SINGAPORE — From Singapore to South Korea, investors are shying away from real estate deals involving office buildings, shopping malls and other commercial assets, worried that rising interest rates and geopolitical turmoil will threaten global economic growth.
Commercial real estate investment activity in Asia Pacific fell 22% year-on-year from July to September, the lowest quarterly total since the second quarter of 2010, according to a November report by commercial real estate and investment management firm JLL.
Market data provider MSCI Real Assets said commercial real estate transactions in Asia-Pacific fell 37% compared with the third quarter of 2022, the sixth consecutive quarter of year-on-year declines. The share of Asia-Pacific acquisitions by global investors approached a record low of 6%.
“The recent emergence of a 'higher interest rates for longer' sentiment has dashed hopes for a quicker recovery,” said Benjamin Chou, head of Asia real assets research at MSCI. “Asia Pacific has lagged the rest of the world in terms of price discovery during this downturn, but the darkening outlook for the third quarter has boosted price expectations, likely sparking further corrections across many key sectors in the region.”
MSCI tracks commercial properties and portfolios worth over $10 million, while JLL monitors transactions worth more than $5 million, and both firms have signaled a slowdown in real estate activity.
This trend was evident in November when Singapore-based property investment group Metro announced it would acquire a 20% stake in Vision Crest Commercial, a prime retail property along Singapore's main shopping strip, Orchard Road, for up to S$40 million (US$29.8 million).
Metro touted the appeal of the 11-story complex but Chairman Winston Chu sounded cautious and described the investment as a defensive move.
“Amid macroeconomic headwinds, it is imperative that Metro maintains a diversified, high-quality portfolio in resilient sectors,” he said. “Metro remains poised to remain resilient through these challenging times.”
According to U.S. commercial real estate services firm CBRE, in an October survey of about 100 senior brokers and appraisers covering the Asia-Pacific market, only 12% said investment activity had improved so far this year compared with 2022. An earlier survey in April was more optimistic, with 73% of real estate investors expecting transactions to recover this year.
Henry Chin, CBRE's head of research for Asia Pacific, said while he saw positive signs in some markets, “we don't expect a recovery in investment activity until mid-2024.”
The report highlighted investor low risk appetite and low expectations of interest rate cuts in the first half of next year, which is increasing pressure on investors in most Asia-Pacific markets to sell assets rather than buy them.
South Korea recorded $4.2 billion worth of transactions in the third quarter of this year, down 35 percent from the same period last year, as domestic institutional investors “are selectively reviewing their core office assets,” according to a JLL report.
Myeongdong shopping district in Seoul: Transaction volume in South Korea was $4.2 billion in the third quarter of this year, down 35 percent from a year ago, according to JLL.
In Singapore, commercial property investment fell 11% year-on-year to $2 billion in the same period, highlighting ongoing economic uncertainty weighing on occupier demand and prime office rents.
“Higher debt costs, particularly interest rates, will reduce risk-adjusted returns for some investors as they find it harder to underwrite deals,” said Pamela Ambler, head of investor relations for Asia Pacific at JLL.
“The challenges of an economic slowdown, particularly weakening global demand and economic downturn in China and, by extension, other trading partners, may also curb investor interest in real estate to some extent,” she added.
But market watchers are noting some bright spots in an uncertain market: “Buying interest is on the rise in India, and low interest rates in Japan are still attracting international capital,” said CBRE's Chin.
JLL's Ambler echoed that view, noting that South Asian economies are “huge beneficiaries” of the current trend of risk aversion, as global investors reduce their exposure to China and build resilient supply chains across the region.
India's strong economic fundamentals are attracting foreign investors to invest in offices, manufacturing facilities and infrastructure projects, she said.
Regarding Japan, Ambler noted that the low interest rate environment within the country, which he called a “global anomaly,” provides an opportunity for currency hedging of real estate investments.
MSCI Real Assets said in a November report that Japan was Asia-Pacific's largest commercial real estate market by both transaction volume and number in the first nine months of the year, with industrial real estate transactions in the third quarter at $1.9 billion, bringing investment year-to-date to $6 billion, the highest nine-month period since MSCI began collecting the data in 2007.
Meanwhile, India had a “strong quarter,” the report said, with Brookfield India Real Estate Trust's sale of a 50% stake in an office portfolio to Singapore-based sovereign wealth fund GIC for $683 million driving higher deal volumes.
MSCI noted that investment volumes in South Asian markets in the third quarter of this year were more than 50% higher than the average for the same quarter in the five years before the COVID-19 pandemic.
Investment management firm Colliers said in a November survey that it is one of the few in the industry to expect a steady increase in commercial real estate transactions in Asia Pacific next year as “the gap between buyers and sellers narrows and more investors put capital to work.”
Next year is “notably a brighter outlook than 2023 as there's a lot of outstanding equity looking for homes,” said Chris Pilgrim, managing director of global capital markets for Asia Pacific at Colliers. “Most Asian markets need to diversify their capital depth.”