APAC economic outlook

While inflation pressures re-emerged in the first quarter of 2024, leading indicators suggest inflation is moderating. Consequently, we expect the global rate-cutting cycle to broaden later in 2024. The risks are skewed, though, towards more inflationary and more hawkish outcomes. 

Chinese activity had a robust start to the second quarter of 2024, aided by industrial production. But more recent data suggests renewed softness amid a still challenging housing market. This reinforces our view that more policy easing will be delivered, even if it remains incremental. The authorities seem content to wait and see how recent easing plays out. 
Recent communication from the Bank of Japan (BoJ) turned hawkish, partly in response to yen volatility, but Japan’s exit from the ‘lost decades’ remains only half-convincing.

While many measures of Japanese inflation remain around target-consistent rates, in year-on-year (YoY) terms, momentum has moderated at a faster pace. We expect the BoJ’s approach to remain cautious. 

In Australia, the Reserve Bank of Australia’s (RBA) balancing act is likely to continue. The central bank is very reluctant to hike again, given the uncertainties over the near-term outlook. That said, the more hawkish statement following its June meeting suggests there may be room for further tightening. Moreover, domestic consumption could see a near-term rebound on tax cuts and wage growth. Overall, most observers expect easing to begin from early-2025.

Unlike the RBA, the Bank of Korea (BoK) appears on track to cut interest rates in the second half of 2024. The central bank presented a dovish inflation outlook during its mid-year monetary policy assessment in June. The BoK’s measures of underlying inflation are trending towards 2% and it expects prices to continue their gradual slowdown. Observers believe the latest comments indicate that the BoK has growing confidence in price stability, which underpins expectations for rate cuts in the second half of the year.  

Source: abrdn Global Macro Research; June 2024 
Forecasts are a guide only and actual outcomes could be significantly different.

APAC real estate market overview

A more hawkish assessment of the pace of rate cuts will delay the recovery in APAC’s commercial real estate (CRE) investments. Asset repricing in APAC lags the US and Europe, and most market/sectors are still valued at tight yield gaps relative to history. Consequently, we have downgraded our outlook for near-term capital returns. We expect a deeper trough and a longer recovery for APAC CRE values. 

Coupled with the growing bifurcation in occupier market fundamentals, we believe bottom-up market and stock selection will be key for investment performance. We prefer strategies targeting offices in Seoul’s key business districts, multifamily rental housing in Tokyo, and industrial/logistics (I/L) properties in Australia. We have further upgraded our expected returns for offices in India’s key markets, such as Delhi’s National Capital Region, to reflect strengthening fundamentals.

Offices in Seoul’s key business districts led APAC’s investment activity over the year to the first quarter of 2024, supported by solid occupier fundamentals. This is especially the case in the central business district (CBD) and the Gangnam business district (GBD) submarkets, where vacancy rates remain significantly tighter than historical levels. We expect this to remain the case, even as new supply ramps up from 2026. That said, a slower pace of rate cuts could moderate investment activity in the near term.

Solid occupier fundamentals are supporting investment demand for Australian I/L properties too, with transaction volumes up 36% YoY in the first quarter of 2024[1]. Leasing demand is outpacing supply and vacancy rates remain near record lows of sub-2% in most markets. We have moderated our expected returns for the sector to reflect higher-for-longer interest rates and potential longer-term supply. Occupier fundamentals, though, remain one of the most robust in the region.

We remain bullish on Japanese multifamily properties, especially those within the Tokyo 23 wards. We expect net migration into Tokyo to keep vacancy rates tight and to support further rental upside, amid elevated home prices and limited supply of for-sale units. This is especially the case for single and compact unit types, as foreign nationals and younger migrants represent a growing share of Tokyo’s population.

APAC real estate market trends

Offices

There were some tentative signs of stabilisation in APAC’s office occupier market in the first quarter of 2024. The average quarter-on-quarter (QoQ) decline in rents slowed to 0.8% (from -1.5% in the fourth quarter) and the average vacancy rate narrowed marginally to 12.9% (from 13%)[2]. The sequential improvement was principally led by CBD grade-A offices in Tokyo and Singapore. QoQ rent increases of 2.1% (from -0.5%) and 1.5% (from -0.2%), respectively, were registered during the quarter. 

Accordingly, we have raised our near-term rental growth forecasts for grade-A offices in Tokyo’s central five wards. While the overall vacancy rate remains elevated, relative to history, deferred new supply suggests lower vacancy risks over the next few years. Potential capital returns could still be limited, though, as investors’ required returns rise in tandem with Japan’s risk-free rate. 

In Singapore, the average grade-A vacancy rate tightened to a post-Covid low of 5.3% (from 5.5%) in the first quarter, with newer and better-quality buildings recording even lower vacancies. The amount of shadow space also shrunk to 0.25 million square feet (mn sf) at the end of March (from 0.6 mn sf 15 months ago). Occupier markets could tighten further over the next few years, with the OCBC building redevelopment potentially removing 1.5% of office stock.  

