THE market sentiment for office investments in Asia-Pacific (Apac) is expected to improve amid expectations of interest rates peaking in the second half of 2023, Colliers said on Thursday (Jun 15).

Peaking interest rates would provide investors with confidence and clarity over asset values and borrowing costs in the region, the real estate investment management company said in its global insights and outlook report.

Colliers noted that Apac office occupancy levels are averaging 80 per cent, beating Europe’s 65 per cent and North America’s 50 per cent. Office density remains high, due to short commute times and the ease of returning to office.

Apac office investment volumes have also held out better amid falling overall transaction volumes globally. The region had a stronger proportion rate of 38 per cent, compared to the Europe, the Middle East and Africa (Emea) region at 35 per cent, and North America at 15 per cent.

Notably, Singapore and Seoul recorded a net absorption of 30 per cent above historical averages, with both markets having registered decreasing vacancy rates over 2022.

“Even as the office markets globally continue to face short-term challenges, Asia-Pacific remains attractive for office investments over the longer term,” said Chris Pilgrim, managing director of Colliers’ Apac capital markets business, noting the region’s “strong fundamentals”.

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These include the “diverse range of markets, positive sentiments towards offices from a demand perspective and strong population-led economies presenting more resilient economic growth”, he said.

The office sector also remains the biggest focus for Apac capital, with 68 per cent of investors in the region earmarking the office sector as their investment focus for 2023.

In a similar vein, office-focused real estate investment trusts (Reits) in the region are expected to be more resilient than their global peers, a separate report by S&P Global Ratings has found.

This comes as hybrid working takes root, leading to tenants downsizing the space they lease. Vacancy rates are also elevated, and higher interest rates are putting pressure on funding costs and asset values, noted S&P credit analyst Simon Wong.

Although office Reits and landlords in Apac are facing similar dilemmas, they have done better in stress tests, when it comes to having a financial buffer against scenarios of sharper declines of rents and asset value.

“Only three out of 15 office-focused rated Reits or landlords in Australia, Hong Kong, mainland China, Japan and Singapore have negative rating outlooks,” said S&P.

In contrast, US office Reits have negative outlooks or CreditWatch placements on six of 11 rated issuers.

S&P performed stress tests on 15 rated issuers across Australia, Japan, Hong Kong, mainland China and Singapore. These included office-focused Reits or landlords with more than 50 per cent exposure to office assets.

The stress tests found Australia and Singapore-rated issuers to be among the most resilient to “sharply lower” lease renewal rates. When it comes to asset valuations, Hong Kong landlords and Japanese Reits were found to be able to withstand up to a 25 per cent decline in asset value, without breaching their financial policy targets or bank loan covenants.