CBRE Survey: Rising Cap Rates and Increased Investment Activity Expected in Asia-Pacific Real Estate

Capitalisation rates (cap rates) of commercial properties across the Asia-Pacific region are likely to continue rising for the rest of the year, with higher borrowing costs and economic uncertainty expected to push rates up by between 75 basis points (bps) and 150bps within the next six months, according to a survey by international commercial real estate services firm CBRE.

According to its Asia-Pacific cap rate survey for the first quarter of 2023 (1Q2023), cap rates across cities in the region have risen, except for those in Japan and mainland China, due to stable interest rates.

For the rest of the year, cap rates of core office and retail assets are expected to see the biggest growth, while investment activity is expected to pick up as 60% of respondents surveyed believed that investors will obtain more clarity on the increases in interest rates and cap rates, thereby closing the expectations gap between buyers and sellers.

“The interest rate cycle appears to be approaching its peak, and we expect this will lead to price discovery in markets such as South Korea and Australia,” said CBRE’s head of capital markets (Asia-Pacific) Greg Hyland.

Demand for logistics properties dim

CBRE found that in 1Q2023, while institutional-grade modern logistics properties were the most popular asset type, interest in these assets appear to have waned as investors shift their attention towards prime real estate and data centres.

During the survey period, 43% of respondents indicated that they received the most enquiries from investors, down from 58% in 3Q2022.

Moreover, more buyers of industrial properties were also looking for discounts, indicating that prices may be near their peak.

In comparison, interest in prime shopping malls/high street shops and alternative investments rose to 24% (3Q2022: 15%) and 23% (3Q2022: 9%).

Of the alternative asset types, data centres were most popular at 30%, followed by healthcare-related assets at 22%, and real estate debt at 19%.

Japan to lead investment recovery in 2Q

In 1Q2023, 36% of respondents reported having a lower risk appetite compared with in 4Q2022, while 42% rated their risk appetite as the same as in the previous quarter.

The survey revealed that Japan is expected to lead the investment recovery in the second quarter (2Q2023), followed by mainland China and Hong Kong in the following quarter, and Singapore, India and New Zealand in 4Q2023.

Amidst the uncertain market, private investors continue to have the strongest buying appetite at 54% (for Hong Kong SAR, Australia and New Zealand) in 1Q2023.

Meanwhile, real estate funds and REITs show the strongest intention to sell due to current refinance pressure and the need to rebalance portfolios.

At the moment, the core obstacles limiting investment activity are price expectation gaps between buyers and sellers, and limited yield expansion with nearly half of respondents indicating that the cost and availability of financing will be investors’ most important consideration when evaluating potential acquisitions, owing to rising interest rates and stricter lending standards.

As buyers and sellers become more realistic about pricing, the price expectation gap is narrowing for Grade A office, retail, institutional-grade modern logistics, hotel and multifamily properties, according to CBRE.

“Interest rate hikes have significantly increased the cost of financing for commercial real estate in (the) Asia-Pacific. Higher interest expenses have deterred investors from refinancing assets, particularly in Australia, (South) Korea, and Singapore. We expect Korea logistics, Australia offices and Hong Kong offices to face the biggest funding gap in the coming 18 months, which could lead to more motivated sellers in the second half of 2023,” said Dr Henry Chin, global head of Investor Thought Leadership & Head of Research, Asia-Pacific for CBRE.

CBRE’s survey was conducted from April 11 to April 26, to examine investment sentiment on market conditions and cap rates for stabilised properties.

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