®

Emerging Trends in Real Estate Asia Pacific 2023
A publication from:

Emerging Trends
in Real Estate®
Asia Pacific 2023

Contentsiv
vi

Executive Summary
Notice to Readers

1
2
3
4
8
10
11
12
14
15
16
18
19

Chapter 1: Uncharted Waters
Transactions Fall
Cap Rates in Limbo
Defensive Havens
Australia: Key Themes
Inflation Boosts Development Risk
Underwriting Changes
China: Key Themes
Mainstream Takes a Back Seat
Distress: Giving Up?
Japan: Key Themes
A Net Zero Future
Making Net Zero Happen

21
23
23
26
27
28
29
30
31

Chapter 2: Real Estate Capital Flows
Development Prospect Rankings
Uptick In Cross-Border Deals
Currency Volatility
Fundraising and Dry Powder
Public Markets Sell Off
Banks Tighten Terms
Nonbank Debt Thrives
Thin Margins for Green Debt

33
34
34
35
37
37
38
39
40
40
41
41
42
43
43
44
44
46

Chapter 3: Property Type Outlook
OfficeRemote Work Drives Change
The Evolving Workspace
Decentralisation Picks Up
Repurposing the Old
Logistics
Yield Compression Bites
Data Centres
Problems Mount
Cutting the Carbon
RetailReinventing the Wheel
Sharing the Retail Pie
Residential
A Global Wave
Do the Numbers Stack?
Hospitality

49
50

Interviewees
Sponsoring Organisations

Emerging Trends in Real Estate® Asia Pacific 2023

i

Editorial Leadership Team
Emerging Trends in Real Estate® Asia Pacific 2023 Chairs

PwC Advisers and Researchers

Stuart Porter, PwCDavid Faulkner, Urban Land Institute

Australia
Andrew Cloke
Anthony Occhiuto
Arash Azimi
Bianca Buckman
Cameron Carter
Camilla Rillstone
Christian Holle
Debbie Miner
Debbie Smith
Hui Peng Phay
James Rogers
Jane Reilly
Joe Sheeran
Josh Cardwell
Josie Hellstern
Julian Susing
Liz Stesel
Matthew Lunn
Nick Rogaris
Ross A Hamilton
Shujie Long
Sue Horlin
Tony Massaro
Voula Papageorgiou

Principal Author
Colin Galloway, Urban Land Institute Consultant
ULI Editorial and Production Staff
James A. Mulligan, Senior Editor
David James Rose, Managing Editor/Manuscript Editor
May Chow, Senior Vice President, Asia PacificDiwa Law, Senior Associate, Asia Pacific
Karen Cheng, Designer

Mainland China
Bin GB Zhao
Kanus KM Yue
Michael Ma
Sally Sun
Winnie Xian
Emerging Trends in Real Estate® is a trademark of PwC and is registeredin the United States and other countries. All rights reserved.
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© November 2022 by PwC and the Urban Land Institute.
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Recommended bibliographic listing:
PwC and the Urban Land Institute: Emerging Trends in Real Estate® Asia
Pacific 2023. Washington, D.C.: PwC and the Urban Land Institute, 2022.
ISBN: 978-0-87420-482-7
ii

Emerging Trends in Real Estate® Asia Pacific 2023

Hong Kong SAR
David KH Kan
Paul Walters
Raphael Chu
TaiwanBonnie P Ho
Daisy H Hsu
David Tien
Jason Liu

India
Atanu Bhattacharjee
Janvi Wadhwa
Indonesia
Brian ArnoldDavid Wake
Margie Margaret
Japan
Akemi Kito
Eishin Funahashi
Hideo Ohta
Hiroshi Takagi
Kenji Nakamura
Koichiro Hirayama
Mayumi Watanabe
Mitsuaki Kukita
Soichiro Seriguchi
Stuart Porter
Takeshi Nagashima
Takashi Yabutani
Takeshi Yamaguchi
Luxembourg
Kees Hage
Robert Castelein
Philippines
Malou Lim
Singapore
Chee Keong Yeow
David Lee
Magdelene Chua

Executive Summary
Although 2022 saw most Asia Pacificmarkets—with the exception of China—
begin to shake off the effects of regional
COVID restrictions, as investors look to
2023 they find themselves confronted
with a different, but no less dangerous,
set of threats: high inflation, rising interest
rates, unsustainable levels of public- andprivate-sector debt, and an impending
global recession.
This stagflationary combination creates
an environment for which there is no
modern-day playbook, and led many
real estate investors in the second half of2022 to step away from the market andwait for events to play out. As a result,
third-quarter Asia Pacific transactions fell
38 percent year-on-year to a 10-year low,according to analysts MSCI.
In the end, though, investors will have toadapt to a new market reality that brings
with it a number of fundamental changes:• Cap rates will move out. Years ofcheap and easy liquidity have hada predictable effect on real estate,causing asset prices to soar and yields
to compress. But as rising interest
rates now begin to revert to mean,
property yields must rise with them inorder to maintain a spread over thecost of debt. This process has so far
been slow to occur in Asia Pacificmarkets, although both Australia andSouth Korea are beginning to see a
degree of cap rate expansion. In theend, though, many interviewees expect
regional cap rates will rise an averageof 100 to 150 basis points in 2023.
One exception may be Japan, whichis expected to maintain its ultra-low
interest rate environment—Japanese
cap rates should therefore remain
relatively stable, making Tokyo amagnet for foreign investment funds.
• Investors seek defensive havens.
Investors have begun realigning
strategies in favour of more defensive
property types, focusing in particularon features such as rent indexation,shorter lease terms that can berevised upwards more easily, andreliable recurrent income. The “bedspace”—including subtypes such as
multifamily, hotels, senior living, andstudent housing—is one such sector.
Logistics, where structural undersupply
will continue to underpin demand,
and where rent typically is a relatively
smaller part of the overall cost of
business, is another. Specialist asset
classes such as data centres, cold
storage, and life sciences, meanwhile,
have “sticky” qualities as well as longindex-linked leases and generally highrents.

Survey Responses by Country/Territory
25

20

20.5%

16.8%

15

15.7%

13.8%
11.4%

10
9.5%

6.7%

5

Source: Emerging Trends in Real Estate Asia
Pacific 2023 survey.
*Includes Cambodia, Malaysia, Myanmar,
Nepal, New Zealand, Taiwan, Thailand,
the United States and Vietnam.

iv

6.3%

4.3%
2.4%
0

Emerging Trends in Real Estate® Asia Pacific 2023

Australia

China

Hong Kong

India

Indonesia

Japan

Philippines Singapore South Korea

Other*

• Rising risk hits development
projects. Build-to-core strategies
became popular in recent years as away to manufacture new product in anenvironment with an overall shortageof high-quality building stock. But withconstruction costs and interest rates
rising and a weak outlook for occupierdemand, many new projects havebeen put on hold.
• Mainstream assets become lesspopular. Offices have always been
the biggest recipients of regional
investment capital, but questions
over occupier demand, especially as
remote-working practices continue,
have eroded their popularity. Demand
continues to be strong, however, formodern, high-quality buildings thatare in demand by occupiers looking tolure staff back to the office. Investors
are also rotating out of the retail sector
and into new-economy themes suchas logistics, although retail yields andvalues have rerated to such an extent
that a growing number of investors arelooking at prime, well-located retailassets as contrarian plays.
As years of COVID restrictions continued
to undermine cash flows, many realestate investors had anticipated asurge in distress sales from insolvent
businesses. So far, however, surprisingly
little distress has surfaced, and witheconomies now normalising, investor
expectations have moderated. Thatsaid, some markets and asset classes
have many assets in need of refinancing
or repositioning. Hotels—especiallyin Japan—offer good scope, even as
regional travel picks up. In addition,
the longtime liquidity squeeze affecting
Chinese developers has led towidespread stress and distress in thelocal market, although bid/ask spreads
remain too wide to lure many foreign
buyers. South Korea, meanwhile, isanother prospective venue for distress,
with fast-rising interest rates and highconstruction costs trapping some recent
buyers in uneconomic deals.
Achieving net zero carbon status has
become an essential part of many
regional investment strategies. The theme

What is the geographic focus of your business’s activities?

