In brief:

• Looking ahead to 2023, we expect real estate returns across Asia-Pacific (APAC) to continue to follow a smoother trajectory than those in Europe and North America.

• Strong domestic demand in key markets, demographic trends and the ongoing maturation of intraregional trade underpin positive economic growth patterns across the region—and may help cushion APAC from the risk of recession in Europe or the U.S.

• Continued demand for industrial and logistics properties will help support the valuations of high quality core assets in 2023—and trigger noncore opportunities for investors to add value by developing or repositioning existing assets, particularly in Australia, Japan, Singapore and Korea.

• Multiyear demographic trends will continue to spark investment opportunities: In Japan, net inbound migration patterns are driving strong demand for multifamily housing in key cities.

Markets apart: Asia-Pacific’s real estate markets display resilience

Worsening macroeconomic conditions in Europe and the U.S. are creating challenges for investors in real assets globally, but real estate markets in Asia-Pacific (APAC) have held remarkably steady. Performance patterns continue to look very different from those in Europe and North America, and real estate valuations have remained quite stable, neither soaring as high nor pulling back as severely as those elsewhere.

Looking ahead, we expect real estate returns in APAC countries to follow a smoother trajectory with less volatility—a dynamic that has direct bearing on our outlook for 2023. The rise of e-commerce, which is driving transformation and innovation across the industrial and logistics sector, continues to create opportunities for investment, particularly in Australia, Japan and Singapore. We also like multifamily residential assets in key Japanese cities—an idea that continues to be one of our highest conviction strategies.

Long-term structural changes support APAC’s growth trajectory

The differential economic growth patterns visible across APAC countries are underpinned by strong domestic demand in key markets, demographic trends and the ongoing maturation of intraregional trade. Approximately 60% of the total trade in APAC now occurs within the region, cushioning the economy when growth slows elsewhere.

China, with the second-largest APAC real estate market behind Japan’s, plays an important role in that dynamic. Due to its restrictive zero-COVID policy and repeated lockdowns in 2022, China’s economic growth declined from an annual rate of 8.1% in 2021 to 3.9% in 3Q 2022. In response, policymakers softened interest rates and finally relaxed pandemic restrictions in December 2022 after a series of public protests. Predictably, the country is now experiencing an unprecedented wave of infections.

Will the government’s more lenient approach to managing COVID-19 restore China’s economic growth trajectory in 2023? Only time will tell whether the government’s policy reversal delivers any near-term economic dividends. If it does, it could impact the entire region, powering up economic growth and demand for a range of financial assets, including real estate.

Global risks continue to generate headwinds

Regionally, specific growth drivers continue to protect APAC’s diverse economies, but broader global pressures are still evident: Russia’s war in Ukraine has nudged inflation higher in APAC, although the rate of increase across the region is generally lower than in the EU, UK and U.S.

Tightening monetary policy has raised borrowing costs and reduced the availability of debt capital across the region, but financing is still available for core investors with strong assets. Australia, New Zealand and South Korea, however, have seen significantly higher financing costs, causing real estate transaction volumes to decline as investment sentiment has become decidedly more cautious. Singapore and Japan’s real estate markets have proven more resilient.

From a liquidity perspective, this shift has started to exert pressure on sellers seeking to off-load assets. As rising funding costs impact property valuations across APAC, increasing price dislocations and value-add buying opportunities are likely to emerge, forcing asset owners to allocate capital more selectively among existing and new projects.

Structural tailwinds drive innovation in logistics

Continuing demand for industrial and logistics properties across APAC should help support valuations for high quality core assets and trigger noncore opportunities for investors to add value by redeveloping or repositioning existing assets.

From a total return perspective, APAC’s industrial and logistics sector has outperformed other sectors since mid-2020 (Exhibit 1). We expect this trend to persist as e-commerce demand continues to rise—driven in part by the region’s young, urban and increasingly wealthy demographics—although the pace of acceleration may slow in 2023. Over the coming 12–18 months, we expect to see the strongest rental growth in industrial and logistics assets in Australia and Singapore.

APAC’s industrial and logistics sector continues to outperform, although the pace of acceleration has begun to slow
Exhibit 1: Trailing 12-month returns (by quarter) for APAC real estate sectors (4Q 2018–2Q 2022)

Source: The Asian Association for Investors in Non-Listed Real Estate Vehicles (ANREV) Open-End Diversified Core Equity (ODCE) Index; data as of December 2022.

Logistics is evolving as producers rethink their supply chains. We have observed a shift from a just-in-time model, which was predicated on the reliability of supply chains, to a just-in-case style of inventory management. Manufacturers are diversifying supply chains and adding space to house excess inventory.

In an interesting twist, COVID-19 has accelerated the use of automated inventory processing systems and robots. This trend has sparked additional demand for new warehouses that meet the need for more open areas. Higher value manufacturing is also growing, particularly in China and South Korea, driving demand for properties built to higher specifications.

Demand for Japanese multifamily housing remains robust

Japan’s multifamily sector remains one of our highest conviction strategies in 2023. In key cities—such as Osaka, Nagoya and Tokyo—multifamily residential properties continue to benefit from strong consumer demand, with occupancy rates of more than 95%, despite the country’s demographic challenges.

Net inbound urban migration patterns and ongoing household formation support multifamily housing development, particularly in Osaka and Tokyo. Although rents are not growing markedly, they are expected to tick upward in the low interest rate environment. In Japan, where the government has pursued a dovish approach to monetary policy, the spread between the cost of borrowing and the available returns in the multifamily sector remains attractive for core investors.

Occupancy rates start to rise in office buildings

Asia-Pacific’s office sector does not suffer from the work-from-home phenomenon visible in Europe and North America, where hybrid working patterns have reduced office occupancy in many cities. Across much of APAC, offices have been open for some time, and physical occupancy rates increased in the second half of 2022. As a result, rent growth has actually started to improve in some key markets (Exhibit 2).

Signs of growth in office rents are emerging in key markets across APAC
Exhibit 2: Net rent growth in key APAC office markets (%)

Source: Jones Lang LaSalle; data as of January 2023.

The flight-to-quality dynamic still holds true, however, and is evident in Melbourne and Sydney, where overall office occupancy rates lag those in Seoul and Singapore. Despite that occupancy differential, Australia has been ahead of the curve on sustainability efforts in the sector.

Signs of rent stabilization emerge in retail subsector

APAC’s retail subsector has experienced headwinds from COVID-19, with rents declining and valuations dropping in Australia, Hong Kong, New Zealand and South Korea. Prime business district brick-and-mortar assets have been the worst affected.

Recently, we have started to see rents stabilize, but we are not expecting a major rebound. Prices will not come back without a strong catalyst, such as rising tourism.

Conclusion: Multiyear trends continue to support long-term growth

Although APAC markets are less reliant than ever on trade with the U.S. and Europe, the current macroeconomic difficulties plaguing those markets may still impact business and consumer confidence across the region. Deeper than expected recessions in either the U.S. or Europe would slow growth in APAC and reduce the availability of debt financing.

How the region manages COVID-19, and any resurgent wave of infections, could dampen economic growth in 2023 and hinder expectations of a quicker recovery. Despite that risk, we remain focused on the opportunities ahead, which enjoy strong support from ongoing demographic trends and rising intraregional trade flows.

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