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With real estate markets forecasted to continue its ‘dramatic’ reset in 2023, a global real estate brand enumerated the six factors shaping the Asia Pacific region’s commercial property landscape.
Although fundamentals in the commercial real estate sector remain strong, Colliers underlined that current sentiment among investors is characterised by “cautious anticipation” of steady growth and healthier returns in the longer term starting in the latter part of the year.
“Real estate, most certainly, is not immune to market volatility, yet we see investors highly conscious of some of the advantages the current situation presents in the region,” it stated.
By employing the right strategy and having the resources, Colliers underlined that the region is still ripe with “exceptional opportunities”.
“Businesses are accordingly realigning plans and investors are sharpening strategies to pick the right markets and assets for robust returns this year”, according to Colliers.
It added that “investors and occupiers should keep eyes on new opportunities, while streamlining decision-making to be able to react immediately to any rebound”.
The global real estate brand identified the underlying forces shaping real estate in 2023.
- Inflation, interest rates and world economics
While Colliers predicts that central banks around the world will continue to hike interest rates to fight surging inflation, it estimates that it will be doled out at a “slower pace” in 2023.
“The persistent inflation — aside from causing commodity price increases, supply chain disruptions and hindrances to the domestic demand recovery — has also weakened Asian currencies against the US Dollar. As this makes regional real estate cheaper in dollar terms, it could potentially reignite deals presently on the back burner,” it added.
With US and European economies forecasted to falter in 2023, demand for real estate in the APAC region is also expected to take a hit.
However, Colliers pointed out that the economic headwinds in Europe and the US will “make the regional markets relatively safer and a haven for property investments”.
Colliers’ consensus is that real estate markets will start to stabilise by mid-2023, with more certainty emerging around the interest rate outlook.
Malcom Tyson, the chief executive officer for Colliers in Australia, said that there is still a significant amount of untapped capital that can be invested in real estate despite the uncertain economic conditions.
“Many global investors are underweighted to APAC markets, including Australia, Korea and Japan, that will be major beneficiaries of this trend.
Moreover, once interest rates stabilise and lenders price debt with more predictable spreads, investment activities will potentially start picking up,” he stated.
- Asset value correction
With investment activities slowing down in the face of rising interest rates, Colliers forecasts a pricing reset across markets in 2023.
The global real estate brand expects capital values to correct by up to 30 per cent, as investors shift their strategies in line with current market conditions.
Despite the predicted steep declines in valuations, Colliers offered that this shock to the market can ‘largely be absorbed’ as the current conditions are not similar to the ones seen during the past financial crisis when loan-to-value levels were much higher.
On the contrary, Colliers believes that the current conditions are “creating new opportunities”.
“Now is a time of opportunity. If investors pick their markets, assets and strategies carefully, this is a good time to capitalise,” said Chris Pilgrim, the managing director of Colliers Asia Pacific Capital Markets business.
Declaring “cash is king”, the executive pointed out that equity-driven investors — notably the private buyers — can vie for assents in an environment he described has “limited buy-side competition”.
They are typically immune to market forces and will continue to be active despite market flux.
“Markets with safe-haven status will be active and locations with deep, embedded levels of private capital will prosper,” he stated.
- Regional resilience
With mostly stable capitalisation rates, Colliers stated that the Asia Pacific region continues to be resilient and is gradually moving toward a sustainable recovery.
“Despite vast and complex regional differences across property markets, we see investors highly keen on the 3Ls ― logistics, living and life sciences ― as demand for these businesses continue to grow globally.”
It also highlighted that the region’s comparatively quicker rate of economic growth, burgeoning consumer class, and rapid urbanisation, along with its tech leadership in e-commerce, artificial intelligence, data analytics, and communication networks makes APAC a strong choice for longer-term real estate exposure.
Colliers revealed that investors’ preference in the region is mostly the big cities, indicating a predilection for reputable markets that potentially can deliver value during a price reset.
Japan was named the top choice among investors looking to invest in the region this year, particularly its office, industrial and multifamily asset classes.
Australia, Singapore and South Korea are also seen as front runners in luring investors, according to the global real estate brand.
Rick Thomas, Colliers’ managing director for emerging markets in Asia, said that economies in the region are “unlikely to fall into recession”.
While he expects a near-term blip in its stability, he forecasted that the region will continue to outperform in 2023.
“Alternative markets will be reviewed but gateway cities will continue to be safe choices for investments and larger capital markets transactions. Occupiers, as well as owners and investors across markets are already leading with environmental, social, and governance (ESG) focus to future-proof their strategies,” he stated.
- Technology-led structural changes
Aside from underpinning social changes, Colliers highlighted that technology has also led to a “quicker evolution of how owners interact with occupiers”.
It noted that real-time facilities management and tools have helped enhance productivity and maximise user experience.
Colliers noted that technology has impacted each sector differently. For example, it has allowed operational efficiencies against rising costs in the industrial sector. While for retail, online platforms will continue to evolve with greater focus on “click-and-collect”.
It also states that the “opportunites are unlimited” for the office sector, as technology allows occupiers to be “highly creative and flexible with their workplace and workforce strategies”.
Ramesh Nair, the chief executive for India and managing director for market development in Asia, said that technology will continue to “shape the way we work and where we work.”
Today, we are witnessing a trend towards “hotelisation” of offices. Workplaces are morphing into unique destinations backed by artificial intelligence, Internet of Things, and virtual reality among other technologies that integrate services with amenities, enabling on-demand experiential spaces. Going forward, owners will invest more in technology,” he stated.
- Defensive assets on investors’ priority list
In 2023, office and industrial and logistics assets will see the strongest demand, according to Colliers, due to investors pursuing a defensive asset strategy.
Citing its 2023 Global Investor Outlook, Colliers noted that multifamily assets also now significantly outpace retail and hotels, and a good number of investors are interested in specialised assets (alternatives).
Another asset observing a surge in demand are big-box warehouses compared to last-mile distribution and is the top industrial and logistics asset pick in 2023.
Additionally, it highlighted that there’s higher interest in industrial parks/manufacturing facilities and container terminals.
“In APAC, the next few months will lead to price discovery and repricing, as market players reassess their portfolios amid greater uncertainty. The search for high-quality and inflation-proof assets will intensify in the year ahead as industry players step ahead with caution keeping eyes on the macro trends,” Mr Nair stated.
- Sustainability fueling flight to quality
Colliers acknowledged the growing focus on ESG criteria and ratings by commercial investors, which it stated is not solely motivated by regulatory and reputational reasons.
The global real estate brand said that this shift in focus is increasingly in response to occupier demands in experiential workplaces and to also balance out asset operational costs over the longer term.
“Investors are focusing on assets with strong sustainability characteristics, with expectations that these will command a premium. Non-compliant assets will be increasingly confined to discounted territories and targeted for redevelopment, as disposal and acquisition strategies are activated,” Colliers stated.
Tammy Tang, the managing director for China, said that the importance of ESG in real estate will continue to grow in 2023 despite “slower investment decision-making, and defensive underwriting” in the sector.
“Previously, the sometimes-low ROI of ESG projects dissuaded investments, but as most companies prepare to face the global economic challenges in the year ahead, every dollar spent must be justified.
“Today, the lower operating costs of ESG projects are becoming a draw, helping both occupiers and landlords save money while enhancing efficiency. We recommend taking a flexible approach, as the market is changing quarter-by-quarter,” she stated.
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