50%

Global focus

Other focus

Focused primarily on
one country/territory

20%

4%
26%

Pan-Asia focus

Source: Emerging Trends in Real Estate Asia Pacific 2023 survey.

is driven partly by governments’ adoptionof Paris Accord targets, partly bydemands of incoming tenants, and partly
by the realisation that owners may be left
with stranded assets should buildings failto meet investor mandates, either now
or in the future. As a result, compliancewith international reporting standards,
in particular the European Union’s
2021 Sustainable Finance Disclosure
Regulation (SFDR), is increasingly
important.
Still, on a regional basis, real estatecarbon efficiency standards remain low.
Markets like Australia and Singapore leadthe pack by a wide margin. Otherwise,compliance tends to be the domain ofinternational funds buying at the top
end of the market, with relatively little
attention devoted to retrofitting Asia’s
large number of older, carbon-intensive
buildings. However, the concept has
recently begun to gain traction in somejurisdictions, in particular Japan and
China. Compliance will continue toaccelerate as 2030 deadlines approach.
In terms of this year’s relatively weakcapital flows, gateway cities once
again stand out, with large global funds
continuing to place capital proactively,
and less activity seen from domestic
buyers. Overseas investment rose by
double-digit figures in Singapore, which
has received capital that in other years
might have been directed to China andHong Kong, and also in Japan.

Singapore and Tokyo therefore placed
first and second, respectively, in thisyear’s investment prospect rankings.
Southeast Asian emerging markets
such as Indonesia, the Philippines,and (especially) Vietnam also migrated
upwards, as investors chase high ratesof economic growth, emerging consumerclasses, and (for Vietnam) ongoing flows
of foreign direct investment into new
manufacturing facilities.
Cheap and easy debt helped deliver
some 14 years of outperformance forreal estate investors, but as interest
rates normalise globally, bank lending is
now pricier, harder to get, and subject
to more restrictive terms. In practice,though, debt availability varies widely
according to market. In China, interest
rates are falling and access to debt ismore accommodative as the government
eases monetary policy. In Japan,
government determination to hold downbond yields means that bank financeremains available at sub-1 percent.
But borrowing costs in other markets(around 4 percent in Australia) are today
significantly higher as interest rates
follow the trajectory of Western markets.
While loans are still widely available
for creditworthy borrowers, terms andtenures are tighter, creating a catalyst fordevelopment of regional nonbank lending
markets.
Individual asset classes, meanwhile,
are still in the process of often profoundchange.

Emerging Trends in Real Estate® Asia Pacific 2023 v

Office: Over the long term, offices willcontinue to be the go-to asset class,although their star has dimmed forthe time being as investors come togrips with the dynamics of new-normal
demand—how much space is needed,
where should it be located (CBD or
suburbs?), and what types of fitout are
required by occupiers in the evolving
universe of hybrid workspaces?
Logistics: Ongoing structural shortagesof logistics space across the Asia Pacificshow no sign of ending, especiallyas online retailing continues to growexponentially. But rapid cap ratecompression seen in recent years has leftmany investors wondering if the industry
has come too far too fast, especiallywith interest rates rising to a point where
margins are now almost nonexistent. Still,with new capacity backlogged, demand
for space will continue to be relentless,while strong rental growth should
soon reestablish yield spreads without
undermining capital values.
Retail: Transaction volumes dropped
off in 2022, reflecting diminishinginterest among mainstream investors
for conventional retail assets, althoughnondiscretionary subtypes continue tofind favour. Over the long term, however,well-performing assets in good locations
will continue to be successful, andmargins should begin to improve once
landlords and tenants are able to find a
successful formula to reimagine assets inways that work to their mutual benefit.
Residential: Multifamily build-torent development has mushroomed
in Asia Pacific markets recently as
global institutional investors target thesector for its long-term, reliable income
streams and short-term rentals thatcan be easily reset to accommodate
inflationary pressures. Japan has long
been the only institutionalised market
in the region, but foreign investors are
now also looking to Australia and China
to host new multifamily markets. Doubts
persist in some quarters, however, dueto questionable demand and aggressive
underwriting that has created ultracompressed cap rates—a strategy that
could backfire if rising interest rates
continue to erode margins.
Hotels: Rebounding travel markets are
finally offering relief to the long-suffering
hospitality sector, although Asia Pacifictourist arrivals still lag significantly behindthose in Western markets. While cash
flows are now rebounding, however, debt
levels remain high, and many regional
hotel assets are still likely to trade at
discounted levels. Investors are targeting
Japan as a likely market for deals in 2023.

Notice to Readers
Emerging Trends in Real Estate® Asia Pacific is a trends and forecast publication now in its 17th edition, and is one of the mosthighly regarded and widely read forecast reports in the real estate industry. Emerging Trends in Real Estate ® Asia Pacific 2023,
undertaken jointly by PwC and the Urban Land Institute, provides an outlook on real estate investment and development trends, realestate finance and capital markets, property sectors, metropolitan areas, and other real estate issues throughout the Asia Pacificregion.
Please note that in the text “China” refers to “Mainland China,” and “Hong Kong” refers to “Hong Kong SAR”.
Emerging Trends in Real Estate® Asia Pacific 2023 reflects the views of individuals who completed surveys or were interviewed
as a part of the research process for this report. The views expressed herein, including all comments appearing in quotes, areobtained exclusively from these surveys and interviews and do not express the opinions of either PwC or ULI. Interviewees andsurvey participants represent a wide range of industry experts, including investors, fund managers, developers, property companies,
lenders, brokers, advisers, and consultants. ULI and PwC researchers personally interviewed 101 individuals and survey responses
were received from 233 individuals, whose company affiliations are broken down below.
Private property owner or developer
Real estate services firm (e.g., consulting, financial, legal, or property advisory)
Fund/investment manager
Homebuilder or residential developer
Institutional equity investor
Bank lender or securitised lender
Other entities

24%
27%
25%
8%
8%
1%
8%

Throughout the publication, the views of interviewees and/or survey respondents have been presented as direct quotations from theparticipant without attribution to any particular participant. A list of the interview participants in this year’s study who chose to be identified
appears at the end of this report, but it should be noted that all interviewees are given the option to remain anonymous regarding their
participation. In several cases, quotes contained herein were obtained from interviewees who are not listed. Readers are cautioned not toattempt to attribute any quote to a specific individual or company.
To all who helped, the Urban Land Institute and PwC extend sincere thanks for sharing valuable time and expertise. Without the involvementof these many individuals, this report would not have been possible.

vi

Emerging Trends in Real Estate® Asia Pacific 2023

Chapter 1: Uncharted Waters“It is these confusing times, when there’s no consensus in terms of how tomake money, when one can make the best investments.”
Almost three years since the appearanceof COVID-19, the winding down of
lockdowns and other restrictions acrossmost of the Asia Pacific has at last
restored some semblance of normality to
the region. But as one storm has faded,another has arrived. Markets awash inliquidity engineered from 14 years ofcentral bank easing are now left to deal
with the economic consequences—rapidly rising inflation, elevated asset
prices, and a looming wall of unpaid
debt.

quick-fire hikes initiated by the Federal
Reserve are bringing with them a host ofunintended consequences that in turnhave roiled the world’s stock, bond, andcurrency markets. The nosedive in theJapanese yen, a blowout in European
credit yields, and an abrupt escalation of
U.S. mortgage rates from 3 percent to 7
percent—these are just a few byproductsof reflexive hiking into an overhang of
global debt that has grown to morethan three times the size of the global
economy.

fear that something, somewhere within
the depths of the global economy isabout to break as a result. This senseof impending peril is amplified by thefact that regional economies have so
far remained relatively sheltered fromexposure to the high inflation andenergy shortages seen recently in theWest. What it means, though, for realestate assets in particular, is not easy to
project—investors can see that risks are
now higher, but have little clarity as towhat they are.

