Instead of seeking higher returns in emerging markets (EMs), should Asia-Pacific (APAC) investors look west to Europe for better risk-adjusted options?

APAC-based investors seek higher-risk strategies and markets

To what extent should investors pursue higher-risk strategies and/or markets to generate higher returns? More importantly, do higher risks always lead to higher returns? It appears these are some of the most important questions facing investors today, especially APAC-based institutional investors who are looking for real estate opportunities. According to the Investment Intentions Survey 2024 published by ANREV1:

  • APAC-domiciled institutional investors remain relatively under-allocated to real estate (current allocation is 7.1%, versus a target of 8.4%), compared with their global peers (average allocation is 10.6%, versus a target of 10.4%).
  • APAC-based investors have a clear preference for higher-risk investment strategies, with almost all respondents indicating a preference for either value-add (78%) or opportunistic (22%) strategies.

Core real estate in Europe is moving back to a position of fair value

The current preference of APAC-domiciled investors for higher-risk strategies appears to be corroborated by other surveys. CBRE’s 2024 Asia-Pacific Investor Intentions Survey, in which 95% of the respondents were based in APAC, also indicated a higher preference for value-add strategies in 2024 (versus 2023). Importantly, these investors are also increasingly assessing opportunities in emerging markets, such as India, Vietnam and Thailand.

The surge in interest rates since 2022 has pushed up investors’ hurdle rates and likely contributed to this shift towards higher-risk strategies and markets. Also, the increasing interest in Asia’s EMs as investment destinations is in line with the China + 1 diversification strategy of multinational companies?

Are investors adequately compensated for EM risks?

In 2023, the volume of commercial real estate (CRE) transactions in India and Southeast Asia ex-Singapore increased by about 10% in US dollar terms, in contrast to the 27% decline across APAC2. Importantly, in the case of Southeast Asia ex-Singapore, transaction volumes in 2023 were 15% above their 2019-23 yearly average.

Global supply chains are shifting in favour of these markets. More importantly, modern logistics facilities that meet the requirements of today’s supply chain operations and delivery services are still in short supply in many of these markets. Therefore, it’s no surprise that industrial properties have emerged as a popular choice for capital allocation. In India, transaction volumes for industrial properties in 2023 were 36% higher than their five-year average. In Southeast Asia ex-Singapore, the difference was 54%.

Industrial/logistics properties in several markets around the world are also favoured by investors. Consequently, a comparison of this sector’s property yields, relative to risk-free rates3 between emerging markets and the more developed ones globally, could provide a basis for our discussion on risk-adjusted returns.

As depicted in Figure 1, industrial/logistics properties in some Asian EMs, such as Vietnam and Mumbai, could be trading at a tighter premium to risk-free rates, compared with more developed markets in Europe (Berlin and Paris) and APAC (Tokyo). It’s also possible that the tighter yield premium ascribed to the Asian emerging markets reflects the potential for higher rental growth. But recent occupier market performance has not provided much support for that assumption. Industrial properties in the major hubs of France and Germany, for instance, registered average rental growth of about 10% per annum (pa) in 2021-23. This outperformed the 9% pa growth in Delhi’s National Capital Region and the 5% pa growth in Vietnam North over the same period4.

Figure 1: Are investors adequately compensated for emerging-market risks?

Source: Bloomberg, Colliers, CBRE, Green Street, Haver, JLL REIS, NYU-Stern, abrdn; March 2024

*Estimate based on Vietnam’s country risk premium over the US’s 10Y bond yield

Better risk-adjusted returns in Europe?

According to our European real estate market outlook in the first quarter of 2024, the weighted average European prime real estate yields increased from 4.3% in June 2022 to 5.4% by December 2023. The spread between all-property prime real estate yields (5.3%) and government bond yields (weighted average Eurozone 2.8%) was back to 260 basis points at the start of 2024. Against long-term averages, this implies core real estate in Europe is moving back to a position of fair value. If net income growth were to be considered, we believe European real estate is beginning to look cheap at current market prices.

In other words, considering country-specific risks (Figure 2) and valuations relative to prospective income growth, core real estate strategies in Europe may offer better risk-adjusted returns for APAC-domiciled investors.

Final thoughts…

We expect the next six-to-12 months to be an attractive window for entry into European core CRE. This is especially the case for prime logistics properties, which could have over-corrected. The living sector is also attractive and we expect tight market dynamics to underpin resilience despite regulatory risks. According to our recent European living strategies report, European residential real estate investment has grown significantly in recent years and represents over 20% of total investment. It could converge with the US’s market maturity to reach a third of all capital deployed in the next five years.

Figure 2: abrdn’s Global Risk Navigator


  1. Asian Association for Investors in Non-listed Real Estate Vehicles
  2. MSCI-RCA data as of March 2024
  3. Using 10-year government bond yields as a proxy
  4. Data from Green Street and Jones Lang LaSalle