising after a lengthy easing cycle. Development activity has slowed, which is expected to limit the increase in vacancy rates observed throughout 2024.
• In Bengaluru, investor sentiment in the industrial asset class has remained largely unchanged, reflected in the stability of the cap rate across the overall market.
• Hong Kong has experienced low transactions volumes; however, investment activity surged quarter-over-quarter due to a notable high-quality logistics transaction in Q3 – the LiFung Centre.
• In Jakarta, industrial demand is primarily driven by the automotive sector, data centers, and modern warehouses catering to E-commerce, Fast-moving consumer goods (FMCG) and logistics. This growth has been consistent with minimal variation.
• Seoul’s industrial investment activity has improved, alleviating concerns about oversupply in the market.

While activity remains limited in Australia amid delayed rate cuts, some buyers are returning to the retail sector now that pricing has been reset. The hospitality and living sectors are also attracting interest. H2 2024 will be the optimal buying window as some sellers expect the rate cute cycle to arrive by year’s end.

In Hong Kong SAR, the relaxation of LTV ratios for commercial real estate investment has improved sellers’ confidence and liquidity, leading to fewer discounted and distressed opportunities. More investors are looking at niche sectors such as student housing and data centres as the office market remains under repricing pressure.

Investment volume in Japan was supported by J-REITs and domestic property firms in Q1 2024. However, activity by foreign buyers weakened amid high interest rates globally. Interest in prime offices and hotels remains strong but investors are becoming more selective towards the residential sector.

Korea continues to see improved market sentiment on the back of easing lending rates. Positive carry is expected to occur by the end of 2024 as yields continue to expand and the cost of finance trends down.

This report was originally published in https://www.cbre.com/insights/figures/asia-pacific-investment-trends-q1-2024

Office: A rise in site inspections and enquiries failed to translate to an increase in leasing activity in Q1 2024 due to occupiers’ cost cautious stance and the first quarter historically being a quiet period for transactions. Occupiers are likely to retain a cautious attitude towards spending and location selection in the near term.

Retail: Leasing was dominated by expansion, with upgrading and relocation also picking up. Demand was led by the luxury and F&B sectors. Although retailers continue to be location sensitive, markets with tight availability are seeing demand spill over to secondary areas.

Logistics: Demand moderated this quarter during what is a traditionally quiet period for transactions. Leasing activity was constricted by stricter capital expenditure controls due to moderating sales growth. 3PL occupiers continued to display steady demand, supported by cost optimisation and outsourcing.

Investment: Asia Pacific commercial real estate investment volume fell by 4% q-o-q to US$24 billion, primarily due to a decrease in industrial investment. Delays to much anticipated interest rate cuts prompted investors to stay on the sidelines, with most buyers opting to wait for additional repricing opportunities as the negative carry situation persists.

This report was originally published in https://www.cbre.com/insights/figures/asia-pacific-figures-q1-2024

Out of the 19 markets covered in this Asia Pacific report, 11 experienced movements in cap rates in Q1 2024.

The Asian market remains stable, without any factors driving movements in cap rates. Australia and New Zealand have driven the changes in the region, with an increase in cap rates in all the surveyed cities, particularly in the office and industrial sectors.

Key Highlights in Q1 2024

Office sector

• In Australia, after a 72% decrease in transaction volumes in 2023, the first quarter of 2024 has seen only a limited number of completed sales. Sales to date over Q1-24 have continued to indicate a softening of cap rates.
• Bangkok’s office sector has experienced a slight increase in cap rates following a rise in select prime rental rates, despite limited movement in sales transactions.
• Beijing’s office has seen a noticeable decline in demand, resulting in a city-wide vacancy rate reaching double-digit year-on-year growth, currently at 20.7%. The en bloc transaction is currently driven by end-user-occupiers who prioritize suitability and affordability over vacancy and rental performance of the property. Investors remain cautious due to concerns about oversupply and declining rent, resulting in higher expectation for cap rates.
• Additional office supply in Jakarta is expected to enter the non-CBD areas, as many corporates are optimising existing office space instead of expanding or relocating. This is due to the adoption of a hybrid working model, which continues to put pressure on the rental rates and occupancy in CBD office spaces.
• Shanghai’s Grade A office market is still struggling to attract leasing demand, leading to downward pressure on rent. The upcoming supply peak in 2024 is likely to further increase pressure on the leasing market, influencing investor’s confidence and driving up cap rates.

