Headwinds

  1. Muted activity in H1 2024 amid lack of yield expansion

    Investment is expected to remain muted in H1 2024 due to limited yield expansion and high interest rates. With most markets continuing to experience negative carry, further re-pricing is anticipated across asset classes.

Recovery

  1. Investment to pick up in H2 2024 with re-pricing and rate cuts

    The second half of the year will see an uptick in real estate investment activity on the back of re-pricing and interest rate cuts. Demand will be led by high-net worth buyers, cash-rich investors and corporates seeking high quality assets. Japan will remain the most preferred market, while Australia and Korea will be the subject of stronger interest.

  2. Focus on value-add and core; more interest in private credit

    Investors will prioritise value-add opportunities for their high internal rate of return, while core assets in tier I markets will remain sought after due to their ability to provide stable cash flow. Private credit investment is poised to gain further popularity due to tight funding conditions.


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Investment to stay muted in H1 2024 amid lack of yield expansion

Following a 26% y-o-y decline in investment volume in 2023, real estate investment activity is expected to remain muted in H1 2024. Limited yield expansion and high interest rates continue to result in a wide yield spread for commercial property as well as a considerable price expectation gap between buyers and sellers.

Yield expansion in Asia Pacific lags that in North America and Europe, with most markets in the region still experiencing negative carry. Among major cities, Hong Kong SAR continues to see the largest negative spread across sectors as financing costs stay at 22-year highs. Although mild interest rate cuts in mainland China have helped create a wider yield spread, investors remain concerned about the large supply pipeline across major sectors and the uncertain economic growth outlook.

These conditions made it difficult for real estate funds to close deals over the course of 2023, with this trend set to persist into H1 2024. With real estate funds possessing considerable capital that has yet to be deployed, and new fundraising having become more challenging, the market lacks liquidity.

Selling intentions, especially among developers, will remain high in 2024. The debt funding gap will continue to put pressure on refinancing, leading to some discounted asset sales as landlords look to raise cash.

This environment will lead to some re-pricing in H1 2024, with CBRE’s 2024 Asia Pacific Investor Intentions Survey finding that more than 60% of respondents are expecting price adjustments in the office sector.

Figure 20: Change in cost of finance and sector yields, and rental forecast

asia-pacific-real-estate-market-outlook-2024-figure-20-updated-final-chart
Note: Size of the bubble refers to forecasted rental growth in 2024. Negative rental growth in Melbourne office, Hong Kong SAR office & logistics, Beijing office, Shanghai office and Auckland logistics.
Retail refers to shopping centres for major cities in Australia, Singapore, Auckland, and major cities of mainland China ; and high streets for Hong Kong SAR and Tokyo. Singapore logistics yield refers to en-bloc assets with a 30-year leasehold.
Source: CBRE Research, January 2024.

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Recovery to commence in H2 2024 after re-pricing and interest rate cuts

With re-pricing making assets more attractive to potential buyers and interest rates starting to fall, H2 2024 should see a pick-up in investment activity. Most markets are projected to return to positive carry by the end of the year. CBRE expects full-year investment volumes to recover by 5% to 10% in 2024.

High-net worth individuals, cash-rich private investors and corporates purchasing for self-use will remain among the most active buyers, capitalising on price dislocation to secure the best quality assets. Activity by real estate funds could see a rebound as many funds approach the end of their investment period.

Japan will remain one of the most preferred markets for cross-border real estate investment, with hotel, retail and residential assets especially sought after.

Australian and Korean investors will remain keen to increase allocations to real estate. Yield expansion in Australia has surpassed that elsewhere in Asia Pacific; a trend that is forecasted to continue into H1 2024 as capital values approach the bottom. Korean buyers will continue to target core office assets amid tight vacancy as part of defensive and stable cashflow plays.

Figure 21: Prime yield to relative borrowing cost (spread)

asia-pacific-real-estate-market-outlook-2024-figure-21-updated-final-chart
Note: Singapore logistics yield refers to 30-year leasehold en-bloc assets. Retail yields of Pacific markets refer to regional centres.
Source: CBRE Research, January 2024.

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Investors to focus on value-add and core; interest in private credit to grow

CBRE expects investors to display strong interest in value-add strategies in 2024 owing to their high IRR amid elevated funding costs. Core and core-plus assets in tier I markets will also be sought after for their ability to provide stable cash flows.

For buyers keen on emerging markets, opportunistic investments will remain the preferred strategy to capture longer-term growth potential.

With funding conditions remaining tight, private credit investment including bridge loans and development loans will continue to gain popularity. These short-term financing solutions offer high interest rates to non-traditional lenders such as private equity, without involving the full risk of real estate investment.

After a year underperforming the listed real estate equity market, REITs’ discount to NAV remains significant and the yield spread against the 10-year government bond yield has improved in major markets including Japan, Australia, Singapore and Hong Kong SAR. REITs will therefore provide attractive prospects for privatisation in 2024, with most such opportunities likely to arise in Australia.

Figure 22: 2024 Investment Strategies

asia-pacific-real-estate-market-outlook-2024-figure-22
Source: CBRE Research, January 2024

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