Key highlights
APAC economic outlook
Our base case remains for a US recession and for the Federal Reserve (Fed) to cut rates from around mid-2024. While we still expect the Fed to cut rates eventually to below neutral, we have raised our US policy rate forecasts for the end of 2024 and 2025.
In Asia-Pacific (APAC), the policy outlook remains divergent. We see further easing in China and fading economic rationale for further policy adjustments in Japan. Australia’s labour market is cooling gradually and housing is turning more inflationary. In Korea, the consensus is shifting towards more gradual rate cuts from mid-2024.
This is a summary of the latest economic outlook for the major APAC markets:
- In China, the fading re-opening rebound has led us to mark down our 2023 growth forecast. We anticipate a more difficult adjustment within real estate, which should weigh on growth to 2025. High-profile trouble at major real estate developers raises the odds of a crisis, but we don’t subscribe to the more pessimistic commentary around China.
- While increased inbound tourism provided a robust economic boost in the first half of 2023 for Japan, domestic demand growth was weak. We expect inflation pressures to continue easing and that a sustained 2% is out of reach. While further policy tweaks are possible, our base case is that standard interest rate policy is likely to remain on hold during our forecast horizon.
- India’s economy has been resilient, but we expect growth to cool more meaningfully in 2024. We expect the Reserve Bank of India (RBI) to keep its policy rate unchanged at 6.5%, but uncertainties around food prices will give the RBI communication a hawkish tilt. As the slowdown takes hold, we expect cooling underlying inflation to give the RBI scope to begin gradual policy cuts in 2024.
APAC economic outlook
Source: abrdn Research Institute; September 2023
Forecasts are a guide only and actual outcomes could be significantly different
APAC real estate market overview
The Chinese economic slowdown will have an impact on the occupier fundamentals of most markets/sectors, given the drag on the global economy. We think prime office and retail real estate in Hong Kong, and prime retail properties in Tokyo, may be most vulnerable. This is mainly because of above-average vacancies and the occupier markets’ historical correlation with external growth.
Besides properties in Australia and Korea, yields in most APAC markets have barely moved since the end of 2021. We expect yields to move out in the next 12-18 months. While logistics properties in many markets will likely see higher yields, the negative impact on capital values is likely to be mitigated by further rental upside.
Following the yield-curve adjustment in July, the market is sensitive to comments from the Bank of Japan (BOJ) and is biased towards hawkish interpretations. While further policy tweaks are possible, our base case is that overall policy settings in Japan are likely to remain accommodative. Consequently, we expect any adjustment in the Japanese commercial real estate market to be gradual, even if the long-term yield rises to 1%.
Occupier market fundamentals guide our market/sector preference and we are most positive about the following:
Seoul offices
Occupier market fundamentals remain solid. Vacancy rates remain low amid limited near-term supply and robust leasing demand from domestic information and communication technology firms. While new supply is expected to pick up in the next four-to-five years, we expect vacancy rates to remain tight relative to history.- Tokyo multifamilyThe robust rebound in net migration into Tokyo is likely to continue, which should keep vacancy rates tight and support further rental growth. The widening rental premium, based on the building’s age, has strengthened the investment case for value-add investment strategies.
- Australia industrial/logisticsRecord-low vacancy rates of 1% or less in many of the capital cities will support rental growth, albeit at a slower pace. We expect the expanding yields to translate into more attractive entry points for investors as interest rates climb.
APAC real estate market trends
Offices
The overall rental decline across the APAC markets we track accelerated to 3.1% year-on-year (y/y) in the second quarter (from -2.5% in the first quarter), on the back of higher vacancy rates of 12.3% (from 11.9%). The weakness was led by the office markets in Shenzhen (-7.9%), Tokyo’s Grade-A central business district (CBD) (-6.4%), Hong Kong (-5.6%) and Beijing (-3.8%). According to CBRE’s latest report on leasing sentiment in APAC, sentiment in Australia and Hong Kong worsened in the second quarter, and remained negative in mainland China.
Meanwhile, Korea registered the most bullish sentiment during the quarter and office rental growth in Seoul outperformed in the second quarter (16.5% y/y). Importantly, it appears domestic investors remain bullish about the longer-term prospects for the sector, despite the projected 6% increase in Seoul’s CBD office stock in 2026. In September, Kyobo entered into a pre-sale agreement to acquire an office project in District 12 of Seoul’s CBD Euljiro 3-ga area, which is scheduled for completion by the end of 2026. The agreed price translates into a value on completion of KRW557 billion (USD421 million), or KRW41 million per py (3.3 square metres). The implied unit price represents a premium of 19% to the KRW34.5 million paid for the Concordian, also in the CBD submarket, during the second quarter of 2023.
