APAC economic outlook

We expect slowing growth, moderating inflation, and falling interest rates to be the dominant macro themes over the next 12-18 months. The Federal Reserve (Fed) has signalled that rate cuts are on the way. The recent depreciation in the US dollar should provide emerging market (EM) central banks, such as the Bank of Korea (BOK), with more room to manoeuvre in 2024. 

China’s recent data has become more reassuring. We have raised our near-term forecasts, even though its housing market remains a challenge. Policy continues to take a targeted and incremental approach, but authorities recognise the need for central government assistance and a coordinated approach to ensure stability. This suggests the fiscal backdrop should be marginally more supportive.

The 2023 Shunto spring wage negotiations in Japan were the strongest since the early 1990s. Given the current elevated rate of inflation and corporate earnings growth, we expect another robust Shunto wage agreement in 2024. Consequently, we now expect the Bank of Japan (BOJ) to end its yield curve control (YCC) and to raise policy rates to 0% by mid-2024 (but no further rate hikes thereafter). 

In India, we expect the Reserve Bank of India (RBI) to keep rates on hold in the near term. The chances of an easing cycle beginning before mid-2024 are rather remote, given the resilience of the economy and food-price risks. We expect the RBI to begin easing only when the economy slows more meaningfully and the real policy rate rises, which is likely from the second half of 2024.   

Elsewhere in APAC, there are some signs of a pick-up in Korean exports, led by semiconductors, as market supply demand imbalances continue to improve. There are also some signs of stabilisation in manufacturing and trade in Singapore, led by electronics exports. The upturn could be sustained along with the rebound in global semiconductor sales. All these suggest both markets could see an economic rebound amid potentially lower interest rates in 2024.

APAC real estate market overview

Peak US rates have historically been a near-term positive for APAC commercial real estate (CRE) capital values, but occupier fundamentals are key. With the overall vacancy rate in APAC still elevated, we expect the region’s near-term capital returns to remain under pressure. We expect borrowing costs to remain higher than what they were previously. We also expect yields to rise further, given repricing in APAC has lagged other regions. That said, we expect a better outcome for Australian logistics properties, Seoul offices, and Singapore properties, given the historical correlation with US yields in these markets and relatively robust occupier fundamentals. 

We expect the banks’ lending stance towards APAC CRE to remain cautious and selective. Difficulties in accessing project financing have resulted in planned projects being delayed or abandoned in markets like Korea. We also expect the bulk of debt funding for 2021’s record transaction volumes in Korea to be due for refinancing in 2024. Retail and logistics properties are likely to face funding gaps. While the BOK’s policy easing could provide some relief, it is unlikely to close the gaps. This should translate into opportunities for private credit investors, especially as traditional lenders pull back.
We remain positive about the following market/sectors:

APAC real estate market trends

Offices

Rental declines for APAC’s offices accelerated to 3.7% year-on-year (y-y) in the third quarter of 2023 (from -3.4% in the second quarter). The average vacancy rate trended higher to 12.7% (from 12.3%). As in the previous quarter, offices in Shenzhen (-7.1%), Tokyo’s Central 5 Wards (-6.2%), and Hong Kong (-6%) led the declines in the third quarter. 

On the other hand, Brisbane overtook Seoul in the third quarter to register APAC’s fastest y-y rental growth of the quarter at 17.1% (from 4.9% in the second quarter). This marks the first time since the first quarter of 2020 that an Australian capital city has taken the region’s top spot in rental growth performance. The average vacancy rate for Brisbane’s prime-grade offices contracted to 11.5% in the third quarter (from 12.6%), the lowest since the fourth quarter of 2019. 

Perth was another Australian capital city where office rental growth improved in the third quarter (3.6% y-y, from 0.8% in the second quarter). The average prime-grade vacancy rate ended the third quarter at an eight-year low of 17.3% (from 18.5%). 

It appears the bifurcation in occupier market performance has grown for Australian central business district offices. This difference is not just between prime and secondary-grade offices but also between different cities. Vacancy rates in Sydney and Melbourne are at multi-year highs, while vacancies in Brisbane and Perth are at multi-year lows. 

Logistics

The industrial/logistics occupier market outperformed other CRE sectors in APAC in the third quarter of 2023, even as the pace of y-y rental growth slowed to 6.6% (from 10% in the second quarter). The average vacancy rate jumped to 6% (from 4.7%) during the quarter, led by Hong Kong (5.8%, from 1.5%) and Shenzhen (13%, from 0.4%). Both markets experienced a significant addition to available stock during the quarter (Hong Kong: +7.5%, Shenzhen: +9.5%), which contributed to the surge in vacancy rates. 

