APAC Real Estate: Growth without added risk

Why Asia Pacific?

The Asia Pacific (APAC) region today offers investors a compelling opportunity to benefit from its strong economic momentum, increasing global influence, demographic advantages and idiosyncratic country level characteristics. There has been a rebalancing of the global economy over recent decades, whereby the APAC region plays a critical role in the global growth story, accounting for over 52% of global GDP growth in the decade to 2023.

Investing in APAC does not equate to increasing risk-taking. By focusing on the most transparent and liquid countries, strong risk adjusted performance can be delivered. Australia, Japan, Singapore and New Zealand are countries where these opportunities can be accessed. Without investing directly into the large (and riskier) engines of growth that are India and China, real estate investors can allocate into the less-volatile markets which benefit from ‘being on the doorstep’ of these economies. Given the pro-cyclicity of real estate, investing in regions predicted to show robust growth contributes to long-term resilience.

Benefitting from diversity. The APAC region is more heterogenous than markets in the US or Europe. Investors can diversify away single drivers of risk by exposing to a range of macroeconomic environments and demographic profiles. Global investors can further diversify specific market risk by including an allocation to APAC in their portfolio construction.

Unlocking Value Add

In APAC, investor preference has shifted towards value-add strategies. Recent surveys show it is now the preferred investment style for 63% of investors in 2024, up from just 33% last year. Value add is a compelling strategy at this stage in the cycle given the ability to deliver both income and capital gains within an acceptable level of risk. Investors have the opportunity today to benefit from the cyclical upside whilst aligning their strategy to structural trends that will drive strong future performance.

The repricing we have observed today has created one of the most attractive buying opportunities since the GFC. The post-COVID era and the subsequent inflation spike is characterized by uncertainty in the wake of elevated debt costs, limited price transparency and illiquidity across the globe. Repricing creates a compelling entry point for the skilled investor as refinancing pressures increase distress driven opportunities with fewer competitors in the current market. Repricing is not consistent across the region with some sectors/markets experiencing much more significant value declines. For example, markets such as Japan are not expected to reprice significantly, however cyclical markets namely Australia and New Zealand are repricing just as much or more than other global markets.

Unlike other cyclical downturns, fundamentals in APAC have remained robust. Real estate returns in APAC sat at 4% last year whereas returns remained negative in both Europe (- 3.1%) and the US (-7.3%). This can be attributed to the strong fundamentals and the different cycles playing out across the region. For example, Japan’s accommodative monetary environment creates a distinctly different environment for real estate investors today. A value correction combined with a healthy occupier market supports our view that today marks an attractive cyclical opportunity for market entry.

The repricing in Sydney logistics has been as significant as that observed In London and more significant than markets such as LA and Paris, highlighted by record low vacancy rates.

Benefiting from the APAC lag. Emerging sectors in western markets that have evolved into mature investment sectors over the past cycle, are yet to fully play out in APAC. Informed investors can build strategic conviction around such sectors, benefiting from early-mover advantage.

For example, investor allocations to life sciences have grown significantly in both the UK and US in recent years. European Investor intention surveys showing that one third of investors are pursuing alternatives are focused on life sciences. As the sector has matured life science rents have settled at circa 40% premium to A-Grade office. These levels are justified by the supply demand imbalance.