Logistics
The industrial/logistics occupier market continues to outperform, even as economic headwinds strengthen across the APAC region. However, the pace of y/y rental growth slowed to 10% in the second quarter (from 11.8% in the first quarter), as the average vacancy rate crept up to 4.8% (from 4.7%) during the quarter. The market remains the tightest in Australia, where the average rental growth was 23% y/y in the second quarter (from 25.9%). Vacancy rates expanded the most in China’s Tier-1 cities (11% from 7.8%) during the quarter. The outlook for warehouses in China’s Tier-2 cities is worse. Singapore-based Mapletree Logistics Trust, for instance, expects a negative rent reversion of up to 10% for its assets in China’s Tier-2 cities.
Japanese logistics properties are sought after by investors in APAC and many offshore investors are in pursuit of forward-purchase opportunities in regional cities. This investment preference appears to be supported by occupier fundamentals. According to CBRE’s data, while the vacancy rate for large multi-tenant logistics facilities in Greater Tokyo was static at 8.2% in the second quarter, vacancy rates in Greater Nagoya, Osaka and Fukuoka narrowed by 0.9-1.4 percentage points to 0.9-5.2% during the quarter.
Retail
Prime retail rents in tracked APAC markets gained 4% y/y in the second quarter – a faster pace compared with the 2.9% increase in the first quarter. The average vacancy rate also narrowed further to 6.9% (from 7.2%) during the quarter. The improved occupier performance in the second quarter was led by Tokyo (10.1%) and Singapore (10.4%), as tourism continues to recover from the pandemic. This could be sustained by lifting China’s ban on group travel to Japan and Singapore in August. In the case of Singapore, JLL notes that leasing enquiries from new international brands have been growing since the start of 2023. Food & beverage assets that target the well-heeled and aspirational mass-affluent consumers dominate these enquiries (apart from lifestyle-related retailers). The reality is that many retailers face challenges, such as manpower shortages, that weigh on their profitability (and thus rent-paying capacity).
In Australia, improved retail operating performance and moderating sellers’ expectations appear to be drawing investors to regional shopping centres. A joint venture between PAG and Fawkner has acquired Midland Gate in Perth for AUD465 million. This represents a discount of 28.5% to the seller’s expected price of AUD650 million in 2019 when the property was first put up for sale.
Living
Advance Residence, a Japanese residential real estate investment trust (REIT), announced the acquisition of 11 properties for JPY22.5 billion (USD153 million) in September. The average building age of the target portfolio is 6.1 years, compared with the 16.7 years of its existing portfolio. It appears the rental premium based on building age has widened for rental apartments in the Tokyo 23 wards. According to Tokyo Kantei’s data for the June-August period, the average rental premium for properties between six and 10 years old, over those that are between 11 and 20 years old, was 11.6% (compared with 10.4% a year ago).
Despite the easing of restrictions on home purchases in Shenzhen, China, poor affordability and a cautious outlook on house prices may be encouraging more people to rent. According to JLL’s research, the occupancy rate of Shenzhen’s private rented housing projects reached 96%, as at the second quarter of 2023. New projects launched in the first half of 2023 achieved an average occupancy rate of 88%. The high occupancy rate helped to drive rental growth of 3.2% y/y in Shenzhen during July. This outpaced the rent increases in the other three Tier-1 cities, according to Centaline/Wind data. The potential of a longer-term exit via a Chinese REIT listing also helped to build the investment case for this market/sector.
Outlook for risk and performance
We expect outward yield shifts to gather pace in most markets in the next 12-18 months, which will continue to put pressure on capital returns in the near term. Over the longer term, our base case is that interest rates will retreat to lower levels. In fact, we expect the net effect of demographic change on interest rates to be negative up to 2030. According to the abrdn Research Institute (aRI), 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 support better capital returns beyond the immediate three-year horizon.
Higher property yields in the near term are likely to be good opportunities for investors to pick up Grade-A assets in core locations. Logistics properties in Australia and Greater Seoul, and Grade-A offices in Seoul’s key business district are attractive, on account of longer-term occupier fundamentals.
Macroeconomic drivers will have a significant impact on real estate’s near-term performance. The key risks to our base case are stickier-than-expected inflation and interest rates. This includes Japan, where we expect the overall policy settings to remain accommodative and any market adjustments to be gradual. A sustained upside surprise in inflation may trigger a faster policy tightening than what we currently expect, with potential negative implications on real estate pricing.
APAC total returns from September 2023
Source: abrdn; September 2023
Forecasts are a guide only and actual outcomes could be significantly different