The problem, of course, is not simply
that higher interest rates lead to ahigher cost of capital. In addition,

The scope of the resulting dislocation tofinancial markets speaks to a profoundlevel of systemic stress, as well as to a

For now, though, investor reaction to
the accelerating volatility has been to
down tools, wait for the dust to settle,

Exhibit 1-1 Asia Real Estate Transaction Volumes by Source of Capital, and Year-on-Year Percentage Change$80

Individual70

Portfolio

EntityUSD billions

60
50
40
30
20
10
0

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

Percentage change

50%
25%
0%
–25%
–50%

2012

Source: MSCI Real Capital Analytics.
Note: Apartment, hotel, industrial, office, retail, and senior housing transactions included. Entity-level deals included. Development sites excluded.

Emerging Trends in Real Estate® Asia Pacific 2023 1

Chapter 1: Uncharted Waters

The biggest decline (23 percent yearon-year) was in China, where COVID
restrictions and an ongoing liquidity
squeeze have led to a risk-off mentality
and a sharp drop in volume. Japan,
where interest rates remain ultra low, was
one of the few markets where activity hasremained relatively resilient, although the
sharp decline in the yen has amplified thedecline in U.S. dollar terms. Singapore,
meanwhile, was the sole major market
to buck the downward trend, withinvestment volumes soaring 47 percent
year-on-year to US$9.1 billion.
In terms of investor sentiment, survey
results suggest a relatively positivemind-set. Although projected profitability
is down from last year’s level, it remains
higher than in both 2021, during thedepths of the pandemic, and 2009,
during the Global Financial Crisis. This
on-the-fence mentality probably reflects
the fact that the cost-of-living crisis
now unfolding in Western markets has
yet to be felt to any degree in the Asia
Pacific. It may also indicate a sense of
uncertainty—if not complacency—as towhether the strong institutional demand
for regional assets seen for at least the2

Exhibit 1-2 Real Estate Firm
Profitability Trends

ExcellentGood

As for which issues investors consider
most problematic (see exhibit 1-3), thenumber-one answer—predictably—
was interest rates, which are making
deal financing increasingly difficult atcurrent pricing levels. The fact thatthe same issue ranked only third frombottom in last year’s survey illustrates

2019
2020
2021
2022
2023

Fair
2018

This plunge in activity is apparent inregional transaction volumes, with thirdquarter purchasing falling a remarkable
38 percent year-on-year to US$32.6
billion, according to analysts MSCI—thelowest third-quarter total in the Asia
Pacific for a decade. Both deal count andbuyer numbers also fell significantly, andwith the value of terminated deals during
the quarter totaling almost 20 percentof completed transactions, the current
supply pipeline offers little hope of anearly turnaround.

In the words of a fund manager inShanghai: “Risk is commensurate withuncertainty, and we’re now operating
in a world of greater uncertainty, where
your distribution of expected outcomesis much wider. That drives you to think
more cautiously around your underwriting
and have more of a buffer, which at the
moment means we’ve shifted that point ofcaution a little further down
the spectrum.”not only how quickly rate hike concerns
have escalated, but perhaps more
importantly how their ascent has
blindsided the market. Given this, morethan a few investors are now revisiting

2012
2013
2014
2015
2016
2017

Transactions Fall

last eight years will continue to prop up
the market going forward.

2006
2007
2008
2009
2010
2011

and assess as best they can how market
dynamics are changing. According to
one Australia-based fund manager:“There is a great pause—no one is taking
significant action, no one is leaving themarket, no one is desperate to sell or
desperate to buy. Everything has justslowed down while everyone tries towork it all out.”

Source: Emerging Trends in Real Estate Asia Pacificsurveys.

Exhibit 1-3 Terminated Deals by Percentage of Total Volume and Deal Count30%% by volume

25%
20%
15%
10%
5%
0%

'07

'08

'09

'10

'11

'12

'13

12%

'14

'15

'16

'17

'18

'19

'20

'21

'22

'17

'18

'19

'20

'21

'22

% by deal count

10%
8%
6%
4%
2%
0%

'07

'08

'09

'10

'11

Source: MSCI Real Capital Analytics.

Emerging Trends in Real Estate® Asia Pacific 2023

'12

'13

'14

'15

'16

Exhibit 1-5 Asia Pacific Grade A Office
Indicative Cap Rates

Exhibit 1-4 Most Problematic Issues for Real Estate Investors

2023

2022

2021

2020

Mar 22

Sep 22

1 Sydney

4.00–5.00

4.50–5.75

2 Melbourne

4.00–5.00

4.50–5.75

3 Auckland

4.50–6.00

5.00–6.25

4 Beijing

3.50–4.75

3.75–4.75

5 Shanghai

3.50–4.75

3.75–5.00

6 Guangzhou

4.00–5.00

4.00–5.25

7 Shenzhen

4.00–5.00

4.00–5.25

8 Hong Kong

2.30–3.50

2.30–4.00

Global economic
growth9 Taipei

2.00–2.60

2.00–2.70

10 Tokyo

2.50–3.50

2.50–3.50

11 Osaka

3.20–4.00

3.20–4.00

Currency volatility

12 Seoul

3.20–4.00

3.50–4.50

13 Singapore

3.10–3.50

3.10–3.75

14 Gurgaon

6.50–8.00

6.50–8.00

15 Mumbai

8.00–8.50

8.00–8.50

16 Bangalore

7.50–8.50

8.00–8.50

Impending interest
rate hikes
Trade friction/
geopolitical tensions
Cost/availability of finance

Low yields
Asian economic growth

Impact of COVID-19
on property rent/values

Source: CBRE Research.
Note: Survey conducted September 26 to October 12.

Vacancy rates
Lack of investableproperties
Competition from
Asian buyers
Competition fromglobal buyers
Environmental compliance
Climate change
1

2

3

4

Least problematic

5
Neutral

6

7

8

9

Most problematic

Source: Emerging Trends in Real Estate Asia Pacific surveys.

deal underwriting to see if numbers still
add up in a fast-changing investment
landscape.

Cap Rates in Limbo
After more than a decade of strong
liquidity and ultra-low interest rates,
cap rates in the Asia Pacific havecompressed to levels more commonly
found in markets in the West. But withbase rates around the globe now rising

sharply, yields for many recently closed
Asia Pacific deals have fallen to a point
where they are below the cost of capital.
Logically, then, cap rates must move out
if buyers are to maintain a meaningful
spread over the cost of debt.
That expansion is already well underway
in the United States and Europe.
However, in the Asia Pacific, cap rates
have so far moved only slightly in somemarkets and asset classes:• In Australia, interest rates rose rapidly
during 2022, with the cash rate at
the Reserve Bank of Australia (RBA)
reaching 2.85 percent in November,the highest in more than nine years.
Against this backdrop, investor
sentiment has shifted perceptibly
downwards, but cap rate movements
have been slow to follow suit (seeexhibit 1-5), especially given poor
price discovery amid a slump intransactions. According to one fundmanager: “We expected cap rates
to move, but we haven’t seen it [yet].
There’ve been a few transactions at thecore end of the market, particularly in
Melbourne, but they haven’t reflected
too much repricing, which you would
have expected. So, we haven’t been
underwriting a lot of office deals—
we’ve put that into the too-hard basket
for the moment.”• In China, a closed capital accountmeans there is no direct linkage tobase rates elsewhere in the world,
and the government anyway neverdeployed quantitative easing as a
response to COVID in the same way
as in the West.

