Key highlights

  • Slowing growth, moderating inflation, and falling interest rates are likely to be dominant near-term themes.

  • Peak US interest rates have historically been a near-term positive for property values, but occupier fundamentals are key.

  • We expect Asia-Pacific’s (APAC) near-term capital returns to remain under pressure, but the potential decline could be lower than previously expected.

APAC economic outlook

We expect slowing growth, moderating inflation, and falling interest rates to be the dominant macro themes over the next 12-18 months. The Federal Reserve (Fed) has signalled that rate cuts are on the way. The recent depreciation in the US dollar should provide emerging market (EM) central banks, such as the Bank of Korea (BOK), with more room to manoeuvre in 2024. 

China’s recent data has become more reassuring. We have raised our near-term forecasts, even though its housing market remains a challenge. Policy continues to take a targeted and incremental approach, but authorities recognise the need for central government assistance and a coordinated approach to ensure stability. This suggests the fiscal backdrop should be marginally more supportive.

The 2023 Shunto spring wage negotiations in Japan were the strongest since the early 1990s. Given the current elevated rate of inflation and corporate earnings growth, we expect another robust Shunto wage agreement in 2024. Consequently, we now expect the Bank of Japan (BOJ) to end its yield curve control (YCC) and to raise policy rates to 0% by mid-2024 (but no further rate hikes thereafter). 

In India, we expect the Reserve Bank of India (RBI) to keep rates on hold in the near term. The chances of an easing cycle beginning before mid-2024 are rather remote, given the resilience of the economy and food-price risks. We expect the RBI to begin easing only when the economy slows more meaningfully and the real policy rate rises, which is likely from the second half of 2024.   

Elsewhere in APAC, there are some signs of a pick-up in Korean exports, led by semiconductors, as market supply demand imbalances continue to improve. There are also some signs of stabilisation in manufacturing and trade in Singapore, led by electronics exports. The upturn could be sustained along with the rebound in global semiconductor sales. All these suggest both markets could see an economic rebound amid potentially lower interest rates in 2024.

APAC economic outlook

APAC real estate market overview

Peak US rates have historically been a near-term positive for APAC commercial real estate (CRE) capital values, but occupier fundamentals are key. With the overall vacancy rate in APAC still elevated, we expect the region’s near-term capital returns to remain under pressure. We expect borrowing costs to remain higher than what they were previously. We also expect yields to rise further, given repricing in APAC has lagged other regions. That said, we expect a better outcome for Australian logistics properties, Seoul offices, and Singapore properties, given the historical correlation with US yields in these markets and relatively robust occupier fundamentals. 

We expect the banks’ lending stance towards APAC CRE to remain cautious and selective. Difficulties in accessing project financing have resulted in planned projects being delayed or abandoned in markets like Korea. We also expect the bulk of debt funding for 2021’s record transaction volumes in Korea to be due for refinancing in 2024. Retail and logistics properties are likely to face funding gaps. While the BOK’s policy easing could provide some relief, it is unlikely to close the gaps. This should translate into opportunities for private credit investors, especially as traditional lenders pull back.
We remain positive about the following market/sectors:

  • Seoul offices 
    Occupier market fundamentals remain solid. Vacancy rates are low amid limited near-term supply and robust leasing demand from domestic firms. While a new supply pipeline is expected to pick-up in four-to-five years’ time, we expect vacancy rates to remain tight relative to history, even by conservative assumptions.
  • Tokyo multifamily
    Generous yield gaps provide an ample buffer against any rise in long-term rates. Faster wage growth is improving affordability for renters, which supports further rental upside. A widening rental premium, based on building age, has also strengthened the investment case of value-add strategies to extract higher returns.
  • Australia industrial/logistics
    Record low vacancy rates of 1% or less in many capital cities will continue to support rental growth, albeit at a slower pace. We also expect expanding yields in the near term to translate into attractive entry points for investors.

Outlook for risk and performance

We expect near-term capital returns to remain under pressure. But we have trimmed the projected decline to reflect the prospect of an earlier-than-expected start to rate cuts, led by the Fed. Over the longer term, our base case remains that interest rates will retreat to lower levels. In fact, we expect the net effect of demographic change to be negative for interest rates up to 2030. According to abrdn’s Global Macro Research team, a falling labour contribution to potential growth more than offsets upward pressure from ageing populations. Moreover, downward pressure on rates across the largest economies means the global financial system provides another check against upward pressure. We expect lower interest rates to therefore support better capital returns beyond the immediate 12-24 months. Higher property yields in the near term are likely to provide good opportunities for investors to pick-up grade A assets in core locations. 

Macroeconomic drivers and geopolitical developments will have a bigger impact on real estate’s near-term performance. While US rates appear to have peaked, and the Fed could bring forward its first cut if data were to deteriorate faster than expected, geopolitical developments and their impact on supply chains remain highly fluid. These could affect inflation and interest rates in unexpected ways. Within APAC, Australia’s inflation remains sticky, and the risk is that rates will rise further in Australia, even as the US pivots. This would have implications for property yields and capital values.


APAC total returns from December 2023