German-based asset manager DWS assesses the outlook for real estate investment in Asia Pacific and highlights investment opportunities in the region.

DWS believes that the outlook for real estate investment in Asia Pacific remains mixed, but there are opportunities for investors with a long-term perspective.

According to the asset manager, Asia Pacific is facing headwinds such as elevated inflationary pressures and weakening global demand, causing subdued regional economic growth in the first half of 2023. Monetary policies continue to diverge across the region. Financial conditions remain tight, with senior loan rates in Australia and South Korea remaining high. However, DWS believes that the lack of development financing presents investment opportunities.

Office leasing slowed down in the region in the first half of 2023, due to a combination of macroeconomic uncertainty, near-term supply waves, and rising vacancies, the firm said. Nonetheless, long-term occupier demand in Asia Pacific remains strong, particularly in North Asia, where there is a stronger inclination towards office-based working. Tenants are increasingly rationalising costs and recalibrating their office space requirements, with larger occupiers preferring high-quality developments with green credentials, efficient floor layouts, and upgraded building facilities, the firm continued.

Prime logistics assets have benefited from strong rental trends over the past 12 to 18 months, driven by resilient occupier demand from e-commerce firms, third-party logistics providers (3PLs), and omnichannel retailers. Logistics demand should moderate in the near-term as global supply chains normalise post-Covid. However, vacancy rates remain low across the region, particularly in Australia and regional Japanese cities, which continues to favour landlords over tenants in the long-term, DWS said.

The speed of recovery in the APAC retail sector seems mixed despite the rebound in international tourism and retail sales across the region, the firm continued. Longer-term rental growth trends should be modest at best and unspectacular due to structural challenges such as e-commerce headwinds and shifting consumer expectations.

DWS believes that the multi-family sector in Asia Pacific remains a small investable market. Due to record-high prices for condominiums, first-time home buyers are choosing to rent instead. In Australia and New Zealand, high interest rates contributed to worsening housing affordability, fuelling unabated rental demand while rising construction costs have exacerbated the lack of new supply. In addition, increasing immigration numbers and relative rental affordability should help underpin rental growth over the coming years, the firm said.

There was a limited number of Chinese tourists arriving in the first four months of 2023, and overseas tourist arrivals in Asia Pacific remained at about 60 per cent of pre-Covid levels. The number of air travel passengers in the region is expected to reach 80 per cent of 2019 levels by the end of 2023, before surpassing that in 2024, which should boost the hotel market recovery in the coming quarters.

DWS believes that the residential markets (multi-family, built-to-rent) in certain locations such as Australia will provide strong rental growth opportunities, particularly over the next few years. Key logistics hubs in Australia, Singapore and regional cities on North Asia are also expected to benefit from strong rents, along with select office markets in Asia Pacific.

Investment Trends 
Real estate investment in Asia Pacific has continued to slow since the second half of 2022. Investment remains concentrated in the core markets of China, Japan, Australia, and South Korea, DWS continued. The high interest rates continue to weigh on investors’ underwriting capabilities, with higher financing costs leading to negative carry for investors reliant on external financing. The disparity between reported asset valuations and transacted pricing remains wide, and the investment risks are increasingly high, particularly for discretionary retail assets.

Combining rental growth and yield forecasts over 10 years from 2023, the residential sector (Australia BTR) will be among the top performers, with unlevered property-level total returns frontloaded in the next few years, the firm said. Prime logistics assets are also expected to outperform, delivering total returns of between 7.5 per cent to 9 per cent per annum. Prime logistics assets in key Australian cities (Sydney, Melbourne, Brisbane) and Singapore remain attractive underpinned by the strong rental growth outlook.

DWS said that there are underlying demand drivers for multi-family housing, and the potential for tax concessions for new residential built-to-rent (BTR) projects from 2024 onwards. Strong rental growth should underpin investment returns, though access to institutional quality stock may involve development risk.

Long-term e-commerce tailwinds are driving leasing demand and structural undersupply of modern warehouses across many cities in the Asia Pacific region. Prime logistics assets in key Australian cities and Singapore remain attractive with strong rental growth outlook, while regional cities in South Korea and Japan present first-mover investment opportunities, the firm continued.

Looking at debt strategies, DWS said that asset-based lending yields have currently reached attractive levels, particularly for construction financing debt. This provides an opportunity for investors to step in amid less competition.

For value-add strategies, the firm believes that asset enhancement initiatives, next-generation office features, biophilic design, and collaboration spaces appeal strongly to the Millennial worker. Redevelopment strategies, particularly for stranded offices, can offer higher development margins, although this comes attached with higher risks.

Overall, DWS believes that the outlook for real estate investment in Asia Pacific remains mixed. However, there are opportunities for investors with a long-term perspective who are willing to carefully assess the market and target specific themes and investment strategies.

The DWS Group has €859 billion ($933 billion) of assets under management, operating in Germany, Europe, the Americas and Asia.