While the occupier fundamentals of Greater Seoul’s logistics properties remain soft, we continue to see some light at the end of the tunnel. According to JLL’s third-quarter data, grade-A logistics properties in the Seoul Metropolitan Area (SMA) registered net absorption of 365,000 pyung (1.21 million square metres (sqm)) during the quarter. This represented 77% of 2022’s total net absorption and the highest quarterly net absorption since JLL began tracking. Consequently, the average vacancy rate of the SMA narrowed to 13.1% (from 16%) in the third quarter, led by the sub-markets in the western region (20.1%, from 28.1%). Investment activity may be picking up, albeit tentatively, with a fully leased asset in Incheon reportedly changing hands at a premium to the vendor’s entry price in 2021.    

Retail

The tourist sector’s ongoing recovery from the pandemic continues to uplift APAC’s prime retail occupier performance. The y-y rental growth accelerated to 5.9% in the third quarter (from 4% in the second quarter). Tokyo and Singapore remained the two largest contributors to the region’s overall rental growth during the quarter, up 13.5% (from 10.1%) and 8.3% (from 10.4%), respectively. Hong Kong also performed better (1.8%, from 0.7%). 

Singapore’s prime retail rental growth (1.3% quarter on quarter (q-q)) outpaced suburban retail (0.7% q-q) in the third quarter, as prime vacancy rates contracted to 12.1% (from 13.2%). Despite the outperformance, prime retail rents in Orchard Road are still on average 24% below their pre-pandemic levels, according to Savills’ data.

Looking ahead, Savills expects prime retail rents in Orchard Road to climb another 3-5% in 2024 as “tourist arrivals in Singapore continue to recover”. On the other hand, suburban retail rents are expected to be flat in 2024 as “outbound travel and inflation dampen discretionary consumption spend in the housing heartlands”. Despite the sanguine assessment of prime retail’s outlook, we note that there are some signs that the pace of tourism recovery is normalising. The relatively strong Singapore dollar and high room rates are starting to impact visitors’ demand.  

Living

CBRE expects the median apartment rent across Australian capital cities to grow by AUD120/week (+26%) between 2023-2028. Vacancy rates are projected to fall to 0.8% (from 1.8%) over this period, according to the latest Apartment Vacancy and Rent Outlook report. CBRE expects rising population, jobs, and income to support housing demand, which could be increasingly met via renting since monthly rents are 30% cheaper than alternative buy options at current prices. Among the three key eastern seaboard markets, CBRE expects Sydney to witness the sharpest contraction in vacancy rates over the next five years (0.8%, from 2.2%), followed by Melbourne (0.9%, from 1.7%) and Brisbane (0.8%, from 1.1%).

We think the migration system overhaul announced in December 2023 is unlikely to cause a fundamental change to this supply-and-demand imbalance. Australian policymakers expect a reduction of around 9% (from the 2023 financial-year level) in net overseas migration (NOM) to Australia because of this reform. That said, this is off a high base since the 2023 financial year NOM was 30% above the earlier official projection. We think affordability for renters is a more significant constraint on near-term rental growth, given the surge in rents over the past 12-18 months in markets like Sydney. 

Outlook for risk and performance

We expect near-term capital returns to remain under pressure. But we have trimmed the projected decline to reflect the prospect of an earlier-than-expected start to rate cuts, led by the Fed. Over the longer term, our base case remains that interest rates will retreat to lower levels. In fact, we expect the net effect of demographic change to be negative for interest rates up to 2030. According to abrdn’s Global Macro Research team, a falling labour contribution to potential growth more than offsets upward pressure from ageing populations. Moreover, downward pressure on rates across the largest economies means the global financial system provides another check against upward pressure. We expect lower interest rates to therefore support better capital returns beyond the immediate 12-24 months. Higher property yields in the near term are likely to provide good opportunities for investors to pick-up grade A assets in core locations. 

Macroeconomic drivers and geopolitical developments will have a bigger impact on real estate’s near-term performance. While US rates appear to have peaked, and the Fed could bring forward its first cut if data were to deteriorate faster than expected, geopolitical developments and their impact on supply chains remain highly fluid. These could affect inflation and interest rates in unexpected ways. Within APAC, Australia’s inflation remains sticky, and the risk is that rates will rise further in Australia, even as the US pivots. This would have implications for property yields and capital values.