Global inflation has accelerated in recent months, reaching its strongest pace since the late 2000s. Inflation in Asia is also rising, driven by an increase in food and energy prices, and to a lesser extent, wage rise expectations as a result of tighter labour markets. In response, central banks in Asia, with the exception of Japan, have moved in lockstep with the US Federal Reserve’s rate hikes to protect their currencies and combat inflation.
In this environment, bond yields are rising and property yields face upwards pressure globally. However, inflation throughout APAC is comparatively lower than in the US and Europe, while general sentiment is less negative. The region is also set apart by more resilient growth projections in the medium term, buoyed by a growing middle class.
Source: Bloomberg as of December 2022
Repricing is likely to drive variation in performance
A price correction will drive variation in performance of existing portfolios, depending on the quality of assets. It is also likely to create new investment opportunities — though investors will need to be mindful of pricing, construction costs and affordability for tenants.
Early repricing evidence is starkest for property that is interest rate sensitive, including bond-like real estate that aims to tap into long-term cash flows. In the longer-term, we believe core and inflation-linked property at rebased yields is likely to outperform secondary assets.
‘Brown’ discounts look set to increase
‘Brown’ discounts for non ESG-compliant assets look set to increase amid wider repricing. Undertaking comprehensive refurbishment to meet modern occupier requirements could therefore offer strong risk-adjusted return potential, post-recession.
The rental premium between ‘green’ and ‘brown’ buildings remains difficult to pinpoint, as green buildings tend to be newer and would naturally command higher rents. Yet occupiers’ increasing focus on ESG means buildings without green credentials are at risk of lower occupancy.
Investors’ ability to maximise buildings’ energy efficiency is heavily dependent on local infrastructure. In this regard, APAC economies are ramping up their commitment to net zero carbon targets, with cities setting goals to decarbonise buildings. However, the decarbonisation of national power grids will need to accelerate substantially in order to meet ambitious targets. For example, just 29% of Australia’s total electricity generation in 2021 came from renewable sources.
Compelling structural drivers remain
Despite increased risk aversion by investors, compelling structural drivers remain evident in many parts of the market, supporting prospects for income and growth. Australia’s growing Build to Rent (BTR) sector is a key example, driven by positive demographic fundamentals and housing affordability constraints.
While the BTR sector is not immune to the impact of rate rises, it is typically more resilient than other property types during market downturns. Occupancies in Sydney, Melbourne and Brisbane remained consistently higher than 95% throughout the pandemic, while rental growth in Sydney and Melbourne has shown relatively lower volatility. Over the medium term, higher migration rates into Australian cities and a continued squeeze on housing affordability are expected to support the growth of BTR occupier demand.
Build to Rent reflects lower volatility in occupancies
Source: PMA, SQM, as of October 2022.
Similarly, Japan’s multifamily sector continues to see stable demand for inner city living in cities such as Tokyo and Osaka, driving the potential for further rental growth.
Overall healthy leasing market fundamentals in the region’s logistics sector remain underpinned by the shift towards online shopping. Markets with limited availability of modern logistics, such as Nagoya and Osaka in Japan, could therefore offer investors attractive relative value and development opportunities. A build-to-suit approach for high quality tenants could help investors both control leasing risks and benefit from resilient income streams over the medium to long term.
Longer term opportunities offer attractive investment potential
Certain submarkets could be appealing to investors in the longer term. For example, home ownership remains challenging in Seoul, where house prices doubled between 2017 and 2021 and the average apartment price now exceeds $1million. Coupled with a lack of professionally managed rental housing, institutional investors could target attractive risk-adjusted returns by delivering high quality, affordable homes via partnerships with local developers.
Markets that are underpinned by long-term travel demand growth, such as Hong Kong and key tourist cities in Australia, could also offer relative value amid potential repricing. In particular, hospitality assets in key Japanese cities such as Tokyo, Osaka, Kyoto and Fukuoka could become a major beneficiary of a post-pandemic recovery in travel demand, since Japan ranks first for travel and tourism competitiveness globally.
Prime, sustainable assets remain well positioned
Attractive, long-term drivers continue to support APAC real estate. As such, we believe prime, sustainable assets remain well positioned to generate strong potential returns.
A price correction, combined with the ability to diversify and tap into the value proposition offered by individual markets, could offer an attractive entry point for overseas capital – particularly given the strength of the dollar.
Property revaluations will naturally take time to play out, but as yields reach stabilisation, we believe assets are likely to reflect an attractive long-term value opportunity, with improved performance prospects.
 Buildings account for about 60% of overall carbon emissions in cities. Source: JLL, “Decarbonizing Cities and Real Estate”, May 2022.
Australia’s Department of Climate Change, Energy, Environment and Water, https://www.energy.gov.au/data/renewables, as at November 2022.
Forbes, “Meet the Korean apartment startup disrupting a red-hot housing market”, September 2022.