APREA Market Flash – December 2024

Which sectors/markets look more attractive as the easing cycle gains momentum?

The sectors most likely to benefit from a cut in U.S. interest rates are those with significant exposure to borrowing costs, consumer spending, or growth expectations. Real estate, financials, consumer discretionary, and certain industrials (e.g., capital goods) tend to see the most direct benefits. Further, start-ups which are currently burning cash and are expected to eventually do well will benefit from the lower cost of capital, and easy availability of liquidity.

Additionally, emerging markets like India in general and particularly, Indian real estate, commodities (especially gold), and long-duration bonds are also likely to perform well in a low-interest-rate environment.

The other asset class that performs well in such an environment are crypto-currencies as a hedge against a weakening dollar as well as driven by a higher risk appetite.

What is the expectation for U.S. rate cuts for 2024/2025 — will the cut in rates boost beaten down sectors such as U.S. commercial property, REITs etc. Which areas will see the biggest turnaround with the move to an accommodative stance?

Post a sharp 50bps rate cut in September, and another 25bps rate cut in November, markets are expecting another cut in December 2024. Overall, the markets believe that the interest rates will ease towards the target range of 2.75 to 3.00 per cent by 2026 – implying a 100bps cut in 2025.

The impact is likely to be positive driven by improved economic performance, lower borrowing costs for REITs, and lower opportunity costs for investors. However, the demand drivers are undergoing a structural shift, which is likely to weigh heavy on the offices and retail. The structural shifts are outlined below:

• Office vacancies in general are high, as artificial intelligence, remote work and offshoring are reshaping office space demand.
• Retail continues to struggle with higher vacancies in malls and traditional stores, as e-commerce continues to gain wallet share, though experiential properties are faring better.

On the brighter side, industrial sector is thriving, with low vacancy rates driven by e-commerce demand.

Do you see other central banks following suit, with some emerging market central banks having already cut rates ahead of the Fed, and how would real estate investments in emerging markets compare with developed markets in this easing cycle?

Yes. I do see other central banks following suit, even though different banks may differ in the timing and quantum of cuts. Different economies might have distinct ground realities that may require the respective central bankers to behave differently over the short term, say, a quarter or so. For instance, India is currently experiencing a higher than target inflation, which may require the RBI governor to hold rates in the near term. Eventually, I see all central banks cutting rates in line with US to defend their respective currencies and economies as US remains a significant source of foreign capital and trading partner for most large economies.

Aashiesh Agarwaal

Senior Vice President – Investment Advisor, Capital Markets
ANAROCK Capital Advisors Pvt Ltd

Which sectors/markets look more attractive as the easing cycle gains momentum?

As we move into the interest rate cut cycle, we have seen most markets in Asia Pacific reach the consensus “top” of the pricing curve, particularly the office and industrial sectors. We have seen markets such as the Pacific and Korea be most responsive in terms of asset repricing, and now with interest rates starting to decline, the debt-to-yield spread is moving into positive territory. In particular, the office sector is set to see increased growth in investment, with the bid-ask spread for core CBD assets now more attractive for investors.

What is the expectation for U.S. rate cuts for 2024/2025 — will the cut in rates boost beaten down sectors such as U.S. commercial property, REITs etc. Which areas will see the biggest turnaround with the move to an accommodative stance?

CBRE is forecasting a 200bps decrease from the peak in Federal Reserve central policy rates by the end of 2025 – with the mid-range of the rates being in the range of 3.5%. This will most likely see both the public and private commercial real estate sectors increase their investment activity. In particular, we anticipate a return of private real estate property fund activity, those of which have been less active during the past few years compared to historic levels.

Do you see other central banks following suit, with some emerging market central banks having already cut rates ahead of the Fed, and how would real estate investments in emerging markets compare with developed markets in this easing cycle?

We have already seen markets such as Hong Kong SAR, New Zealand and Singapore cut interest rates in response to the Federal Reserve, with other markets in the region such as Australia and Korea to follow suit over the next few quarters.

With most commercial real estate markets, excluding Japan, being in negative carry territory for the past 18 months, the interest rate cuts will mean that investors will be looking at both a more attractive price entry point alongside the prospect of lower interest rates in 2025 and 2026.

When looking at the emerging markets, interest rate movements look to be quite similar. For example, Thailand will look to cut rates in the next couple of quarters to support slowing domestic demand, whereas Vietnam will look to keep rates accommodative until 2025 to support the recovery of real estate and banking sectors.

Ada Choi

Head of Research, Asia Pacific
CBRE

After almost 2 years of heightened borrowing costs and challenging dealmaking conditions, some light emerged at the end of the tunnel in July this year, as the US Federal Reserve signalled its intention to lower interest rates. The ensuing 50 bps cut in September pushed the 10-year US Treasury down to as low as 3.6%, but this reprieve proved to be short-lived, as the 10Y UST began rising yet again in October in the lead-up to the US Presidential Election.

