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Off the back of stabilising interest rates, investors are predicted to maintain or increase their target allocations for some key commercial asset classes across the Asia Pacific in 2024, according to JLL.
But that doesn’t mean that economic factors will provide smooth sailing conditions, the firm noted. Rather, investors who deploy their funds efficiently might be best placed to weather the pressures of higher inflation and interest rates at a stable but high level.
Already, investment is increasing from the cohort of buyers who take a longer-term approach to commercial assets.
The latest edition of Cornell University’s Institutional Real Estate Allocations Monitor noted that 40 per cent of institutional investors’ allocations to real estate in general exceeded targets in 2023 – up from 32 per cent in 2022 and just 8.7 per cent in 2021.
In the Asia-Pacific region, this is seen playing out with major forces such as Singapore’s Government Investment Corporation increasing its allocation to real estate by 13 per cent in 2023. South Korea’s National Pension Service also upped its target allocation to alternatives (including real estate, private equity and hedge funds) from 13.8 per cent in 2023 to 15 per cent in 2027.
Pamela Ambler, JLL’s head of investor intelligence for Asia Pacific, said that those who think in terms of decades are confident in the payoffs of commercial investment.
“Despite pressures in today’s market, the longstanding merits of commercial real estate investments persist. From a 10-year return perspective, commercial real estate has consistently demonstrated its value and held up well against other asset classes,” Ms Ambler said.
“Real estate, in particular private real estate investment, offers lower volatility and reduced correlation to other asset classes, with a more stable income profile providing compelling diversification benefits,” she added.
Ms Ambler noted that maturing global real estate debt will have an impact on the desirability of commercial assets over the course of the next few years.
JLL estimates that in 2025, US$3.1 trillion of real estate assets globally will have maturing debt that requires refinancing. The amount of new equity required for these loan maturities ranges from an estimated US$270 to US$570 billion. The firm believes that these debt maturities will cause investors to look at diversification strategies throughout the capital stack, triggering transactions.
According to the firm’s research, available capital funds for commercial real estate totaled somewhere in the region of US$402 billion as of October 2023.
In light of that, the JLL’s advisors suggest that buyers who are able should make moves early in 2024, as improving market fundamentals will encourage more of this capital to be deployed.
The subsectors of living and logistics are expected to be the first to experience an inflow of funds, according to Richard Bloxam, CEO of capital markets at JLL.
“In our view, while the current higher-rate environment has created a cooling effect on real estate’s attractiveness in the short term, strategic allocation targets into real estate are expected to remain stable and, in some cases, trend higher, especially in the long run,” he said.
“We anticipate this will materialise initially in sectors, such as living and logistics, and in markets with strong rental growth expectations where values also appear to be bottoming out,” Mr Bloxam added.
Whether the year will deliver more positive results for the sectors harder hit by COVID-19, however, remains to be seen.
JLL noted that the global allocation of funds towards the retail and office sectors remains on the decline, with retail core fund exposure in Asia Pacific falling from 21 per cent in 2019 to a 7 per cent in 2023. The office sector saw a decrease in allocation from 47 per cent to 41 per cent over the same period.
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