Emerging Trends in Real Estate® Asia Pacific 2023 3

Chapter 1: Uncharted Waters

As a result, authorities now haveroom to stimulate China’s struggling
economy by cutting rates, and withweak demand also suppressing
inflation, the pressure on cap rates is ifanything more downward then upward.
Nonetheless, asset yields have still
moved out, largely due to declining
occupancy caused by the combined
impact of an office supply glut and theongoing economic slowdown. One
investor commented: “Office yields
haven’t quite [moved out] to levels
investors were expecting. You are
getting positive spreads, but then how
firm are the rents? And with further
downward pressure [on the economy],
it’s going to be a while longer before
people want to step in for long-term
income purposes.”rate deals involving Australian logistics
and Tokyo multifamily assets werecited by interviewees as examples. In
particular, investors who ramped up
their leverage to boost returns on tightly
priced deals may be facing problems,
especially if assumed rental increases failto materialise.

upwards), and reliable recurrent income.
There is also a preference for asset
classes where rent typically forms a
relatively smaller part of the overall costof business.

Another issue was identified by a fundmanager in Japan: “A number of larger
investors come from countries that are
raising interest rates,” he said, “and so at
a certain point there will be a disconnect
between a levered-risk play [in Asia] andwhat you could do unlevered, risk-free, inyour own currency. I think that point may
be approaching, as central banks raiseinterest rates by three-quarters and fullpercentage points. But it hasn’t hit yet.”In addition, prices of the increasing
numbers of stressed or distressed
assets in China have yet to meetforeign investor expectations, although
there are signs this may be changing.
• In Japan, meanwhile, authorities
remain solidly in easing territory, withlittle sign of a change in conviction.
Cap rates in Tokyo are therefore firm
and in some instances have evencontinued to compress.

How long the current period of inactivity
will last is hard to predict. According
to one Australia-based investor: “I’mhoping that after Christmas there might
be a different sentiment, though it may
not happen that quickly. There needs
to be more certainty before sentimentcomes back. Inflation needs to go down,
unemployment to go up, property prices
to come down, and banks starting tosay, ‘OK, we’re prepared to lend on that
opportunity.’”

These three market snapshots show
not only that base rate and cap rate
dynamics vary widely by location, butalso that asset owners are as yet in nohurry to accept writedowns, leaving
buyers and sellers at something of
an impasse.

Interviewees identified Australia andSouth Korea, which saw the highest
levels of cap rate compression regionallyin recent years, and are now also seeing
significant interest rate hikes, as themarkets most exposed to the inevitableround of cap rate decompression.

• Multifamily. Although multifamily
cap rates in the Asia Pacific areoften uncomfortably low, build-to-rent
projects offer a diversified occupierbase (thereby lowering risk from tenant
nonrenewal), together with short leaseterms (i.e., two to three years) thatallow scope for regular rent increases.
They are also likely to be increasingly
popular among occupiers priced outof home purchases as interest rates
rise. Japan has historically been the
only major multifamily market in the
Asia Pacific, but this is changing
as investors rotate to untapped
alternatives, in particular Australia andChina (see exhibit 1-5). According
to a developer in Singapore: “I think[multifamily] cap rates will expand, but
not as much as in retail or office. Firstly,
that’s because there’s demand but
not much supply. But it also gives you
a hedge against inflation, and whenpeople are looking to invest in an asset
class that’s an inflation hedge, theliving asset class is the one thatstands out.”

There are various reasons for this, apartfrom those already identified. First,
investors are sitting pat as they digest
what current events mean for pricing.
Second, the weight of unallocatedinstitutional capital looking for a homein Asia Pacific markets reinforces theimpression that a seller’s market is stillin place.
Finally, many owners whose underwriting
is based on unrealistically low exit cap
rate or rental growth assumptions are
reluctant to take losses. Recent low cap

4

Defensive Havens
With the writing now on the wall, investors
are beginning to realign strategies infavour of defensive properties more
resilient to the unusual combination ofrising inflation, higher interest rates, andan oncoming global recession.
What that means in practice is a
migration towards assets with a particular
combination of features. These include
rent indexation, shorter lease terms(i.e., so that rents can be easily revised

Emerging Trends in Real Estate® Asia Pacific 2023

The “bed space” is one such group. It
includes the following subtypes:• Hotels. Hotel rooms have the shortest
leases of all (i.e., they operate ona “daily rental” basis), which again
makes them suited to inflation-driven
price hikes. Investors are currently
focused on facilities in the two- andthree-star range rather than those at
the upper end of the market, which
may be subject to inflationary pressure
on high input costs, as well as from theuncertain future of the business travel
market.
In addition, the hotel sector is
beginning to see a critical massof stressed facilities finally cometo market. According to one fundmanager, “I think people are looking
at hotels and seeing a lot of owners

Exhibit 1-6 Multifamily Investment Volumes for APAC Markets, Excluding Japan$2.0

Australia

China

Hong Kong

Singapore

South Korea

Rest of APAC

USD billions

1.5

1.0

0.5

0.0

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

2016

2017

2018

2019

2020

2021

2022

Source: MSCI Real Capital Analytics.

and operators who have had aphenomenally tough time and that are
just tapped out. They can’t just keep
bleeding so they get rid of the asset,
and we’re now seeing quite good
assets quietly for sale.” Japan wasconsistently earmarked as a probablevenue for such deals.
Also, as tourism returns, demand forrooms is beginning to rise sharply, justas many stressed or distressed hotels
look to the market for capital. Some
investors are now looking at conversion
plays, turning underperforming hotels
into residential facilities.
• Senior living. Although Japan
has historically been the only true
institutionalised market for seniorliving in the Asia Pacific, investments
in Australia have recently gained
momentum, making it today thebiggest regional player in the seniorliving space, according to MSCI. The
US$2 billion worth of Asia Pacific deals
struck during the first nine months of2022, including in markets as diverse
as New Zealand, China, Hong Kong,

Singapore, and South Korea, is thehighest ever seen in the first ninemonths of a year, suggesting that asector long regarded as too difficult
may finally be gaining traction. In part,
this is a reflection of new operating
models. Land lease communities—
where homeowners own the home
but rent the land from the community
operator—are becoming increasingly
popular in Australia, while an evolving
model emerging in Southeast Asia is
combining early-retirement facilities
with a medical care component,
providing both operational revenues
and long-term leaseholds on the realestate side.
• Student housing. With university
enrollment relatively resilient toeconomic cycles, and students
something of a captive audience,
student housing is seen as anothersafe-haven asset class. At thispoint, Australia remains the only
institutionalised market in the Asia
Pacific. Although the sector was badly
hit by COVID travel restrictions in 2021
(affecting especially some 200,000

Mainland Chinese students attending
local institutions), the reopening ofuniversities has resulted in somesignificant transactions in the student
housing space, with transaction
volumes in the first half of 2022
higher than during the whole of theprevious year, according to MSCI.
Still, the market in Australia is by now
fairly mature, and with opportunities
elsewhere in the region restricted bya lack of scale, the potential for major
regional expansion in the sector may
be limited, according to one investor
with experience in the sector.
Logistics assets also are seen as
recession resistant. Ongoing structural
undersupply in an environment of rapidly
rising demand tends to ensure highoccupancy, at least for well-positioned
facilities. As one fund manager said:“Pricing has gotten hot, so finding value
has gotten hard, but the good news isthat you are still able to underwrite theoperating fundamentals, which in some
sectors is hard to do. So, while you
might be concerned about cap rates,
you’re less concerned about income.”
In addition, most logistics leases haveannual indexation uplifts allowing them tocapture inflation within their cash flows.
Another factor generating confidence
is that logistics rents usually represent
only a small proportion (usually between
2 and 5 percent) of tenants’ total costs.
With transport making up around 50
percent, occupiers looking to cut corners
are therefore more likely to find themon the transport side rather than fromwarehouses.
Build-to-suit logistics projects are also
regarded as defensive due to theirstickiness. Because tenants mandate
specifications, landlords will agree to adeal only if the tenant is locked in for aminimum period—probably at least 10
years—creating a dependable, annuitylike product. Additional stickiness canbe generated by adding automation.
According to one logistics investor,
automation should be installed at tenant
cost wherever possible as part of fitout. It
can consist of anything from temperature

Emerging Trends in Real Estate® Asia Pacific 2023 5

Chapter 1: Uncharted Waters

Exhibit 1-7 Niche Sectors in Which Investors Are Active or Plan to Be Active
2023

2022

2021

2020
67%

Data centres
54%

Life sciences

51%

Flexible/
serviced offices

That said, opinions have recently becomepolarised because rapidly rising demandhas caused logistics cap rates tocompress to a point—at sub-3.5 percent
in Australia—where higher interest rates
threaten to turn yield spreads negative
just as values are at a cyclical peak.
Others have countered that strong rental
growth in a market with extremely tightsupply offsets this risk considerably (seechapter 3 for more).