With the election now decided, attention will naturally shift to crystal-ball-gazing in terms of what sort of policies a new Trump presidency could bring. While it’s not clear which of the pronouncements on the campaign trail are genuine, concrete proposals as opposed to political rhetoric, what is clear is that markets are already bracing for further inflationary pressures. The fact that the 10Y UST barely flinched indicates that bond markets were expecting a Trump victory, while its 70 bps ascent from September’s trough points to investors’ belief that rates are less likely to fall as significantly in the medium-term.

What about Asia Pacific commercial real estate? Since the election results were finalized, several economic data providers have lowered their GDP growth forecasts, pointing to a higher likelihood of tariffs and reduced global trade. Against this backdrop, higher-growth markets like India and Southeast Asia, Australia amongst the developed world, and rapidly-institutionalizing alternative sectors, would become relatively more attractive if GDP growth prospects are dampened elsewhere. Finally, notwithstanding its transition towards a low-but-positive interest rate regime, Japan’s commercial real estate market could also remain in the spotlight for awhile more if interest rates do indeed remain high for even longer elsewhere.

Benjamin Chow

Head of

Which sectors/markets look more attractive as the easing cycle gains momentum?

The industrial sector has become increasingly attractive to investors due to its compelling combination of relatively low risk and long-term growth potential. Driven by the relentless pursuit of supply chain optimisation, this sector is well-positioned to capitalise on the escalating demand for institutional-grade logistics and warehousing facilities in strategic locations. The integration of cutting-edge technologies, including automation and artificial intelligence, has further bolstered operational efficiency, catalysing the demand for high-tech industrial spaces.

As the availability of prime industrial assets becomes increasingly scarce, investors may turn their focus to value-add opportunities. One such strategy involves acquiring out-dated industrial assets with subpar specifications and repositioning them to meet modern standards. By undertaking strategic improvements, investors can unlock hidden value in these assets, resulting in higher returns and long-term appreciation.

Do you see other central banks following suit, with some emerging market central banks having already cut rates ahead of the Fed, and how would real estate investments in emerging markets compare with developed markets in this easing cycle?

Since the Fed’s 50 bps rate cut on September 18, only Hong Kong SAR and South Korea have reduced their rates by 25 bps. This suggests that most Asia-Pacific central banks are exercising caution, meticulously evaluating their monetary policy strategies before enacting any changes given the uncertainty surrounding the duration and extent of the Fed’s easing cycle. For instance, the Reserve Bank of India (RBI) and the Reserve Bank of Australia (RBA) are projected to lag the Fed’s policy, with only a shallow rate cut in December, while the Bank of Thailand is only expected to make a 25 bps cut in the first half of 2025.

Despite so, investor sentiments were invigorated, which had stimulated buying activity. There were already a handful of big-ticket transactions recorded in the Asia-Pacific region, and as the cost of borrowing gradually gets reduced, alongside lowering treasury yields, cap rate would also get compressed, encouraging investment activity and bolstering asset values.

Safe haven markets like Singapore and Australia will continue to be high on the list for institutional investors, capitalising on their solid fundamentals, stabilising cap rates and completion of asset repricing. Interest in South Korea will also surge, given the strong occupier demand for office. Along the same vein, India’s commercial real estate market is expected to maintain its upward trajectory in 2025, buoyed by positive investor sentiment and robust economic growth.

On the other hand, structural challenges are still expected to plague the Greater China market and weigh on capital values, but investors can take this opportunity to acquire quality assets at a discounted price.

In contrast to other central banks, the Bank of Japan is expected to adopt a more hawkish stance, with economists predicting further rate hikes that could elevate the benchmark rate to 1.0% by mid-2025. We anticipate a moderate expansion in cap rates for traditional real estate sectors such as office and logistics, owing to a slight uptick in interest rates.

Christine Li

Head of Research, Asia Pacific
Knight Frank

Which sectors/markets look more attractive as the easing cycle gains momentum?

As the easing cycle gains momentum, certain sectors and markets appear particularly attractive. Historically, real estate investment trusts (REITs) have tended to perform well in periods when bond yields fall and monetary policy shifts toward an easing stance. Lower interest rates further benefit REITs through asset revaluations and favorable relative yields compared to fixed-income investments. In the United States, vacancy rates have remained relatively steady in retail and apartment sectors, though vacancies in the industrial space are starting to increase from previously low levels. Meanwhile, in Japan, multi-family housing maintains its long-term appeal due to demographic shifts and rising household formation in some gateway cities.

What is the expectation for U.S. rate cuts for 2024/2025 — will the cut in rates boost beaten down sectors such as U.S. commercial property, REITs etc. Which areas will see the biggest turnaround with the move to an accommodative stance?

Expectations for U.S. rate cuts in 2024 and 2025 raise the possibility of a boost to beaten-down sectors like U.S. commercial property and REITs. In the commercial real estate market, the office sector continues to face significant challenges, although there were slight improvements in the second quarter of 2024. For the first time since 2022, office net absorption—a key industry metric measuring changes in occupied space—turned positive, with over two million square feet occupied in the three-month period, according to Wells Fargo. Additionally, demand for multifamily real estate assets has surged, with net absorption reaching its highest level in nearly three years during the second quarter of 2024.