Logistics

The YoY rental growth for APAC’s I/L properties slowed to 5.7% in the first quarter of 2024 (from 6.2% in the fourth quarter of 2023), as the average vacancy rate climbed to 7.1% (from 6.1%). The softer occupier performance was led by Greater China’s I/L sector – especially in Beijing and Shanghai, where rents fell by 1% YoY (from +1.6%) and 0.1% YoY (from +1%), respectively, during the quarter. 

We expect China’s I/L occupier market to remain under pressure in the near term, given significant new supply is scheduled for completion in 2024-25. This is especially the case in Greater Beijing, which represents 77% of the 2024 completions across the three key tier-1 cities that we track. Consequently, JLL further downgraded its 2024-26 rental growth forecast for Beijing’s I/L properties to -7.5% per annum in the first quarter (from -5.1% in the fourth quarter of 2023). 

In contrast, investment interest from investors and end-users remains healthy in Singapore. In the first quarter of 2024, median prices for multiple-user factories and warehouses increased by 9.1% QoQ and 6.3% QoQ, respectively, reversing two quarters of decline[3]. Importantly, prices for freehold and 60-year leasehold industrial properties rose at a faster rate of 2.2% QoQ and 1.6% QoQ, respectively, during the quarter. This compares with the 0.3% sequential climb for 30-year leasehold assets.

Retail

APAC’s prime retail rental growth picked up in the first quarter to 5.3% YoY (from 4.9% in the fourth quarter of 2023), as the average vacancy rate contracted to 5.1% (from 5.7%). The improved occupier performance was chiefly driven by further gains in Tokyo’s prime retail properties, where the average vacancy rate is now back to the pre-Covid low of 1%. Meanwhile, Australia’s retail sector is stabilising, with a flat average rent (YoY) in the first quarter, following five years of decline. 

According to the CBRE survey published in April, retail leasing sentiment was positive across all markets in APAC, with the sharpest improvement in Japan. Food and beverages remain the most active retail sector in the region, with leasing demand most solid in Singapore and South-east Asia. Importantly, as vacancy rates in prime areas contract further, half of the respondents see market dynamics shifting in favour of landlords. 

Compared with the I/L sector, the occupier market outlook for prime retail properties in China’s tier-1 cities appears more constructive. This is especially the case in Beijing, where the average prime retail rent rose 2% YoY during the first quarter of 2024. This reversed the 1% decline in the fourth quarter of 2023. The average vacancy rate fell to 5.2% (from 5.9%), the lowest since the fourth quarter of 2019. 

Living

Multifamily rental housing within Tokyo’s 23 wards registered a pick-up in YoY rental growth to 3.5% during the first quarter of 2024 (from 3% in the fourth quarter of 2023). This marked the fastest pace of YoY growth in four years[4]. Rental gains in the first quarter were led by the single (less than 30 square metres (sqm)) and compact (30-50 sqm) unit types, which registered YoY growth of 4.2% (from 3.2%) and 3.7% (from 3.1%), respectively. Rental growth for family (more than 50 sqm) units slowed to just 0.5% YoY during the quarter (from 4.4% in the fourth quarter of 2023). 

In Australia, CBRE expects the median apartment rent to rise 28% between 2023 and 2028, as the average capital city vacancy rate shrinks to 0.8% (from 1.8%) over the same period. Monthly rents are still 22% cheaper than alternative buy options at current prices, which could see relative rental affordability retained even if interest rates were to trend lower to 2-2.5%. Following the Federal Budget announcement in May 2023, the market had expected a faster completion of build-to-rent apartments if the lower Managed Investment Trust withholding tax rate were to apply. The draft legislation released in April was met with caution, though, given eligibility requires affordable rental units to be set aside, which could discourage investments.

Outlook for risk and performance

We have downgraded our outlook for near-term capital returns. We now expect a deeper trough and a longer recovery for APAC CRE values. This is especially the case for the Greater Chinese markets, where structural challenges remain a drag on investors’ confidence. 

We think the factors that pin-down the equilibrium rate of interest (r*) in the long run – including demographics, inequality, and the relative price of capital goods – are unlikely to have moved significantly since the pandemic. Therefore, our base case remains for interest rates to retreat to lower levels, and for lower borrowing costs to support better capital returns beyond the immediate 24 months. As such, higher property yields in the near term are likely to be good opportunities for investors to pick-up grade-A assets in core locations. 

Macroeconomic drivers and geopolitical developments will have a significant impact on real estate’s near-term performance. Our base case remains for the global rate-cutting cycle to broaden in the second half of 2024, but the risks are skewed to more hawkish scenarios. Geopolitical developments and their impact on supply chains remain highly fluid. These developments could impact inflation, and therefore interest rates, in unexpected ways. 

On a more constructive note, higher construction and financing costs may continue to discourage new starts and defer completions, which could translate into lower downside risks to occupier markets in the medium term. This is especially the case for better-quality assets that benefit from the growing bifurcation in performance.