Retail sector

• The Beijing retail sector has demonstrated stability and witnessed growth. This positive performance can be attributed to increased foot traffic and rising revenue in shopping malls, particularly during the Chinese New Year (CNY) holiday period in Q1. Shopping malls will need to remain at the forefront with distinctive features to attract consumers to achieve sustainability in the marketplace.
• Hong Kong’s retail investment sector has been primarily driven by end-users and local investors, with cap rate remaining stable. Rental performance has generally remained healthy. Investors are still cautious about purchasing retail assets, being mindful of the vacancy rate.
• The number of visitors to malls in Jakarta has grown by 15% to 20% compared to last year. Some existing brands are expanding their operations, and new brands have also entered the Indonesian market. Investors still remain cautions due to high competition from new malls entering the market.
• Shanghai’s retail sector has also benefited from the robust tourism industry during the CNY holiday. Overall, sales and leasing demand performed well in Q1. The reflection of retail leasing activities and space uptake takes time to manifest in the investment market, resulting in largely flat cap rates during this quarter.

Industrial sector

• Bangkok industrial saw upward movements in sales transactions for warehouse facilities and standard factory buildings. This was caused by strong foreign direct investment intended for large scale users of automotive supply parts (including electronic vehicles) as well as electronics. On the other hand, the rental market remained the same, with no major rental movements noticed.
• Beijing’s industrial sector is currently influenced by end-user. Neighbouring cities such as Tianjing and Langfang have witnessed a decline in rental rates and an upturn in occupancy, which has had an adverse impact on the capital city’s industrial market. The intensified competition among cities to attract tenants has driven demand to shift away from the gateway cities and further weakened investor confidence in the industrial sector.
• The industrial market in Hong Kong remains a high priority for many investors. Import (9.7%) and export (16.6%) figures were positive in the first two months of 2024, which helped keep the industrial market cap rate stable.
• Stressed by the massive new logistics supply in Shanghai, investor prospectus continued to weaken in Q1, resulting in more cautious investment sentiment and higher industrial cap rates.

CBRE professionals in Asia Pacific note that the timing for a recovery in investment activity has been pushed back amid limited risk appetite and delays to interest rate cuts. Nearly 70% of respondents expect a recovery from Q4 2024 onwards.

Cap rate expansion is expected across most markets in Asia Pacific, with cap rates in Australia to expand further, while Japan will remain stable. More pronounced expansions are expected in secondary assets over the next six months.

Other key highlights from the survey include:

• Investors remain net sellers – particularly real estate funds, property companies and banks – but pressure is easing. Meanwhile, private investors continue to have strong net buying intentions.
• The price gap between buyers and sellers is also narrowing across sectors, indicating stronger support for deal closure.
• The survey reveals that in terms of investor preferences, flight-to-quality demand remains, while hotel and multifamily assets are gaining traction on cyclical and structural tailwinds.

CBRE believes that with interest rates having peaked in most Asia Pacific economies, investors should aim to complete acquisitions before rate cuts commence, with the optimal buying window expected to open in the second half of 2024.

This report was originally published in https://www.cbre.com/insights/figures/q1-2024-asia-pacific-cap-rate-survey

Q1 2024 Singapore Figures report provides the latest commentary and data on net absorption, rents, vacancy, supply and other key metrics in Singapore’s office, business parks, retail, residential and industrial markets, along with an analysis of real estate investment activity.

Office: Low vacancies, limited supply and flight to quality continued to drive office rental growth. Net absorption was relatively flat in Q1 with no fresh supply.

Business Parks: Overall demand for business parks remained cautious. Shadow space increased due to consolidations within the banking and financial sector.

Retail: The Orchard Road and City Hall/ Marina Centre submarkets continued to outperform in Q1 2024. As such, prime islandwide retail rents sustained its recovery, rising by 1.0% q-o-q.

Residential: New home sales remained muted in Q1 2024 despite a pickup in launches. Private home prices extended their increase but the pace of growth moderated.

Industrial: Given limited options for occupiers seeking prime logistics facilities in the near term, rental performance is still expected to be steady in 2024.

Investment: Preliminary real estate investment volumes in Singapore for Q1 2024 fell 23.4% q-o-q (down 30.9% y-o-y) to $4.372 bn, mainly on a decline in public land sales.

This report was originally published in https://www.cbre.com.sg/insights/figures/singapore-figures-q1-2024

Asia Pacific has emerged as a dominant source and destination for global capital. Singapore, Hong Kong, China and Japan were among the top ten sources of global cross border capital in H2 2023. Notably, Singapore and Hong Kong were the second and thirds biggest sources of global cross border capital respectively.

Japan, China, Australia and Singapore were among the top ten destinations for global cross border capital in H2 2023.

Asia Pacific performed best in 2023, with investment volumes reaching 91% of their 10-year average. While North America reached 68%, the Europe, Middle East and Africa (EMEA) region reached just over half (52%) of its 10-year average. In 2023, global investment volumes were among the lowest since the global financial crisis with overall investment volumes at 75% of the 10-year average.

The region’s performance was backed by a significant pick-up in investment activities in Q4, primarily in December, signalling the region’s strong potential for recovery in the year ahead. Colliers’ global report highlighted that the forecasts for 2024 and 2025 present Asia Pacific’s strong growth story.

