Diversification to shape real estate investments in 2024

An expert said capital will cascade into “alternative” sectors next year.

2024 will be a transformative year for the Asia Pacific real estate market as investors focus more on diversification of their asset classes.

According to Christopher Pilgrim, managing director of Colliers Asia Pacific Global Capital Markets, there has been an evolution in investor behaviour over the past year which he expects to continue in 2024.

“Investors are displaying greater adaptability in their investment strategies, navigating fluidly across both geographic and asset class considerations,” Pilgrim said. He added that geographic diversification will stand as a core strategy for investors in the region.

In terms of asset classes, the expert has observed institutional capital cascading into “alternative” sectors like multifamily, senior living, and student housing. This shift underscores a strategic repositioning towards more lucrative avenues,” he said.

Apart from alternative assets, real estate barons are also looking into thematic investments on a global scale. “Investors are increasingly drawn to narratives that align with overarching themes, fostering a strategic approach that extends beyond traditional market boundaries,” Pilgrim said.

Focus on ESG-compliant assets will also continue to 2024 as more investors see the value that these types of assets bring.

ESG friendly assets are also likely to help drive rental growth in property sectors such as the industrial segment, said Catherine Chen, director for Asia Pacific Research at Cushman & Wakefield.

Meanwhile, the flight-to-quality trend in the office and logistics sector will also push stakeholders to commit further towards addressing sustainability and climate change, said Christine Li, head of Research at Knight Frank Asia Pacific.

Upturn for the market

Next year will also be a transformative time for the property market as it is expected to see higher transaction volumes on the back of the stabilisation of interest rates.

Interest rate hikes have been one of the biggest challenges faced by investors and developers, with Hong Kong, Australia and South Korea being amongst the most adversely affected, said Chen.

“2023 has been one of the most volatile in recent history in terms of global interest rate rises and inflation, challenging for both the debt and equity investors across real estate asset classes,” Pilgrim said.

“The expected stabilisation of interest rates will rejuvenate confidence within the debt markets, catalysing an upswing in lending and borrowing activities,” he added.

Li echoed this sentiment, adding that 2024 will mark an “upturn for real estate investment markets” in the APAC region.

“Odds for a soft landing that the Fed has been trying to engineer for its economy are getting better. Interest rates will peak as the Fed finally pauses on its extended rate hike cycle, which should allow bid-ask spreads to narrow and investment activity to rebound,” Li said.

“Asia Pacific will remain the main engine of growth for the global economy, and as China’s recovery gets on firmer ground, these conditions will continue to support the region’s real estate sectors,” she added.

Office takes over

In terms of investment, offices rose as the most transacted asset class in the APAC region. Based on data from Cushman and Wakefield, the office sector accounted for 38% of transactions in the first semester of the year (1H23).

Office demand in APAC also held up better than in the United States and Europe, given the stronger return-to-office trend in the region, said Li.

“With tech occupiers continuing to rationalise employee headcount, financial and professional services firms as well as flexible space operators have made up the slack in leasing activity,” she said.

Data from Knight Frank showed that office rents in the APAC region have continued to decline in 2023. As of 1H23, rents have declined by 1.8%.

Martin Wong, director and head of Research & Consultancy for Greater China at Knight Frank, confirmed the slow leasing activity in the office market, saying the market’s weak performance is due to the large supply available and the slow movement of investors amidst the high interest environment.

Li had a similar sentiment, saying: “The rise in funding cost and concerns over slowing economic growth has generally sparked more caution for developers as buyers are turning more selective in tandem.”

“Office property landlords have reacted to the structural challenges brought on by hybrid working styles and a flight-to-quality trend as tenants focus on what it occupies rather than just how much,” she added.

Increasing allocation for industrial

Behind office, the industrial sector was the second largest sector in APAC in terms of investment.

Pilgrim said there has been a sustained uptick in capital allocation towards logistics assets in APAC.

According to Chen, the share of industrial investment increased from a 10-year average of 17% (2013 to 2022), to 22% in 1H23.

“As a major logistics hub, Asia Pacific remains underserved by modern and high-quality logistics facilities, on the back of growing demand from a rising middle class,” Chen said.

Other driving forces of the industrial market include e-commerce and third-party logistics (3PL) players, as well as manufacturers, said Li.

“Whilst e-commerce demand is normalising, optimisation of the sector’s logistics footprint has driven demand for modern facilities. Preference for institutional-grade facilities in core areas and last mile locations continued to fuel leasing activity in the region, whilst China+1 strategies also saw ongoing expansions by major manufacturers in Southeast Asia,” Li said.

The same was observed by Chen, adding that the China+1 strategy has driven interest for manufacturing and logistics assets in Southeast Asia.

Retail remains relevant

Compared to the industrial segment, the retail sector performed best in Singapore in terms of investment.

Chen said retail investment accounted for over half of the total transaction volume in Singapore in 1H23.

“This was primarily led by a few large deals bought by Frasers and Link REIT,” added Chen.

Region-wide, Pilgrim said the retail sector in APAC “displayed remarkable resilience and strength compared to other regions.”

“It stands out with its consistent performance, boasting a streak of 12 months with stabilised yields,” Pilgrim said.

Respite for residential

Like retail, the residential sector, particularly in Hong Kong and Australia, is also receiving interest from investors.

According to Pilgrim, there has been an increase in investment in the apartment subsector in Hong Kong and Australia. In 1H23, apartments accounted for 16% and 14% of total investment of the respective markets.

Residential sales have also been performing quite well in Hong Kong as developers are becoming more aggressive to clear up their investors, said Knight Frank’s Wong.

Many developers in the region are likewise trying to free up their investors left in the past two to three years, said Wong.

On the buyer side, Li said they are taking advantage of the rate hikes being paused at the moment.

“Buyers are utilising this window of opportunity to lock down on their dream homes,” she said.

READ PART II HERE: Experts tout SG’s strata commercial spaces an ideal investment choice; High interest rates stall foreign property deals in Hong Kong