51%

Senior housing

48%

Business parks

45%

Self-storage

44%

Affordable
housing43%

Student housing
39%

Resorts
0%

10%

20%

30%

40%

50%

60%

70%

Source: Emerging Trends in Real Estate Asia Pacific surveys.

Exhibit 1-8 Prospects for Niche Property Types
2023

2022

2021

2020
6.8

Data centres
6.1

Life sciences

5.9

Self-storage

5.75

Flexible/
serviced offices

5.74

Affordable housing

5.59

Student housing

5.44

Business parks
5

Resorts0
Abysmal

1

2

3

4

Source: Emerging Trends in Real Estate Asia Pacific surveys.

6

Emerging Trends in Real Estate® Asia Pacific 2023

5
Fair

6

One way to avoid the cap rate squeeze
on logistics assets, according to an
Australia-based fund manager, is to
avoid the ultra-competitive prime end
and instead buy midmarket assets withyields of around 5 to 6 percent. The wide
cap rate differential usually outweighs the
additional risk, creates a more material
spread to the cost of debt, and retains
the same rent growth story offered bymore expensive facilities. As a result,he observed: “We still see compelling
opportunities there, albeit they’re not atthe very pointy end of the market.”A cluster of related new-economy
subsectors are also seen as defensive
plays, due mainly to rapidly risingdemand driven by disruptive social
trends:

5.96

Senior housing

control to specific features that may
not be readily available elsewhere on aturnkey basis. As the investor observed:“If the tenant pays, it immediately
becomes more sticky because they
have to amortise their own fitout. So
automation, temperature controls, and soon all make for sticky premises.”

7

8

9
Excellent• Data centres. The sector faces someheadwinds due to its high carbon
footprint and the impact of inflation on
development costs. But demand for
new capacity is enormous as data use
proliferates on the back of a variety
of secular trends that range fromthe popularity of remote working to
growing 5G takeup. Payback periods
are short, and given their capitalintensity, data centres tend to be sticky,
making tenant turnover low and again
providing reliable, annuity-like income
streams.

90
80
80
70

Basis points

60
50

50

40
30

30

20
10
0

5
Tokyo

Seoul

Shanghai

Sydney/Melbourne

Source: JLL.

• Cold storage. Current cold storage
infrastructure in Asia Pacific markets
continues to fall well short of demand
from e-commerce buyers. In addition,
the goods held in cold storage
facilities—mainly nondiscretionary
grocery and pharmaceuticalproducts—are resilient to economic
cycles, while long weighted averagelease expiries (WALEs), low vacancies,and common use of rent escalation
clauses all contribute to creation of an
ultra-defensive asset class.
• Life sciences. Seen as something of
the golden child of today’s realestate markets (just as data centres
were a few years ago), life-sciences
facilities have caught the tailwinds ofa heightened focus on medical issues
caused by both the pandemic andrapidly aging regional demographics.
Whether the sector will have the samestaying power as data centres is open
to question, though. According to one
investor: “I think it’s more a cyclical
opportunity than permanent. I also
think it’s only so scalable.”

Other challenges include a high bar
for operational expertise, as well as
various barriers to entry, including alimited number of prospective tenants,
a shortage of suitable locations,and often-strict design requirements
depending on the nature of work
conducted. That said, once up andrunning, life-sciences rents are highand facilities again tend to be sticky,
especially if constructed on a build-tosuit basis.
One investor noted that recent
regulatory changes have prohibited(or at least complicated) U.S. Foodand Drug Administration recognitionof work performed in Chinese labs.
This is likely to lead projects with aninternational focus to migrate instead
to India, where they will conduct
work outsourced by multinational
pharmaceutical companies in muchthe same way as the country’s
business process outsourcing(BPO) industry caters to the global
technology sector. Currently, anumber of huge facilities are underconstruction in India, whose costadvantages will probably to divert alarge amount of basic research workfrom more expensive labs in the West.

A final challenge, according to one
investor active in the sector, is that
other regional clusters of life-sciences
facilities, such as those in South Korea,
Japan, and Singapore, receive direct
support from local governments by
way of subsidised land and facilities.
Opportunities for private-equity
participation are therefore substantiallyreduced.
• Self-storage. This is another sector
where rents can easily reset to suitinflationary trends. End-user demand is
set to pick up due to home downsizing,and global players are known to be
active in the region as they look to
replicate successes in the UnitedStates and Europe.
The extent of this migration into neweconomy themes can be seen in recent
data for newly raised capital. In the year
to October 2022, according to analysts
Preqin, regional investment funds raised
a total of some US$16 billion for use in
Asia Pacific opportunistic strategies—
more than three times the total raised forthe whole of 2021, and dwarfing the 2022
amounts raised by all other asset classes
combined (see exhibit 1-9).

Exhibit 1-10 APAC Fundraising, by Strategy, 2018 to 2022 YTD
2018

2019

2020

2021

2022 YTD$30
25
20
USD billions

Exhibit 1-9 Yield Spread of Cold
Storage and General Warehouse Stock,
Asia Pacific, Q4 2021

15
10
5
0

Opportunistic

Value-addedCoreCore-plus

Debt

Source: Preqin as of September 2022.

Emerging Trends in Real Estate® Asia Pacific 2023 7

Chapter 1: Uncharted Waters

Australia: Key Themes
Australia’s appeal as a go-to market
for global investors has ensured thatcommercial real estate volumes remained
strong throughout 2022. Although local
interest rate hikes beginning in April led
to a decline in transactions (deal flow
fell 7 percent year-on-year in the firstnine months of 2022), overall volumes
remained on a par with historical levels.
Although cap rates and values havebegun to soften, Australia has so far
proved relatively resilient to interest
rate pressure.
One explanation for this is that the weightof capital looking to buy core assets inAustralia is today dominated more thanever by offshore, rather than domestic
players. There are various reasonsfor this:• Despite the emergence of a risk-off
mentality in parallel with rising interest
rates, the high levels of dry powder
held by global funds means buyers
remain willing to pay a premium forhigh-quality core assets.
• Weaker pricing in Australia’s publicmarkets has created a denominator
effect that depresses domestic funds’
investment in private assets.
• A roughly 12 percent decline in theAustralian dollar in the year to
November 2022 has made local assets
cheaper for U.S. dollar–denominatedbuyers.
• Cap rates remain at levels too low
to satisfy underwriting standards ofdomestic players, partly because local
cost of capital is higher, and partly
because rising interest rates mandatethat yields should move out.
According to one Sydney-based fundmanager: “Conversations I’ve hadwith [local] investors over the last few
weeks were saying they’re going tocool their jets for the next few months.
Their investment committees currently
have plenty going on across other asset
classes, but from an offshore perspective

8

that’s not the case—if they have an
allocation for the Asia Pacific, it’s notgoing to China, meaning Australia is still
pretty much top of the list. So capitaltransactions will be dominated for at least
the next six months by offshore groups,
where they can see relative value.”
Another reason for the current cap
rate resilience, especially for offices,
is an underlying confidence that workfrom-home policies are not significantly
eroding CBD occupier demand, at any
rate for prime assets. Recent statistics
published by the Property Council ofAustralia may indicate low occupancy
rates of 52 and 41 percent for offices
in Sydney and Melbourne respectively,
but those estimates fail to account for avariety of factors, including the fact thatmost offices were never fully occupied
even in pre-COVID days, according to an
executive of one locally based developer.
Nor do they reflect recent designchanges and facility upgrades that havegenerated a flight to quality into betterappointed and more sustainably focused
assets and away from older or less wellappointed buildings.
Another factor that may help support
office sector fundamentals, according
to a large domestic developer, is thattenants are now taking more space on
renewal. “The rule of thumb used to be 10
metres per person,” said the developer.
[Occupiers] now want this to be bigger,with more space per person.”In addition, and unlike in other Asia
Pacific cities, the trend towards
decentralisation of office space into
city suburbs appears to be weaker inAustralia than it is elsewhere. While some
CBD fringe districts, such as Sydney’s
Pyrmont, South Eveleigh, and Surrey
Hills, have emerged, these areas offer
a complementary cultural dynamicthat involves adaptive use of heritagebuildings, rather than the establishmentof true hub-and-spoke facilities that aim
to serve commuter-belt workers.