Do you see other central banks following suit, with some emerging market central banks having already cut rates ahead of the Fed, and how would real estate investments in emerging markets compare with developed markets in this easing cycle?

With some emerging market central banks already cutting rates ahead of the U.S. Federal Reserve, there is potential for other central banks to follow suit. If emerging countries continue to reduce rates earlier and at a faster pace than the U.S., this could create more attractive investment opportunities in those markets, though caution is needed to avoid excessively rapid cuts. In Thailand, property stocks are expected to benefit from a recovery in visitor arrivals in 2024, though challenges remain due to slower growth in mall rents and hotel room rates, as well as supply pressures in the housing sector. In the Philippines, property developers are poised to achieve a fourth consecutive year of double-digit growth in residential sales in 2024, supported by robust economic growth of over 5%.

James Ong

Chief Strategy Officer
Tsao Pao Chee (TPC)

Which sectors/markets look more attractive as the easing cycle gains momentum?

1. U.S. interest rate cuts are not just good news for U.S. markets and U.S. real estate, but also positively impact markets across Asia. Hong Kong’s monetary policy is directly linked to that of the U.S. on account of the HKD’s peg to the USD, and as the Fed cuts rates it feeds through to Hong Kong and has a positive impact on the residential market in Hong Kong. But more than that, rate cuts will improve overall market sentiment towards real estate and help lift performance meaningfully.
2. The power of lower interest rates on REITs is immense! Lower risk-free rates boost asset values and NAVs rise as cap rates fall. REIT share prices will need to rise to keep pace with the higher valuation of REIT property portfolios. On the financing side, lower interest rates reduce debt costs and lower priced debt capital, and an overall lower cost of capital will allow REITs to acquire more and more accretively, too. High dividend paying stocks like REITs also benefit from falling rates as the yield spread to bonds improves, providing a further driver of REIT outperformance.
3. Global REITs are well placed to continue to benefit after having risen 11.6% in the past six months and just over 27.0% since November 11, 2023. REIT earnings growth should accelerate in 2025 and beyond as interest rate headwinds ease. Debt spreads for U.S. REITs are down 75bps on top of the 75bps drop in base interest rates, making for a far more compelling financing environment. REITs are well placed to take advantage of that and of lower real estate valuations by acquiring assets. In 9M24 U.S. REITs alone issued $43bn in unsecured debt, well above the 2023 and 2022 totals, providing lots of firepower to go and acquire accretively.

Joachim Kehr

Portfolio & Regional Head, Asia-Pacific
CenterSquare Investment Management Asia Pacific

Which sectors/markets look more attractive as the easing cycle gains momentum?

South Korea has seen growing investment activities with year-to-date transaction volume rising 31% from the same period a year ago. This is as senior loan costs for prime office came down and the bid-ask gaps narrow. Mega office deals returned in Q3 with others still in the pipeline. Foreign investors showed conviction in logistics and hotels as sector performance improved. And the market recorded its first sale of a stabilized hyperscale data centre, a significant milestone for Korea.

While Australia hasn’t experienced easing yet, the certainly of base rates peaking is providing more clarity around a pricing trough. Offshore groups returned noticeably acquiring logistics and office assets, with inbound flows rising 20% YTD.

And despite the BOJ’s monetary tightening, investment into Japan continues to rise with volumes up 28% YTD. Pricing is expected to hold steady due to strong competition for assets and accommodative access to credit provided by Japanese financial institutions and lenders. Japan’s long-term interest rate remains low and positive yield spread across all property types are highly attractive. The emergence of price growth means investors can view property as an inflation hedge rather than a substitute for fixed income.

Business parks in major markets Mumbai and Chennai picked up as well. Both domestic and global institutional investors saw upside in India’s strong economic growth alongside favourable demographics.

What is the expectation for U.S. rate cuts for 2024/2025 — will the cut in rates boost beaten down sectors such as U.S. commercial property, REITs etc. Which areas will see the biggest turnaround with the move to an accommodative stance?

During the rate hike cycle that began in 2022, the higher cost of debt eroded the risk-adjusted return of core investments and prompted a re-pricing cycle. Investors sought higher returns by accepting higher risks in value-add and opportunistic investments and diversifying into alternative sectors. At the rate reduction cycle takes shape and Asian central banks move to loosen monetary policy at varied pace, the spreads between property yields and cost of debt will widen. This will lead to the re-emergence of core real estate strategies in office markets where cap rates have adjusted the most.

Do you see other central banks following suit, with some emerging market central banks having already cut rates ahead of the Fed, and how would real estate investments in emerging markets compare with developed markets in this easing cycle?

Real estate investments in emerging markets (EM) are less sensitive to inters rates as most of them are value-add/ opportunistic in nature. Investors consider market-specific secular trends when investing in EM. Transparency is also a key factor as it encourages highest investment and is used as a market filter to understand the risk profile for potential investments. Progress in transparency, such as greater data coverage, more institutionalization, and better regulatory framework is beneficial to the development of capital markets in EM. Investors do also look for opportunities through development, JV, entity and construction financing opportunities in EMs.

Pamela Ambler

Head of Investor Intelligence & Strategy, APAC Capital Markets
JLL