APAC economic outlook 

The global economy is slowing but a soft landing remains our base-case scenario. The Fed’s 50 basis point (bp) rate cut in September provided a powerful signal that policymakers are thinking about risks as post-Covid inflation shocks fade. Their concerns around the health of the global business cycle are also increasing. Easing inflation and rising unemployment suggest the Fed is likely to cut interest rates by at least 75bps in 2024 and 150bps in 2025.   

China’s latest data mostly reinforced the lacklustre economic picture that emerged over the summer. Chinese authorities announced a wide range of policy easing measures in September, which are more aggressive than we have seen. But it’s unclear whether these measures are enough to drive a lasting turnaround in market sentiment. Further support measures seem highly likely.  

In Japan, solid Shunto wage negotiations are finally feeding into higher realised earnings, with base pay measures rising meaningfully over the past quarter. If this trend continues, services inflation could stabilise, and the Bank of Japan (BOJ) would have a greater impetus to continue with its gradual policy normalisation. This could cause further currency and market volatility. 

The Reserve Bank of Australia (RBA) is focused on returning inflation to target. Observers think the RBA remains some distance behind the Fed in cutting rates, with the labour market cooling too gradually for its comfort. Forward indicators, however, point to further softening and most expect the RBA to begin lowering rates in the first quarter of 2025. 
Korea’s inflation pressure is easing and, coupled with the outsized Fed rate cut in September, observers think the Banks of Korea is on track to deliver at least one rate cut in the fourth quarter of 2024. While the prospect of lower interest rates is welcome news for investors, observers are watching for any deterioration in external demand for Korean exports.

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

APAC real estate market overview 

The start of the Fed’s rate-cutting cycle has helped market sentiment but the policy outlook in APAC remains divergent. Besides structural challenges in Hong Kong and China, we believe property yield gaps in most markets/sectors have room to expand. Repricing has lagged other regions amid a weaker occupier outlook. Consequently, our base-case scenario remains for APAC’s real estate market recovery to be long and slow.

Performance bifurcation between newer and older central business district (CBD) offices has widened in several markets, presenting investors with potential value-add opportunities. That said, investment strategies will need to go beyond just targeting a green certificate, given stakeholders’ sharper focus on operational decarbonisation to meet net-zero ambitions. A truly forward-looking, value-add strategy for offices would have to plan for capital expenditure requirements to keep the building’s carbon footprint aligned to an operational decarbonisation pathway over the longer term. 

Among the APAC’s developed markets, Seoul remains our highest-conviction office market. Occupier market fundamentals in its key business districts remain sound, given low vacancies amid limited near-term supply. While more new supply is scheduled for completion from late-2026, we expect vacancy rates to remain tight, relative to history, even in the bear-case scenario. 

The living sector ranks highly in our investment preferences globally. Tokyo multifamily properties, backed by solid occupier fundamentals, remain popular among institutional investors. We think there are multiple tailwinds to support further rental upside. Net migration, coupled with better wage growth and more dual-income households, will underpin leasing demand and affordability. But thinner development margins, because of higher land and construction costs, have discouraged new projects. This has constrained future housing supply. Limited supply is also keeping condo prices high, which is encouraging households to rent (rather than buy).    

Excluding Hong Kong and China, investment opportunities appear limited for opportunistic strategies, given the slower-than-expected repricing. An exception could be Greater Seoul’s logistics properties. Distressed opportunities have emerged as more assets with non-performing loans are put up for public auction. While speculative cold storage developments remain a near-term drag on occupier fundamentals, we think vacancy rates could start to contract from 2025.

APAC real estate market trends 

Offices

APAC’s office occupier market stabilised in the second quarter of 2024, with the average quarter-on-quarter (QoQ) decline in rents slowing further to 0.6%[1] (-0.6 versus -0.8% in the first quarter).  Vacancy rates were broadly unchanged at 12.9% during the quarter. CBD prime-grade offices in Brisbane, Tokyo and tier-1 Indian cities outperformed their peers in the region during the second quarter. They registered an average QoQ rental growth of 3.4% (from 3.9%), 1.8% (from 2.1%) and 1.1% (from 0.9%), respectively.  

The average grade-A office vacancy rate in Tokyo’s central five wards (C5W) narrowed further to 3.6% in the second quarter (from 4.2%). Improved corporate profitability translated into an expanding footprint to accommodate increased hiring activity. Occupiers are increasingly drawn to larger and higher-quality offices to gain an edge in talent acquisition. Consequently, the bifurcation in performance between modern buildings in prime locations and older, less accessible buildings with poor amenities has widened. 

Positive news continues in the Indian office occupier market. Total net absorption across the top seven cities gained 27.5% QoQ to 10.6 million square feet, while vacancy rates fell to a three-year low of 15.3% during the second quarter. Expansionary leasing demand was led by both global and domestic firms looking to increase headcount, including activity from global capability centres.    