Emerging Trends in Real Estate® Asia Pacific 2023

As in other markets, the standout asset
class in Australia over recent years
has been the logistics sector, driven
by chronic undersupply of modern
warehousing and rapid e-commerce
demand. Today, even as that demand
peaks, the market is set to remain
structurally undersupplied, with the ratioof under-construction space relative toexisting stock currently at just 2 percent,according to CBRE.
Some investors have turned bearish
on the space because recent deals
at sub-3.5 percent cap rates appear
unsustainable in a higher interest rateenvironment. The spread for logistics
yields relative to Australia’s risk-free rate
fell to less than 100 bps by mid-2022,
according to MSCI, down from almost
400 bps 12 months previously. As buyers
and sellers faced off, transactions fell
substantially on a year-on-year basis,and yields have started moving out forsome assets.
At the same time, others see a naturaloffset to this trend in the shape of rising
rents (as well as capital values) resulting
from tight vacancies. According to one
fund manager: “Rents will probably
grow by 25 percent this year, so if you’re
worried about cap rate expansion,consider that every 7 percent increase
in rent will yield you 25 basis points ofprotection in terms of expansion of cap
rates. So you have already an embedded
75 basis points of protection with current
levels of rent growth, and you also havezero vacancies in the market.”This divergence of views has created abuyer/seller mismatch. On the buyer side,current valuations are not accretive forAustralian REITs, and even private-equity
buyers nervous about low cap rates are
not convinced rent growth projections
will pan out as advertised, given the highlevel of incentives (not to mention thecost of fitouts and cash contributions)needed to attract high-quality tenants.

For owners, meanwhile, there is little
incentive to sell, especially if they havereliable end users tied to the asset withlong leases. According to an investor in asignificant logistics portfolio in Australia:“The game in the market right now is tojust buy these guys [i.e., good-quality
tenants], move them in, sign them up
for long leases, and then adjust backto market over a period of three to five
years. In that case, in the fifth year you
have that really high rental that’s adjusted
back up. And then you sell it.”Niche asset classes have seen significant
activity in 2022. Australia has the region’s
only institutionalised student housing
sector, which was badly affected byuniversity shut downs and the absenceof Australia’s army of foreign university
students in 2021. However, one largedeal, involving the sale of a share of aportfolio of student apartment towers
across multiple cities to a Singaporean
sovereign wealth entity, was completed
in mid-2022. Although the numbers of
returning international students are still
70 percent below 2019 levels, the longterm fundamentals of the industry are
considered strong. Two other deals wereclosed in Melbourne and Perth during
the year. Senior housing assets havealso been actively traded, as mentioned
elsewhere in this report.
Finally, residential real estate in Australia
has not proved as resilient as its
commercial sector counterparts, despite
the recommencement of immigration flowsthat can only boost long-term demandfor housing space. Home prices rosestrongly in 2021, and had been expected
at least to retain their value going forward.
As recently as April 2022, estimates from
National Australia Bank projected a 0.4
percent full-year increase in capital city
home prices. By October, however, thebank had revised its estimate to a roughly
20 percent decline by the end of 2023
from an April 2022 peak.
This abrupt about-face in home valuations
has come almost entirely at the hands ofa reversal in domestic monetary policy,
as the Reserve Bank of Australia initiatedan unanticipated tightening cycle that
saw the nation’s cash rate increase from
0.1 percent in April to 2.85 percent by the
beginning of November.

For a country especially sensitive to risingrates—Australia has the world’s secondlargest ratio of household debt to GDP,according to the Bank for International
Settlements, as well as a high proportionof variable-rate mortgages—the extra
burden has weighed heavily on
housing demand.
At the same time, while a 20 percent
fall in home prices may seem
unprecedented, the decline comes froma high base given rapid increases inhome prices seen in 2021. In addition,
the extent of the reversal varies
significantly by city and district, with lesswell-located suburbs feeling the brunt of
the falloff.
Development of an Australian multifamily
asset class is another trend that is
gaining traction, with a significant numberof new projects underway, mostly backed
directly or indirectly by foreign capital.
However, opinions remain divided as
to whether a build-to-rent asset class is
feasible either economically or culturally
in Australia (see chapter 3 for further
discussion).

Forecast Change in Australia Capital City Home Values
2020

2021

2022*

2023*

SydneyMelbourne

Brisbane

Adelaide

Perth
–20%

–15%

–10%

–5%

0%

5%

10%

15%

20%

25%

30%

Sources: CoreLogic, NAB Economics.
* Forecast.

Emerging Trends in Real Estate® Asia Pacific 2023 9

Chapter 1: Uncharted Waters

Inflation Boosts Development
Risk
Although build-to-core strategies
became popular in recent years as away to manufacture new product in anenvironment of too little investable stockand too much investment capital, risks
associated with development have now
risen substantially. Inflationary pressure
on construction costs was cited ininterviews as the main cause, a view
confirmed by survey responses (seeexhibit 1-11).
In part, this is because prices of raw
materials are denominated in U.S. dollars
and become more expensive as local
currencies depreciate.
In Australia, one interviewee said thatsteel and timber had risen around 15

percent in the year to October 2022, butthat the impact varied widely according
to sector: “Steel is about 4 percent ofconstruction costs in an office building,”
he noted. “But in a [logistics] shed, it’saround 50 percent, so there are different
risks for different asset classes.”
In Singapore, an increase in construction
costs of “easily 15 percent” was noted
during 2022 by one local developer,
mainly attributable to materials.
In South Korea, one private-equity
manager involved in different build-tocore projects cited “a huge increase in[construction] costs, to a level where
projects are no longer viable.” Apart fromgeneral inflationary pressures, Korean
cost increases have also been driven bychanges to labour laws and health andsafety regulations.

Exhibit 1-11 Projected Change in Economic Factors, Next Three to Five Years
WorsenNo change

Improve2023

Construction costs 2022
2021
2020

Cost of finance

Global economic
growthYield compression

Asian economic
growthCompetition from
Asian buyers

Competition fromglobal buyers
Availability ofinvestable properties
0

20

40

Source: Emerging Trends in Real Estate Asia Pacific surveys.

10

Emerging Trends in Real Estate® Asia Pacific 2023

60

80

100

Finally, pricing pressures in China havepulled in the opposite direction, withinterest rates declining and the cost ofsome inputs, such as steel, falling in thesecond half of 2022.
In addition, construction projects havesuffered from a variety of other problems:• Shortages of materials caused bysupply chain delays.
• Rising construction financing costs andrisk-free rates.
• Increased utilities costs (especiallyenergy).
• In many markets, manpower shortages
have led to significant construction
delays and increased costs due tohigher salaries. This is a secular
problem caused by the unpopularity
of construction work in increasingly
wealthy populations. In Hong Kongand Singapore, the issue has been
aggravated by tighter labour lawsthat prevent the importation of foreign
workers. Labour shortages are now
driving a shift to prefabrication, withfactory-built components trucked tosites for assembly. Although some
types of prefabrication techniques
have been in use for years, there
is now a growing trend towards
modularisation, where complete
building sections (e.g., bathrooms)
are manufactured off site as a single
unit. Fabrication usually takes place inneighbouring markets such as China
or Malaysia, where labour costs arelower. The costs of modularisation
are still relatively high, but are now
decreasing as adoption ticks up.
Apart from these practical problems,a lack of visibility over input costs andoccupier demand is leading someinvestors to postpone or avoid build-tocore development altogether, especiallyfor larger, more expensive builds.
According to one investor, “If you’rebuilding a multistorey office tower thattakes three years to develop and you
have to take a view on where the market
and cap rates will be three years fromnow, I think that becomes a tougher sell.