There are signs that interest rates have peaked in some markets in APAC with expectation on more market activities and a gradual recovery in 2024.

The APAC real estate sector was experiencing a low transaction environment in Q4 2023. Owners, investors, and occupiers remained cautious about real estate investments with a lot longer due diligent process. However, the signs of peak interest rate in some APAC markets are resulting a more positive sentiment towards investments in 2024.

Key Highlights in Q4 2023:

Office Sector

• Transaction volume continued to be low across all major Australian office markets. The sales that have begun to complete are predominantly secondary grade assets with value-add potential. These sales are primarily being undertaken by syndicates. These transactions require a significant amount of time to complete due diligence and raise the required capital. The further interest rate rise that occurred in November 2023 continues to put pressure on capitalisation rates. The number of assets being listed and subsequently withdrawn due to pricing disconnect between vendors and purchasers suggests that there is still further cap rate softening to come in 2024.
• The rental rates for office segment have increased slightly in some micro markets of Bengaluru. This improvement was attributed to the commencement of the Mass Rapid Transit System and the overall improvement in connectivity. However, property values have not moved in tandem due to low transaction volume. As a result, the cap rates on the higher end of the range have decreased.
• No en-bloc office sales were transacted in Jakarta last quarter. Office assets along with the new phase of the public light rail transit have triggered investor interest. A huge supply is expected to enter the market. Corporate users have started looking for newly built offices either acquiring the whole building or leasing more space for expansion purposes.
• Office demand in Manila remains lethargic and there is an increase in supply pressure with new office buildings coming onto the market.

Retail Sector

• Retail has been experiencing a consistently low transaction environment for Australia as the market recalibrates based on the increased interest rate environment. Consumer confidence appears to be falling, impacting non-discretionary spending. We expect further cap rate softening into Q1 and Q2 2024 as the price differences between vendor and purchases expectations continues.
• In Bangkok, there were no significant retail transactions in the past quarter to evidence value movements. Retail rents have increased following the opening of some premium malls in core locations, which has pushed the cap rates up slightly. However, the rise in rental value for those premium stock is still yet to be seen whether it will establish a continuing upward trend in the immediate term.
• In the fourth quarter, rental rates in prime areas in Beijing and Shanghai have shown improvements. This upturn can be attributed to the resurgence of consumer engagement in these areas. Despite the overall growth in total retail sales, it will take some time for rental rates to fully adjust and align with the improved consumption. Property owners and landlords are taking a cautious approach to rental growth, allowing adequate time for rents to align with evolving consumption patterns and market condition.
• The retail occupancy and rental performance in Hong Kong have generally remained healthy, thanks to robust domestic consumption. However, investors exhibit caution towards the retail sector due to its high vacancy rate.

Industrial Sector

• Australian industrial market drove the movement in the industrial sector in this survey. The current rental levels are expected to peak in 2024 as a result of tenants’ gross occupancy costs hitting their limit. Nonetheless, vacancy rates are still low across Western Sydney, prime industrial area, which should see rents hold at current levels throughout 2024. However, incentive levels are starting to creep upwards.
• The transactions concluded in Q4 have resulted similar cap rates as the last quarter in Jakarta. Major logistic players have been observed looking for land or joint venture partners.
• The industrial cap rates remained flat owing to stabilization of yields and asset values as sustained demand from the third party logistic (3PL) players, eCommerce and fast-moving consumer goods (FMCG) sectors is countered by new supply in Mumba

Asia Pacific Trends Q3 2023 features in-depth and up-to-date data and insights on the Office, Retail, Industrial & Logistics and Investment markets across the region. Key trends include:

Office:

• Leasing demand remains weak as occupiers stay cautious
• Mainland China, India and Tokyo account for bulk of activity
• Transactions take longer to close due to slow approvals
• Non-banking financial and tech firms drive demand
• Most markets set to remain in favour of tenants

Retail:

• Retail sales moderate but travel demand continues to provide strong tailwinds
• Retailers stay in expansion mode; Location remains key as demand focuses on prime locations
• Consumer demand for unique experiences drives leasing for non-traditional retail space
• Japan remains most upbeat market thanks to strong tourist inflows
• Leasing demand projected to remain robust in coming quarters

Industrial & Logistics:

• Slowing regional economy continues to weigh on leasing activity
• Strong demand from ecommerce platforms and stable activity from 3PLs
• Supply pipeline remains significant
• Investment volume holds steady in the first three quarters of the year
• Leasing and investment volume forecasted to soften

Investment:

• Sentiment remains weak despite slight uptick in investment volume
• Re-pricing continues to constrain purchasing activity
• Retail and hotel assets witness stronger deal flow
• Japan remains most upbeat market
• Investment to stay subdued amid high interest rate environment

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