As WE move into a new year, the global economy is entering a challenging phase with a substantial increase in risk factors impacting investors and occupiers.

The real estate industry is at the heart of the current economic situation, with a sharp slowdown in activity and notable value adjustments resulting from the rapid shift in the outlook for interest rates and inflation. As a result, we expect to experience a period of adjustment in 2023 while investors, occupiers, lenders, and developers appraise the new valuation landscape.

Even as the economic rebound strengthens post-pandemic across the Asia Pacific (Apac) region, the surging inflation accompanying it has complicated the real estate outlook. As most central banks in the region tighten monetary policies to combat inflation, growth will inevitably slow.

Nonetheless, Apac will remain the world’s fastest-growing region, particularly supported by demand in domestic-oriented economies in emerging South-east Asia and India. While the Chinese Mainland economy may not reach its full potential output, growth could outperform expectations after pandemic restrictions were significantly eased towards the end of 2022.

There have also been recent positive developments on the geopolitical front. One example is the G20 summit held in Bali in November. This was the first physical meeting between political leaders of major economies since the pandemic and signalled a thawing of US-China relations. Although it is unlikely to resolve all differences, a more consultative approach could revitalise global trade flows – a crucial cog in export-dependent economies in the region.

Inevitably, the region’s interest rates will reach multi-year highs in 2023. As a result, real estate markets in Apac will have to weather a period of transition, as occupiers and investors relook their strategies in a rapidly evolving environment.

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Residential sector: Resilience amid caution

After a banner year in 2021, homebuyers are finally taking a breather and adopting a wait-and-see approach amid rising mortgage rates and an elevated inflationary environment. The rise in near-term interest rate expectations indicates that a price reversal will be widespread across several regional key markets. 

Despite the recent double-digit correction, the pull-back was still moderate. New Zealand and Australia’s overall residential prices, in particular, are still 20 per cent and 25.5 per cent higher than at the start of the pandemic.

Looking ahead, price correction is unlikely to be of the same magnitude as previous downturns. This is largely due to significantly higher construction costs (for new builds) and low unemployment rates, which will provide a cushion to prevent a steep fall in housing prices if economic prospects deteriorate further.

The prime segment, where buyers are less sensitive to rising borrowing costs, is still thriving – attributed to wealth preservation by high-net-worth individuals (HNWIs). Safe haven assets will support HNWIs’ demand for prime properties in gateway markets, including Singapore, which is highly sought after by Greater China buyers due to its reputation as a growing hub for business and finance in Apac.

Office sector: Ongoing workplace experiment  

The office sector is facing challenges due to the structural shift towards more hybrid work in a post-pandemic environment. Nonetheless, the relative resilience of prime demand over the past couple of years has left the sector in a better starting position, with prime vacancy low in many markets across the region.

Catalysed by the weakening economic and operating environment, occupiers will be forced to review the quantum of space they hold. As a result, they will be more cautious in making lease decisions, while landlords will prioritise safeguarding their cash flow.

With ongoing anxiety about the economic outlook, occupiers facing incoming lease expiry are more inclined to renew their leases for shorter terms instead of expanding or relocating. Renewal cases are currently dominating some Apac markets, and we could see more of this phenomenon in the coming year.

While we foresee shadow space emerging amid mass layoffs, significant space reductions across Apac should be few and far between – underpinned by a stronger preference for office-based work in cities like Tokyo and Seoul, as compared to the United States and Europe.

Market conditions in 2023 will continue to favour occupiers, as highly amenitised buildings with sustainability accreditations are being completed and ready for occupancy.

In the coming years, it will be vital for companies to create environments that support a variety of work styles for their employees, enabling them to do so comfortably and productively. As such, businesses are now at an optimal point in time to evaluate how they can best provide for their employees and take steps to curate the most desirable workplaces for them.

Logistics sector: Tenacious against headwinds  

Since 2020, Apac’s household spending has been on an upwards trajectory as real income rose. This was a boon for the logistics sector as vacancy rates tightened to record lows and rents surged.

Fast forward to end-2022, consumers have re-evaluated their spending in light of moderation in real income growth and deteriorating sentiments. The pace of private consumption is expected to slow down but remain resilient in 2023.

Companies are now resigned to slower sales as consumers scale back on purchases. E-commerce giant Amazon, for instance, anticipates sluggish sales during the festive season, indicating that individuals and companies are less willing to spend.

Correspondingly, to avoid further complications in supply chains, businesses are continuing to leverage the “China plus One” strategy and diversifying production into other markets.

Demand, albeit declining, is being diverted to India and South-east Asian countries like Indonesia, Vietnam, and Thailand – enticed by lower costs, ease of trade and a growing manufacturing base. Moreover, the rising middle-class population is driving the growth of these economies, rendering the logistics sector to display resiliency as it navigates through uncertainties.

Fundamentals for the logistics sector in Asia-Pacific have yet to be as well-established as the US or Europe, leading to an acute shortage of modern facilities and fierce competition.

As we encounter headwinds in 2023, market fundamentals will render a generally balanced logistics market in Apac, with rental growth set to moderate compared to the past two years. Logistics occupiers will continue committing to build-to-suit solutions and gravitate towards institutional-grade assets. Structural factors will still bode well for the sector in the long run.

Capital markets: Strategising the new landscape  

After over a decade of abundantly available capital, the rapid reversal in macroeconomic fundamentals is changing the playbook for real estate investment globally and regionally. Listed real estate has corrected in tandem with the heightened uncertainty, and transaction activity in private markets is set for a pause while in transition.

With the rising tide of low-interest rates on an ebb, the search for a new equilibrium will bring about a period of dispersion as asset managers, investors, and developers appraise the new valuation landscape. On the cusp of a new era, several major themes will underpin the new investment landscape.

1. Inflation hedges

Commercial real estate, which exhibits income growth potential, diversification benefits and relative stability, will see strengthened interest. Counter-cyclical as well as those which capture structural changes, from continued digitalisation trends to the region’s wider demographic changes, can also offer opportunities. As building costs rise, there may be increased opportunities for refurbishment and repurposing of assets to capture alpha-based returns.

2. Flight to quality

For commercial real estate to serve as an effective inflation hedge, it would require to some extent, landlords to successfully push through positive rental reversions. These conditions are particularly conducive in well-leased, quality assets located in gateway markets. We expect investors to focus particularly on core, liquid assets in prime locations with attractive yields relative to the cost of debt.

3. Rise of dollar investors

We expect increased demand from dollar-denominated investors from North America, the Middle East, and parts of Asia, seeking to capitalise on the currency’s strength and diversify their portfolios into the region’s core markets. These investors are watching the re-pricing of markets closely and are ready to move quickly when conditions stabilise.

4. Dominance of private and sovereign investors

The final key theme in the short term is the greater dominance of private and sovereign investors. With longer horizons and deep pockets, these investors are prepared to move quickly to secure prime assets while there is limited competition. Over the last two years, Singapore has seen a huge influx of family offices from the US and Europe, and we see these private investors being the most aggressive buyers for trophy office assets in the region’s safe-haven markets.

The writer is head of research, Asia-Pacific, at Knight Frank