Exhibit 1-12 Actual and Projected Construction Cost Inflation, Asia Pacific Cities
2021

2022*

2023*

Melbourne
SydneyAs a rough guideline, however, markets
in Europe, and even more so the UnitedStates, which are typically faster to adjust
to changing fundamentals, have so far
seen cap rate increases of around 75 to
100 basis points (bps), with moves to 150
bps projected for 2023. Although figures
vary widely by market and asset type,this offers an indication of where future
exit cap rates might be set in Asia Pacificmarkets.

Hong Kong
Beijing
Shenzhen
Shanghai
MumbaiBeyond that, investors are cutting useof debt where possible and creating
buffers for contingencies such as higher
operational costs or further interest rate
and risk-free rate increases. Provisions
are often made for extended holdperiods. According to an investor in
China: “We underwrite a three- to fiveyear hold, which is similar to before, but
psychologically, we have to run scenarios
in which exit isn’t easy. So we do provide
for holding another one or two years andstill be able to make a decent return.”

Ho Chi Minh City
Seoul
Osaka
Tokyo
Singapore0%

is so wide. One investor pointed out thatthe onus for setting pricing baselines
in the Asia Pacific had long ago shiftedfrom international to regional capital,
which tended to create a valuation floor
given the ever-growing size of regional
institutions and a preference among local
investors for longer hold periods.

5%

10%

15%

20%

25%

30%

35%

40%

45%

Source: Turner & Townsend construction market survey 2022.
* Forecast.

But logistics development, which has anine-month construction period and a
12- to 18-month development cycle, is a
bit easier to wrap your head around. So,
what you’re seeing is that some of thoselonger-dated development projects arebeing put on hold.”At the same time, the caution now evident
in this space plays into the hands of thelarge, vertically integrated developers
with deep pockets and expertisethroughout the investment/development
pipeline.

Underwriting Changes
As investors adapt their underwriting
to factor in higher interest rates andinflation, the most obvious change will bethat provisions for exit cap rates will movehigher. As one fund manager said: “That’s
how property works—logic says there has
to be liquidity above the risk-free rate.”
The question is: how much will they
move? Interviewees were reluctant tobe drawn on this question, probably
because the range of potential outcomes

Again, the fact that some asset classes—
especially those in niche areas where
supply/demand dynamics are moretransparent—tend to provide a clearer
path forward makes them preferred
options. In the words of one investor:“That’s where logistics, for example, iseasier to underwrite—because you canhave stronger conviction on where rents
are going given the supply/demand
imbalance and some of those macro
trends that are driving the demand
equation. In other sectors, it’s a lot moredifficult to underwrite.”
For development deals, materials
are now more likely to be purchasedin advance and project managers
directed to employ a “value engineering”
approach. Basically, this involves finding
ways to find economies via more rigorous

Emerging Trends in Real Estate® Asia Pacific 2023 11

Chapter 1: Uncharted Waters

Although China’s zero-tolerance
approach to COVID containment
served it well in the initial stages of thepandemic, widespread lockdowns andmanufacturing industry closures became
common in many parts of the country as
increasingly contagious strains emerged.
Ensuing declines in both industrial
output and consumer spending havebeen compounded by weak exports,
as international demand for Chinese
products softened. China’s full-year
gross domestic product (GDP) growth isprojected to fall to 3.2 percent in 2022,
according to the International Monetary
Fund (IMF), down from 8.1 percent
in 2021.
China’s real estate sector, which (together
with associated industries) represents
some 20 to 30 percent of the economy,
was already feeling stress before COVID
lockdowns appeared. A governmentinduced financing squeeze initiated inAugust 2020 (known as the “Three Red
Lines”) had already led to a numberof developer defaults in 2021, whichthen accelerated to record levels as the
economy softened in 2022.
Developer bad debt grew to 29.1 percent
of total property loans in the first half ofthe year, according to estimates from
Citigroup, up from 24.3 percent at theend of 2021. The situation is worse
in offshore bond markets, where 94
percent of dollar notes from Chinese
developers traded at distress levelsof below 70 cents on the dollar at the
beginning of November 2022, according
to Bloomberg.
Although the government has now eased
its clampdown and encouraged banks
to increase lending to developers, theprospects for an industry-wide recovery
seem unlikely in the short term.
One problem is that rapid growth inChina’s property markets over the last
three decades created a pro-cyclical
wealth effect. Rising asset prices madebusinesses and homeowners feel richer,encouraging them to spend more.

12

Chinese Nonperforming Loans (NPLs), 2020 to H1 2022
Private developers
Implied true NPL % for real estate sector
State-owned developers
60%
47.8%

50%

Percentage of all loans

China: Key Themes

46.5%

40%
29.1%

30%

24.2%

20%

24.3%

14.8%

13.5%
14.1%

10%

7.9%

6.1%
2.5%

2.6%

0

2020

H1 21

2021

H1 22

Sources: Bloomberg, Citi Research estimates.

The additional spending then boosted
incomes elsewhere in the economy(including those of local governments
selling land), thereby reinforcing both thegrowth and the exuberance.

real estate adjustment. . . . Furthermore,
the potential for banking sector losses
may induce broader macro-financial
spillovers that would weigh heavily on
China’s medium-term growth.”

But wealth effects function in both
directions. Once the balance is tipped
and overvalued asset prices begin
to correct, momentum accelerates
to the downside. In this case, as thedeveloper financing squeeze stretched
into 2022—far longer than anticipated—home sales and pricing fell significantly
and more projects ground to a halt,
driving more than US$25 billion indeveloper delinquencies during thefirst eight months of the year. Nor is theend in sight. According to Bloomberg
Intelligence estimates, at least US$736
billion owed to creditors is still at risk ofrestructuring or a haircut.

As problems mount, transaction volumes
for commercial real estate have also
declined, with activity falling by some 23
percent on a year-on-year basis acrossboth Mainland China and Hong Kong in
the first nine months of 2022, according
to MSCI.

As the IMF commented in its October
2022 World Economic Outlook: “A further
intensification of negative feedback loops
between housing sales and developer
stress risks a larger and more protracted

Emerging Trends in Real Estate® Asia Pacific 2023

Although foreign funds with boots on the
ground and a mandate to commit capitalremain open-minded, global investors—
especially from markets in the West—are
largely staying away. In part, this is due tothe ongoing downturn in the development
sector. Even moreso, though, privateequity investors say they are holdingback out of concerns over potential
economic and operational downside
generated by zero-COVID polices.
According to one foreign fund manager
based in China: “The challenge as itChinese Developer High-Yield U.S. Dollar Bonds, Discounts from Par

90 cents or more

70–89 cents

Below 20 cents

Below 10 cents

50–69 cents

30–49 cents

20–29 cents

100%

50%

0
Dec
2021

Jul
2022

Sep
2022

Oct
2022

Source: Bloomberg.

