Insight

Where do we see opportunities in APAC real estate?

Where do we see opportunities in APAC real estate?

Since the end of the Global Financial Crisis, institutional asset owners have been growing their private market allocations in search of higher returns and lower volatility. While the interest rate hikes in 2022 led to a slowdown in private market investments by institutional investors, the trend is still positive.

In this Q&A we speak to Noah Wangh, Head of Transactions, Asia-Pacific, Invesco Real Estate on where he sees potential opportunities in the APAC real estate market.

Q: Do you see value in equity or debt investing right now in the context of APAC real estate?

A: Clearly over the last year, the seismic shift for private real estate markets globally and in APAC has been the sharp rise in interest rates in most markets. This has created a bid-ask spread and as a result transaction volumes have fallen. Within APAC, Japan is the exception, where rates have remained low, yield spreads are still strongly positive, and financing availability is largely unchanged in the last 12 months. In markets like Korea and Australia where price discovery is still playing out and debt is expensive and more limited, we’re seeing good value in downside-protected structures and lending opportunities.    

In the longer term, we view real estate as an attractive asset class in a world of higher rates and higher inflation – the key  is to identify and invest in assets where rental income is able to keep up with inflation and costs can be managed. To do this, we’re looking to take advantage of structural trends such as population growth or changing consumption patterns, as well as cyclical themes such as APAC’s post-covid re-opening which is driving demand in areas such as hospitality.

Q: Could you compare the opportunity set for real estate between the US and APAC, particularly in light of the recent headlines about US commercial office space?

A: The softening of office fundamentals in the US has been in the news a lot lately. The US office markets are recording an average vacancy rates of nearly 20%1 and office re-entry rates of key US markets are hovering at around 50% of pre-COVID levels2. APAC presents quite a different picture – for example, office vacancy in Tokyo and Seoul are 4.6% and 1.5% respectively as of Q1 2023, and office re-entry rates of some key markets are already at par with the pre-COVID levels3. That said, it’s also important to acknowledge that not all APAC office markets are performing equally. The quantum of new office supply, degree of work-from-home adoption, and general economic growth rates are all important drivers of office performance, and one needs to evaluate each of these market-by-market.

Figure 1 – Office re-entry rates vary across global regions

Source: JLL Research, 2023

Q: Could you pinpoint specific areas of value within APAC?

A: We see value in Japan logistics, as well as multifamily, which are supported by strong fundamentals, and offer some of the largest positive yield spreads of any product globally today. We also like Japan hospitality, given the rapidly recovering inbound tourism to Japan, which benefits from the weak yen. While the Australian market is directionally closer in its macro cycle to the US, we think the Australia residential sector offers good opportunities, given the population growth tailwinds and constrained supply, and there are a variety of ways to play in this space, including build-to-rent residential, purpose-built student accommodation, and master-planned communities. We also think the opportunity in credit in both Australia and Korea is compelling.

With contributions from Monica Uttam, Thought Leadership and Insights, Asia Pacific

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

When investing in less developed countries, you should be prepared to accept significantly large fluctuations in value.

Footnotes:

  • 1

    CBRE EA

  • 2

    JLL Research "The Future of the Central Business District"

  • 3

    Ibid.

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