Logistics

The QoQ rental growth of APAC’s industrial/logistics (I/L) properties slowed sharply to 0.3% in the second quarter (from 1.7%). The average vacancy rate climbed further to 7.7% (from 7%). The sequentially weaker occupier performance was again led by the Greater Chinese I/L sector. This was specifically in Beijing, Shanghai and Hong Kong, where rents fell by 3.9% (from -0.9%), 2% (from -1.1%) and 1.8% (from -0.7%), respectively. 

Grade-A logistics rents in Greater Tokyo were flat QoQ in the second quarter, while vacancy rates were marginally lower at 9.6% (from 10% in the first quarter). There are signs that vacancy rates may have peaked, following three years of steady increases, as new supply in the Route 16 area is set to drop in 2024-25 to around half the record-breaking levels of 2023. Any decline in vacancy rates is expected to be moderate, though. 

Transaction volumes for Greater Seoul’s logistics properties jumped 35.3% year-on-year (YoY) to KRW1.3 trillion (USD940 million) during the second quarter, despite a further hike in the overall vacancy rate to 21.3% (from 19%) in the first half of the year2. While the near-term occupier fundamentals remain weak, it appears investment demand is slowly returning. This could be driven by an increase in distressed opportunities and the prospect of a sooner-than-expected stabilisation of the occupier market as new supply tapers.

Retail

APAC’s prime retail rental growth slowed in the second quarter to 1.2% QoQ (from 1.4%), with the average vacancy rate broadly static at 5.2%. Prime retail rents in Tokyo outperformed in the second quarter, although the sequential pace of growth decelerated to 3.4% (from 4%). 

Rents for Australian regional centres were mostly flat in the second quarter, but Perth outperformed with a sequential growth of 0.95% – the fastest among key capital cities2. Western Australia has recorded the fastest population and employment growth in the country, and this has driven retail sales and rental growth in Perth. The improving occupier fundamentals are translating into solid investment demand, with transaction volumes for retail assets in Perth up 53.4% YoY in the 12 months to June 2024.  

India’s retail occupier market strengthened further in the second quarter. The average YoY rental growth across the tier-1 cities accelerated to 6% (from 3.6%), as the average vacancy rate contracted further to 10.8% (from 11.6%) – the lowest in 16 years. India’s second-quarter leasing volume was double that of the first quarter, with domestic brands representing 80% of the activity. Millennial preferences are fueling the expansion of mid-range fashion brands and gaming centres, which has led to leasing demand for additional space. 

Living 

Advance Residence, the largest Japanese residential real estate investment trust by market cap, recently announced its earnings for the six-month period to July 2024. The average rental increase on tenant turnover reached a record high of 9.8%, led by renovated units in the portfolio (+26.2% versus +7.5% for those not renovated). By area, the units located within Tokyo’s 23 wards were the best performers (+12.4%), followed by those in Greater Tokyo (ex-the 23 wards, +8.9%). It appears there are several tailwinds that support further rental upside in Tokyo’s multifamily sector. Net migration, coupled with improved wage growth and more dual-income households, will continue to underpin leasing demand and affordability. 

The occupier fundamentals for Australia’s residential build-to-rent (BTR) properties remain sound. The nationwide rental vacancy rate was at a low of just 1.3% at the end of June, while rents registered average growth of 7.3% YoY. Observers have reported mounting challenges, though. In Melbourne, where 60% of the future pipeline is, the number of BTR apartments in the approved, application and early planning stages has contracted by 12% in the past six months alone3. Uncertainty over the withholding tax regime applied to foreign-owned projects, as well as higher construction and financing costs, have dampened investors’ enthusiasm. 

Outlook for risk and performance 

We have raised our near-term total return forecasts for APAC’s property market. This reflects, in part, the repricing that has already taken place in Australian CBD offices, especially in Sydney and Melbourne. While we think the bulk of the downside in capital values is likely behind us, the scope for a market re-rating is limited and performance is likely to remain bifurcated.

The BOJ’s gradual policy normalisation has increased the pressure on Japanese property yields to rise. But Japan’s policy setting remains accommodative. with real rates still deeply negative. Property yield gaps remain generous, relative to other markets. The rental growth outlook for sectors like Tokyo’s multifamily and offices has also improved. The weight of investment capital could therefore mitigate the pressure for Japanese property yields to rise. 

Macroeconomic drivers and geopolitical developments will have an outsized impact on real estate’s near-term performance. Our base case remains for a soft landing of the global economy, but a hard landing (i.e. recession) is now our second-most likely scenario. Geopolitical developments and their impact on supply chains remain highly fluid. These developments could affect inflation (and interest rate) outcomes in unexpected ways. 

On a more constructive note, elevated construction and financing costs may continue to discourage new starts and defer completions. This 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.