​Global interest rate rises have reverberated through the Asia Pacific (APAC) real estate markets in 2023, causing shifts and influencing every aspect of the industry – with countries and sectors feeling the effects in differing ways.

In general, China’s reopening and the perception that interest rates are near their peak have somewhat brightened economic prospects across the region for the second half of the year. That hasn’t meant the challenge is over, however, with commercial real estate investment looking to recover from falling to its lowest quarterly level in Q1 since 2010.

While retail and hospitality may stand to make a greater recovery due to returning tourism and consumption in 2023, the office sector remains sluggish with high supply and a transforming employment landscape. Attention is being paid to alternative asset classes yet uneven volume growth is expected to remain. Logistics is under pressure from oversupply in certain markets but is still being driven by secular growth trends.

What does this mean for the opportunities across the Real Estate Investment market in APAC, for investors, professionals, and businesses? Aurex Group’s team helps to break down how the markets are responding to rising interest rates and where the market is going next.

The impact of an increasing interest rate across APAC

In Australia, we’ve witnessed incredible upward pressure on domestic interest rates via the Reserve Bank (RBA). This has translated into increased borrowing costs for consumers and investors alike, with 12 interest rate hikes since August 2022. The current interest rate setting is at 4.1%, meaning financial institutions will be lending funds to property owners anywhere between 5.5% up to 7.5% – equating to a doubling of rates over the last 12 months.

In the second half of the year, there has been some reprieve, with the RBA electing to freeze the interest rate in increases in July and August as inflationary pressure eases and falls to a more favourable 2-3% per annum.

The sensitivity to the interest rate fluctuations has contributed to a cooling effect on residential property with mortgage repayments and borrowing rates increasing, and overall, the attractiveness of real estate as an investment opportunity has taken a hit.

In Greater China, we are seeing a different response to the global outlook. Interest rates in China have historically remained fairly flat, averaging 4.3% between 2013 and 2023. They reached an all time high of 5.77% in April 2014 and, recently, a record low of 3.55% in June 2023.

Since the reopening of the country at the beginning of the year, the Chinese government has been implementing various new policies to boost the real estate market. Lowered interest rates are aiming to encourage businesses and individuals to make investments in real estate. While some report a 1.5% increase in housing prices in the first half of 2023 due to the lower mortgage rates available, total home sales are down year-on-year, and uncertainties remain around the sensitive topic of house prices.

China’s property market is still feeling the effects of its severe downturn in 2022 due to the country’s zero-Covid-19 policy. China’s real estate borrowers with low credit ratings have been challenged and increased the demand for private credit investments in Greater China. Offshore investors have also been detracted, withdrawing capital from the market.

In Singapore, interest rates tend to be closely linked to global interest rate trends, and therefore, like the majority of the market, these rates have climbed quickly. Currently sitting at 3.77% in August, it is predicted to continue to slowly rise this year.

Colliers has reported real estate investment activity in Singapore shrank to roughly $4 billion in the first quarter, the lowest quarterly volume since the height of the pandemic in Q4 2020. The total real estate investment volume sank more than 63% in the first quarter, from $10.9 billion in the same period in 2022 – despite there being a number of significant residential collective sales and industrial deals.

Volatile interest rates and the recent turmoil of the US banking sector following the collapse of Silicon Valley Bank and the Credit Suisse and UBS Group merger have been cited by analysts. Yet, Singapore’s safe-haven appeal remains even as investors take a wait-and-see approach. Colliers has predicted an overall recovery in transaction volumes by the end of 2023 should more certainty emerge around interest rates.

Source: https://www.schroders.com/en-hk/hk/institutional/insights/asia-pacific-real-estate-market-update-31-05-2023/

How are the real estate asset classes responding and performing across APAC?

Commercial Office
In general, higher global interest rates often lead to decreased demand for income-generating assets like commercial properties. Investors seek lower returns in a high-yield environment, driving down property prices.

In Australia, the commercial property market has had a mixed response to the rising interest rates with yield rates being forced up for the first time in over a decade. This has meant values have fallen in the cost of many commercial properties, particularly those that have not had significant rental increases, slightly offset by rental reviews that have been aligned to the inflation rate which has spiked over the last two years. Analysts predict commercial investors will be cautious until there is a clear line of sight on interest rates later in 2023.

In China, the commercial office market remains the most affected asset class not only due to the rising global interest rates but also the increasing vacancy in top tier cities such as Beijing and Shanghai.

In Hong Kong and Singapore, the rival business hubs, commercial deal values have increased on a quarterly basis, moving against the regional trend. In the first three months of the year, Hong Kong’s commercial property was up 15% on the previous, and Singapore posted a 40% increase compared to its preceding three months. With wealthy buyers and a strong rental demand, rising rates are unlikely to have an ongoing negative affect on these two commercial property markets.

It can be said that the end of the low inflation rate and low interest rate is ushering in a new era of real estate investing. Property owners need the operational expertise to generate rental incomes to meet their repayments and solidify their balance sheets. This creates an opportunity for professionals and businesses to benefit from talent in this field, and demand will be driving attractive packages across the region.

 

Retail

Higher interest rates restrict economic activity, resulting in lower demand in real estate assets like retail units. Naturally, this decreased demand can lead to decreasing occupancy rates and as such, lower rental income for property owners.

Across the region, segments of the retail property market have been facing challenges already due to the rise in e-commerce. Vacancy rates have now been on the rise as interest rate changes have forced costs of business higher as profit margins tighten.

