Which countries will lead real estate investment activity in APAC for the rest of 2023?

Japan is expected to lead in Q2, then Hong Kong in Q3.

Capitalisation rates in Asia Pacific are likely to continue to rise for the rest of 2023, but investment activity is expected to increase in the second half of the year as cap rate adjustments help close the price gap between buyers and sellers, according to a new CBRE survey. 

The CBRE survey found that cap rates have increased in the first half of 2023 for all property types across most Asia Pacific cities, except for Japan and mainland China where interest rates remain stable. Despite strong real estate fundamentals, higher borrowing costs and an uncertain economic environment are likely to force cap rates upward by an additional 75 bps (basis points) to 150 bps over the coming six months. Cap rate expansion is expected to be most pronounced for core office and retail assets.

Nearly 60% of respondents expect investment activity to increase in H2 2023, as investors believe they will have greater clarity on interest rates and cap rate increases will help close the price expectation gap. Japan is expected to lead the investment recovery in Q2 2023, followed by Mainland China and Hong Kong in Q3 2023, and Singapore, India, and New Zealand in Q4 2023. 

Private investors continue to have the strongest buying appetite, while real estate funds and REITs show the strongest intention to sell due to current refinance pressure and the need to rebalance portfolios. 

The current obstacles limiting investment activity are price expectation gaps between buyers and sellers, and limited yield expansion. Investors believe long-lasting high interest rates and expectations of slower economic growth are likely to be the key challenges for the next six months. 

“The interest rate cycle appears to be approaching its peak, and we expect this will lead to price discovery in markets such as South Korea and Australia,” said Greg Hyland, Head of Capital Markets, Asia Pacific for CBRE. 

As buyers and sellers become more realistic about pricing, the price expectation gap is narrowing for Grade A office, retail, institutional-grade modern logistics, hotel and multifamily properties. When it comes to traditional logistic spaces, more buyers are looking for discounts, indicating that prices may be near their peak. 

Nearly half of respondents indicated that the cost and availability of financing will be investors’ most important consideration when evaluating potential acquisitions, due to rising interest rates and stricter lending standards.

“Interest rate hikes have significantly increased the cost of financing for commercial real estate in Asia Pacific. Higher interest expenses have deterred investors from refinancing assets, particularly in Australia, Korea, and Singapore. We expect Korea logistics, Australia offices and Hong Kong offices to face the biggest funding gap in the coming 18 months, which could lead to more motivated sellers in the second half of 2023,” said Dr. Henry Chin, Global Head of Investor Thought Leadership & Head of Research, Asia Pacific for CBRE. 

Institutional-grade modern logistics properties were the most popular asset type in Q1 2023, with 43% of respondents indicating that they received the most enquiries from investors. However, logistics properties have attracted significantly less interest than in recent years as investors have shown a growing appetite for prime retail assets and data centres. 

CBRE’s survey examined investment sentiment on market conditions and capitalisation rates for stabilised properties. Capitalization rates—usually called cap rates—measure a property’s value by dividing its annual income by its sale price. A lower cap rate generally indicates a higher value. To read the full report, click here.