Risk warning

The value of investments, and the income from them, can go down as well as up and an investor may get back less than the amount invested. Past performance is not a guide to future results.

Key highlights

  • A Chinese economic slowdown will affect occupier fundamentals in most market/sectors, given the drag on the global economy
  • Outward yield shifts are expected to accelerate in the next 12-18 months, which will keep pressure on near-term capital returns
  • Policy outlook in Asia-Pacific (APAC) remains divergent, but we expect lower rates over the long term
  • APAC economic outlook

    Our base case remains for a US recession and for the Federal Reserve (Fed) to cut rates from around mid-2024. While we still expect the Fed to cut rates eventually to below neutral, we have raised our US policy rate forecasts for the end of 2024 and 2025.

    In Asia-Pacific (APAC), the policy outlook remains divergent. We see further easing in China and fading economic rationale for further policy adjustments in Japan. Australia’s labour market is cooling gradually and housing is turning more inflationary. In Korea, the consensus is shifting towards more gradual rate cuts from mid-2024.

    This is a summary of the latest economic outlook for the major APAC markets:

    • In China, the fading re-opening rebound has led us to mark down our 2023 growth forecast. We anticipate a more difficult adjustment within real estate, which should weigh on growth to 2025. High-profile trouble at major real estate developers raises the odds of a crisis, but we don’t subscribe to the more pessimistic commentary around China.
    • While increased inbound tourism provided a robust economic boost in the first half of 2023 for Japan, domestic demand growth was weak. We expect inflation pressures to continue easing and that a sustained 2% is out of reach. While further policy tweaks are possible, our base case is that standard interest rate policy is likely to remain on hold during our forecast horizon.
    • India’s economy has been resilient, but we expect growth to cool more meaningfully in 2024. We expect the Reserve Bank of India (RBI) to keep its policy rate unchanged at 6.5%, but uncertainties around food prices will give the RBI communication a hawkish tilt. As the slowdown takes hold, we expect cooling underlying inflation to give the RBI scope to begin gradual policy cuts in 2024.

    APAC economic outlook

    Source: abrdn Research Institute; September 2023

    Forecasts are a guide only and actual outcomes could be significantly different

    APAC real estate market overview

    The Chinese economic slowdown will have an impact on the occupier fundamentals of most markets/sectors, given the drag on the global economy. We think prime office and retail real estate in Hong Kong, and prime retail properties in Tokyo, may be most vulnerable. This is mainly because of above-average vacancies and the occupier markets’ historical correlation with external growth.

    Besides properties in Australia and Korea, yields in most APAC markets have barely moved since the end of 2021. We expect yields to move out in the next 12-18 months. While logistics properties in many markets will likely see higher yields, the negative impact on capital values is likely to be mitigated by further rental upside.

    Following the yield-curve adjustment in July, the market is sensitive to comments from the Bank of Japan (BOJ) and is biased towards hawkish interpretations. While further policy tweaks are possible, our base case is that overall policy settings in Japan are likely to remain accommodative. Consequently, we expect any adjustment in the Japanese commercial real estate market to be gradual, even if the long-term yield rises to 1%.  

    Occupier market fundamentals guide our market/sector preference and we are most positive about the following:

    • Seoul offices

      Occupier market fundamentals remain solid. Vacancy rates remain low amid limited near-term supply and robust leasing demand from domestic information and communication technology firms. While new supply is expected to pick up in the next four-to-five years, we expect vacancy rates to remain tight relative to history.
    • Tokyo multifamily
       The robust rebound in net migration into Tokyo is likely to continue, which should keep vacancy rates tight and support further rental growth. The widening rental premium, based on the building’s age, has strengthened the investment case for value-add investment strategies.
    • Australia industrial/logistics
      Record-low vacancy rates of 1% or less in many of the capital cities will support rental growth, albeit at a slower pace. We expect the expanding yields to translate into more attractive entry points for investors as interest rates climb.

    APAC total returns from September 2023

    Source: abrdn; September 2023

    Forecasts are a guide only and actual outcomes could be significantly different