However, the retail real estate sector has reached higher levels compared to previous years, after Covid-19 impacted the sector heavily. The rebounding of consumption and returning tourism is helping to drive retail sales growth and Hong Kong, Singapore and Shanghai have all posted recovering retail rental figures in prime shopping areas in 2023.

Source: https://www.schroders.com/en-hk/hk/institutional/insights/asia-pacific-real-estate-market-update-31-05-2023/

 

Industrial

Industrial property has shown its resilience during the interest rate increase as the asset class continues to attract interest from investors looking for capitalise on evolving consumer trends and rental growth remains strong. While pockets of oversupply exist in Greater Tokyo and Greater Soeul, most major APAC markets are still undersupplied in modern logistics warehouses.

In Singapore, JLL reported on the industrial property leasing market’s strong growth trend in 2023, in spite of increasing interest rates and macroeconomic turmoil. This has led commentators to expect further performance of the industrial property market against the external headwinds, igniting interest from investors looking to rebalance their portfolio with higher yielding assets such as logistics and warehouse properties.

In China, industrial and logistics real estate has also remained stable, however, offshore financing costs have made an impact. Investors have become more cautious about making new investments in the region.

In Australia, industrial properties have been affected by the interest rate increases over the past 12 months with yields and returns outcomes similar to those in commercial and retail properties.

Residential 

For residential real estate markets, higher interest rates increase the cost of financing. This can restrict new construction projects and discourage property upgrades, decreasing supply in the market. Prospective home buyers are now facing higher mortgage repayments, potentially dissuading some from entering the market all together.

In Australia, the residential property market has exhibitied a discernible shift in demand dynamics. Subdued demand for housing has led to a slowdown in price growth, particularly in the major cities such as Sydney and Melbourne – evident through the declining auction clearance rates and increase in time properties remain on the market.

On the other hand, recent changes in both Federal and State based legislation has seen the significant expansion of Build to Rent space in Australia this year. While still in its infancy relative to global trends, it is expected to help combat the housing shortage issue in Australia. Finding suitable land at a cost that makes the developments viable to institutional investors is the biggest challenge for the sector at the moment.

Business failures have also exacerbated the market downturn in Australia, with rising interest rates contributing to financial hardship and failure for many builders and building companies. The increased cost of borrowing, supply chain issues and material price increases have caused the closure of over 2,000 builders as at July 2023.

In Singapore, residential property prices are going against the regional trend, with private home prices rising 3.1% in the first half of the year. These results follow not only interest rate increases but also the government’s own cooling measures with the doubling of stamp duties for foreigners to 60% in April.

The lucrative nature of the sector is drawing in further investors, with buyers still prepared to pay S$3,000 per square foot for private apartments in the central region of the highly urbanised city-state. While property prices will remain elevated, analysts don’t predict any further government intervention with rising interest rates helping to curb some demand.

In China, the government cut two benchmark lending rates in June as policymakers aim to lower the financial burden on households and stabilise the cooling property sector. The move has fuelled broader hope for economic stimulus to shore up China’s headline growth and stabilise market confidence.

 

Alternative Assets

While demand for real estate has been dampened by the interest rate increases over the last year, alternative assets have still attracted investors and operators’ eyes as a way to diversify and enhance risk-adjusted returns.

Non-traditional forms of real estate assets, from educational institutions and childcare centres to student housing and data centres have become increasingly popular in APAC. The region’s larger macroeconomic drivers such as urban growth, adoption of internet, smart phones, and an ageing population underpin the need for these alternative assets, reported JLL.

While borrowers will be stretched, market commentators believe there are real estate opportunities where long-term return on investment (ROI) is strong and investors can still take advantage while others await further stability.

Influence on the talent market in 2023

At Aurex Group, we have observed how higher financing costs have changed the employment landscape across the region, with lesser new developments and a more patient approach from the majority of investors.

For candidates with alternative financing capability, this is the right time to consider your opportunities as demand for this expertise is high. For candidates from an acquisition background, we have seen these opportunities plateau somewhat in 2023 yet foresee this changing once confidence in future interest rates returns.

There will be lesser movement amongst candidates as we move into the second half of the year and closer to bonus season. Depending on which real estate asset class or market professionals find themselves in, we also anticipate that candidates in general will prefer to stay within their current roles, with little motivation to move while wider market instability is at play.

For businesses, that means finding talent at the moment will come at a premium, and for candidates, only those that have the desired expertise or confidence to move before broader confidence returns will reap the benefits.

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How Aurex Group can help

If you are a company considering hiring, we welcome the opportunity to present our services and capabilities. If you are a candidate, please check our jobs page or contact us to discuss your background, skills, and future aspirations. We always look forward to stayin

References and further reading:

• Singapore Property Investment Activity Slows on Higher Interest Rates, US Bank Turmoil – Straits Times, Grace Leong, 19 April 2023
• Asia Pacific real estate market update – Schroders, Andrew Haskins, 14th June 2023
• Industrial property market outperforms expectations – Tay Huey Ying, 28th April 2023
• Cash Rate Target – Reserve Bank of Australia
• CoreLogic HVI, July 2023
• Federal Budget 2023: Build to rent win, but is it enough to meet surging demand? – The Property Tribune, Henry Thai, 12th May 2023
• NAB Quarterly Australian Commercial Property Survey Q1 2023 – Business Research & Insights, NAB Group Economics, 4th May 2023