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Storm Clouds Gather

Asia Pacific property markets face a number of battle fronts in 2023. The first is external to the region as the war in Ukraine combined with post-COVID supply chain disruption has fueled inflation causing central banks to raise rates and in doing so cool growth. This is nowhere more apparent than in the US and Europe, the final demand markets for Asia’s exports. The second is within the region itself and concerns its largest economy, China, which accounts for 53% of the region’s GDP and almost a third of all manufactured products. A low growth and, thanks to zero-COVID policies and a more assertive political direction, more isolated China, is depriving real estate capital of a universe of investment opportunities while funds flowing out of the Mainland have slowed to a trickle. The final battle front is longer term and structural and concerns how people work and shop and how new technologies are tearing down the old boundaries between asset classes while creating new ones in an orgy of creative destruction. Something familiar to markets globally.

A Silver Lining

Asia is not alone in facing a challenging 2023 of course, a sub-par year in terms of growth and some way from pre-COVID norms. However, measured against the yardstick of the global economy, and in particular the US and Europe, Asia’s strengths become apparent. While North America and Europe face recession in late 2022/early 2023, Asia Pacific will see modest growth in many jurisdictions, higher rates in some. Interest rates are also expected to rise more slowly as inflation fails to make the inroads it has elsewhere. Even geopolitical tensions are moderating thanks to the G20 Bali Summit. A raft of trade agreements, temporarily grounded by COVID, should also help accelerate the post-pandemic resurgence as supply chains mend and the region’s low-cost base reinforces its competitiveness. While ‘alternative asset classes’ are proliferating in the region, other disruptions such as flexible working and online retail are making fewer gains than elsewhere while large parts of Asia Pacific are still enjoying the luxury of catch-up growth, delivering outsized economic gains in, for example, Southeast Asia and parts of India.

Rays of Light

Looking ahead into 2023, it is unlikely that any of the three battle lines will be redrawn, but this doesn’t mean a dearth of opportunities, quite the opposite. In an inflationary environment Asia’s shorter lease lengths should prove appealing while ‘index-linked’ defensive sectors such as self-storage, student housing, multi-family housing and senior living should find an audience. The ‘New Economy’ remains as fresh as ever.

In Japan, low interest rates and a weak Yen will continue attracting overseas capital with logistics assets, and multi-family housing all being targeted while hotels should prove to be an actively traded asset class in 2023.

Singapore meanwhile is emerging as a ‘geopolitical safe space’ in the region, building its financial services base, attracting private family offices, and benefiting from the exodus of talent from Hong Kong. Vietnam continues to benefit from its dismantling of COVID restrictions and ‘China plus one’ and is expected to post enviable growth of 4% in 2023.

In Australia, Asia’s principal resource-driven economy, high yields, strong growth compared to major markets and a weaker Australian Dollar should attract offshore investors. Sectors to watch include logistics, core offices and a range of alternatives.

In China, as elsewhere in the region, life-sciences, data centres, logistics and cold chain investments have lost none of their allure as structural drivers remain compelling. Even with low inflation and low interest rates, debt burdened firms may deliver distressed assets, but pricing remains contentious.

And a look at 2023 wouldn’t be complete without mentioning ESG. Love it or hate it, it’s here to stay and expect to see growing ESG commitments, and more ESG initiatives as part of investment strategies across all asset classes.

This article was originally published in https://www.savills.co.jp/research_articles/167577/209583-0

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Economy

The moderate recovery of the Japanese economy is expected to continue in 2023, driven by consumer spending and corporate capital investment. However, with the output gap still negative, the Bank of Japan (BoJ) has made it clear that it will retain its loose monetary policy for the time being. If the economic recovery were to lead to a rise in corporate earnings as well as real wages, thereby maintaining moderate inflation, the likelihood of a shift to a tighter monetary policy would increase. However, the consensus is that such a move, were it to eventuate, would not occur until H2 2023 at the earliest.

Office

While relocations to higher grade office buildings were on the rise in 2022, downsizings and consolidations were still widely observed, leading to a general upward trend in vacancy rates. As an increasing number of companies favor the implementation of hybrid working schemes, tenants are likely to become more selective than before with respect to office specifications. With increases in supply forecast for most cities, market rents are likely to continue to fall.

Retail

The Ginza highstreet market will continue to be driven primarily by demand from luxury goods brands in 2023. While high street rents appear to have bottomed and maintaining the low levels, they should begin to rise once again in Q4 2022 and continue to slowly increase thereafter.

Logistics​

Unprecedented volumes of new supply is expected across Japan in 2023, due to the greater focus placed on logistics properties by developers. As a result, vacancy rates are expected to rise in all four metropolitan areas, despite continued robust tenant demand for logistics space.

Investment

Commercial real estate transaction volume in Japan for 2022 is expected to be slightly lower than the previous year’s level.  Nevertheless, expected yields have continued to decline, indicating that investor appetite remains stable. Some investors have become more selective amid overseas interest rate hikes and concerns over a possible recession in US and Europe.  However, the BoJ appears unlikely to tighten its monetary policy in the short term, and appetite for Japan real estate looks set to remain robust in 2023.

This report was originally published in https://www.cbre.com/insights/reports/japan-major-report-japan-market-outlook-2023

Although the pandemic has faded into the background, 2022 was still a tumultuous year highlighted by events such as the war in Ukraine, the subsequent energy crisis, and persistent inflation leading to interest rate hikes. A global recession is likely, but the Japanese economy looks to fare better due to its belated reopening. The majority of investors in Japan are still pursuing new investment opportunities, and 2023 will see more participants. The matured Japan market will welcome a more diversified pool of investors, which will give the market more liquidity and greater potential for growth.

This report was originally published in https://www.savills.co.jp/research_articles/167577/209392-0

Asia Pacific’s key office markets tell a story of resilience overall, with steady demand in some markets, surging supply in others – and some cities in India experiencing both surging demand and supply.

As has been the case since the start of the COVID-19 pandemic, the Asia Pacific office market continues to demonstrate its resilience. Fully 153 million square feet (msf) of office space has been absorbed across the region’s top 25 markets since the end of 2019, with 47msf of that occurring in the first nine months of 2022. Indeed, Asia Pacific continues to be the only region to record consecutive quarters of positive net absorption throughout the pandemic.

The broad outlook is for this to continue, though inevitably with nuance at the local level. Full-year office demand in 2022 is expected to reach 65msf, on par with the 63msf absorbed in 2021 and well above the pandemic lows of 2020. A modest improvement is forecast in 2023, with net absorption projected to reach 71msf (+9% y-o-y), before growth stabilises at around 5% per annum through to 2026. While this represents robust demand, it comes at a time of heightened supply as projects that were delayed in the early period of the pandemic regain momentum. Following the 112msf of new supply in 2022, a further 130msf is expected to be delivered in 2023 before slowing to less than 100msf from 2024 onwards. Inevitably, with supply outstripping demand in the near-term, regional vacancy is forecast to soften further, rising from 12.5% pre-pandemic to reach a little over 18% in 2023, after which it is expected to hold steady.

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