by NGOC ANH 09/02/2023, 02:38

Forces shaping Asia Pacific real estate in 2023

Asia Pacific will continue to outperform other regions globally in 2023, led by defensive assets across office, industrial and logistics real estate.

In Vietnam, office, industrial and logistics real estate will be most in demand in 2023.

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Real estate markets in the Asia Pacific have been in a reset and that is going to continue in the year of 2023. Against strong fundamentals, the sentiment among real estate investors today is much like cautious anticipation of steady growth and healthier returns in the longer term starting the latter part of 2023. Real estate, most certainly, is not immune to market volatility, yet we see investors highly conscious of some of the advantages the current situation presents in the region. There’s consensus that for those with the right game plan and resources, there are some exceptional opportunities in Asia Pacific.

Businesses are accordingly realigning plans and investors are sharpening strategies to pick the right markets and assets for robust returns this year. In doing so, it’s crucial to first identify the underlying forces shaping real estate in 2023.

Inflation, interest rates and world economics

Central banks globally will continue to raise interest rates to combat inflation, although expected at a slower pace in 2023. The persistent inflation – aside from causing commodity price increases, supply chain disruptions and hindrances to the domestic demand recovery – has also weakened Asian currencies against the US Dollar. As this makes regional real estate cheaper in dollar terms, it could potentially reignite deals presently on the backburner.

What’s seen weighing on the external demand for Asia Pacific real estate is the US and Euro economies faltering in 2023, due to weakened global economics. However, these headwinds in Europe and the US make the regional markets relatively safer and a haven for property investments. 

Colliers’ consensus is that real estate markets will start to stabilize by mid-2023 with more certainty emerging around the interest rate outlook. “Despite uncertainties, there remains a significant amount of unsatisfied capital looking to be placed in real estate. In Vietnam, office, industrial and logistics real estate will be most in demand in 2023. The next type of assets to be on investors’ radar would be in the housing and serviced apartment segments, especially those serving the real needs of workers, experts and expats migrating to Vietnam and industrial clusters in the country. Another interesting segment worth watching in 2023 is hospitality real estate, as Vietnam is striving to capitalize on the rebound of travel and leisure needs from both domestic and international tourists post pandemic.” – said David Jackson, CEO of Colliers (Vietnam).

Asset re-pricing

As property markets come to terms with the phase of slower investment activities, a pricing reset across markets is underway in the face of interest rate hikes. This is driving a shift in investors' strategies, with capital values expected to correct by up to 30%.

The shock the market is presently feeling can largely be absorbed, as the current market dynamics do not echo the past financial crisis when loan-to-value levels were much higher than today. These conditions, we believe, are creating new opportunities. “Now is a time of opportunity. If investors pick their markets, assets and strategies carefully, this is a good time to capitalize. Cash is king and equity-driven investors, notably the private buyers, can bid for assets in an environment with limit ed buy-side competition. They are typically immune to market forces and will continue to be active despite market flux. Markets with safe-haven status will be active and locations with deep, embedded levels of private capital will prosper.” – said Nguyen Viet Hoang, Director, Business Development, Colliers (Vietnam).

Regional resilience

Asia Pacific remains resilient with largely stable capitalization rates, gradually steering towards a sustainable recovery. Despite vast and complex regional differences across property markets, we see investors highly keen on the 3Ls – logistics, living and life sciences – as demand for these businesses continue to grow globally.

Asia Pacific is a strong consideration for longer term real estate exposure given its relatively faster pace of economic growth, burgeoning consumer class, rapid urbanization, along with its tech-leadership in e-commerce, artificial intelligence, data analytics, and communication networks.

Investors’ preference in the region is largely the big cities, signaling choice for known markets that potentially deliver value during a pricing reset. Japan is on investors’ 2023 priority list for office, industrial and multifamily asset classes, driven by the weak Yen and the country’s comparatively benign inflation outlook. Australia, Singapore, and South Korea are also seen as front runners in luring investors.

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Though some recent changes may prompt investors to more caution, Vietnam still projects a consistent reputation of a safe place to park money amid global turmoil due to the pandemic, geopolitical conflicts, supply chain disruptions, and economic uncertainties. Yet, occupiers, as well as owners and investors across regional markets are already leading with ESG focus to future-proof their strategies. Increased manufacturing diversification activity away from China will drive more capital flow into the ASEAN region. Much to do for Vietnam to continue capitalizing this trend in an ever-increasing competition for foreign investment.

Technology-led structural changes

Across the globe, people have embraced new ways of shopping, working, living and dining, and moving forward, technology will continue to underpin further social changes. In real estate, technology has led to a quicker evolution of how owners interact with occupiers, real time facilities management, and tools that enhance productivity and maximize user experience.

In fact, technology has impacted each sector differently. While for industrial, it allows operational efficiencies against rising costs, for retail, online platforms will continue to evolve with greater emphasis on click-and-collect. For office, the opportunities lie in technology allowing occupiers to be highly creative and flexible with their workplace and workforce strategies.

Defensive assets on investors’ priority list

As investors pursue defensive assets strategy, office and industrial and logistics (I&L) real estate are most in demand in 2023. Colliers’ 2023 Global Investor Outlook reveals that beyond office and I&L, multifamily now notably outpaces retail and hotels, and a good number of investors are interested in specialized assets (alternatives). Big-box warehouses are now more in demand, compared to last-mile distribution, and is the top I&L pick in 2023. Also, there’s higher interest in industrial park/manufacturing facilities and container terminals.

Vu Minh Chi, Senior Manager, Industrial Services, Colliers (Vietnam) suggests: “As market players reassess their portfolios amid greater uncertainty, investors will gear for high-quality and inflation-proof assets. The development of industrial park in Vietnam, therefore, needs to ensure an integration of sustainability factors as well as an ecosystem to improve the attractiveness and readiness for luring large and long-term foreign investors.”

Sustainability fueling flight to quality

There’s growing emphasis investors are placing on environmental, social and governance (ESG) criteria and ratings of real estate. This is not just for regulatory and reputational reasons, but increasingly in response to occupier demands for experiential workplaces and to also balance out asset operational costs over the longer term.

Investors are focusing on assets with strong sustainability characteristics, with expectations that these will command a premium. Non-compliant assets will be increasingly confined to discounted territories and targeted for redevelopment, as disposal and acquisition strategies are activated.

“Despite slower investment decision making, and defensive underwriting, the importance of ESG in real estate will only grow in 2023. Previously, the sometimes-low ROI of ESG projects dissuaded investments, but as most companies prepare to face the global economic challenges in the year ahead, every dollar spent must be justified. Today, the lower operating costs of ESG projects are becoming a draw, helping both occupiers and landlords save money while enhancing efficiency. We recommend taking a flexible approach, as the market is changing quarter-by-quarter.” – concluded Cao Le Tuong Van, Director, Capital Markets & Investments Services, Colliers (Vietnam)./.