relates to zero-COVID is that there aresubstantial operational hurdles. If you
have a newly acquired asset that is thensubject to quarantine at the asset or citylevel, the challenge is that, rather thanbeing able to execute on your asset
enhancement initiatives or your lease-up
plans, you find yourself mired in rent relief
negotiations with 100 tenants.”
Another Hong Kong–based consultant
said: “Quite frankly, China at the moment
is ring-fenced, it’s too difficult. I don’t
have a single external investor who’s
looking at a project in China. They’re
obviously keeping their eye on themarket, but when they go to the board ortheir investment committee, they’re told:‘Not now.’”
Although Western funds may have closed
their books for the time being, sentimentamong Middle Eastern and Asianinvestors is more positive, especiallythose in Singapore, which is currently
by far the biggest source of outboundAsia Pacific capital. According to one
Singapore-based investor: “I sensemany institutions are not going [to China]
because it’s just too difficult to convince
their investment committees. But we don’t
have that issue—for us it’s just a questionof making money, and there are still
opportunities in China, especially given
the clampdown on local developers.”
Ironically, gun-shy foreigners may be
avoiding Chinese markets just as thecountry is brimming with prospects. Not
only are interest rates heading down
rather than up, but the market is flushwith stressed developers looking to raisecash by paring balance sheets. In an
environment of reduced competition,
attractive cap rates, positive yieldspreads, and a rerating of some asset
classes following the establishmentof a domestic REIT industry, someinterviewees were targeting previously
hard-to-buy assets now trading at
substantial discounts to replacement cost.
These include growth sectors suchas logistics (despite a macro-driven
slowdown in leasing) as well as
multifamily assets in tier-1 markets,described by one investor as “a great
asset class, with lots of liquidity, strong
demand from tenants, and proven to bequite resilient over time.”

looking to exploit a need for bridging
finance for incomplete projects, or to
alleviate immediate cash flow deficits.
Although there was a general consensus
that the extent of these distressed
opportunities has yet to match investor
expectations, as well as concern theymight be affected by potential contingent
liabilities, confidence was high that
assets would eventually come to market.
According to one locally based fundmanager: “People argue that prices are
not coming down enough, but I think now
is the time to start looking—if you startlate, you won’t have enough time when
the price really drops.”
Retail assets, meanwhile, have largely
been relegated to the sidelines due
to concerns over potential COVIDrelated shutdowns and a decline in
consumer spending, while CBD offices
suffer from both oversupply issues(especially in Shanghai) and questions
over future occupancy rates at a time of
economic weakness. A trend towards
decentralisation, as new office clusters
spring up in outlying districts, has added
further to CBD oversupply, which is willprobably take several years to absorb.
Finally, as domestic developers continue
to flounder, well-placed observers
report that the government remains
focused on its goal of widespreadindustry consolidation. According toone: “Basically, they’re looking at two
strategies. One is to intervene in a
major way and essentially nationalise
the residential market with the help ofsome leading state-owned enterprises[SOEs]. The other is to say to the SOEs
and leaders in the market: ‘You’ve got
six months to get your act together, torationalise and sort yourselves out. We’ll
facilitate, but will leave the industry tocome up with the ultimate solution.’
But whether it’s government-induced
or government-facilitated, I think theintervention is ultimately going to bepretty radical.”

Debt—especially mezzanine-type—has
become another popular play in China,
providing better security for investors

Emerging Trends in Real Estate® Asia Pacific 2023 13

Chapter 1: Uncharted Waters

analysis of design brief parameters, but
without compromising overall project
quality.

course, that mainstream is dead, though
it may help explain why there has beensuch a dramatic slowdown in deals.

Traditionally, many building contractors—
especially in Japan and South Korea,
where build-to-core strategies arecommon—have assumed inflation risk via
fixed-price (aka guaranteed maximum
price [GMP]) contracts. While in principle
this protects investors by locking in costs,
in practice GMPs are counterproductive
if contractors are left bankrupt by rising
input prices. As a result, some contracts
negotiated perhaps two years ago in a
low-inflation environment are now being
renegotiated.

• Office, for example, remains by far thebiggest asset class in the Asia Pacificregion, making it impossible to ignore
even as Asia Pacific transactions in
the third quarter of 2022 fell by almost
half year-on-year, according to MSCI.
In particular, prime central business
district (CBD) assets are invariably inshort supply and therefore constantly
the targets of regional core funds
competing to place capital. Interest
has increased recently as corporate
occupiers migrate to higher-quality
buildings in order to entice staff backfrom work-from-home arrangements.
By contrast, interest in non-prime
offices has fallen away due to difficultyin assessing current and future asset
values. In particular, this has led
to reduced interest in office asset
enhancement projects, although inprinciple such plays continue tobe popular.

Discussions for new deals, meanwhile,
have become problematic, stranding
some investors who may have alreadybought land but whose cost basis forconstruction has been pushed up by
inflation to levels significantly higher
than anticipated by their pro forma
underwriting.
According to one investor: “Myexpectation is that the GMP contract inKorea, in which materials costs were
locked in, will now go away, and I’ve
heard the same thing is happening inJapan. I think you’ll still get GMP, but
you’ll be subject to materials priceinflation—that’s going to be a big change
in both those markets for build-to-coreprogrammes.”

Still, while office will always be seen
as an evergreen asset class, in today’s

markets even prime assets can be
subject to negative undercurrents. Fora start, buyers are no longer bidding
up as they did in the past. At thesame time, owners are showing little
inclination to sell in the absence ofpressing reasons such as end-of-fundobligations. As a result, a wide pricing
gap has formed. In previous years,
such pricing gaps were generally
resolved to the upside, but the
expectation in the current environmentis that a buyer’s market will quickly
take shape as office cap rates expand.
Even in Singapore, which saw strongtransactions for office assets in 2022
and was identified in our survey as
one of only a few regional markets withpotential for rent increases, prospects
have dimmed. According to one local
developer: “It depends on interest
rates, but with the recent crazy highs,
it will be hard. Banks have stopped
giving out fixed loans, so there may
not be enough money to buy property,[buyers] can’t control the interest rates,[their] electricity bills are going up, andrents can’t be increased easily—there’s
no end to it.”Exhibit 1-13 Asia Pacific CBD Office Yields, Q3 2022
Seoul CBD

Hong Kong–CBDs

Sydney CBDTokyo–5 Wards

Singapore CBD

9%Mainstream Takes a Back Seat
As can be seen from the above
discussion, the current high-inflation,
recession-prone environment favours
assets relating to fast-growing industries,
often involving niche products orservices driven by themes such as digital
disruption, the obsolescence of existing
stock, or migration. Affordability is
another theme in play, as are assets thatoffer a guarantee of future cash flows andthat can index rents to inflation.
Generally speaking, though, few of thesequalities (and sometimes none of them)describe attributes offered by mainstream
asset classes. That does not mean, of

14

8%
7%
6%
5%
4%
3%
2%

2013

2014

2015

Source: MSCI Real Capital Analytics.

Emerging Trends in Real Estate® Asia Pacific 2023

2016

2017

2018

2019

2020

2021

2022

Exhibit 1-14 Cities Most Likely to See
Rental Growth in 2023
DeclineIncrease

1 Singapore

5.81

2 Tokyo

5.12

3 Sydney

5.03

4 Ho Chi Minh City

4.94

5 Melbourne

4.80

6 Osaka

4.58

7 Shanghai

4.55

8 Seoul

4.49

9 Hong Kong

4.45

10 Jakarta

4.40

11 Shenzhen

4.35

12 New Delhi

4.16

13 Beijing

4.15

14 Guangzhou

4.08

15 Manila

3.98

16 Kuala Lumpur

3.98

17 Bangkok

3.91

18 Mumbai

3.90

19 Taipei

3.90

20 Auckland

3.68

21 China—second-tier cities

3.55

22 Bangalore

3.40

Source: Emerging Trends in Real Estate Asia Pacific2023 survey.
Note: Data scored on a nine-point scale.

• The retail sector also is facing
headwinds as sentiment sours andcapital rotates elsewhere, in particular
towards logistics assets. The numberof retail deals that closed in the third
quarter of 2022, together with thenumber of pipeline deals, fell by morethan half compared to the same period
in 2021, according to MSCI. The selloff
may be overdone, though. The reasons
behind the retail slump are obvious
enough, but with sector rerating now
largely complete, the industry is
now basically de-risked, with many
profitable assets available for purchaseat low prices.
Several interviewees saw retail as acontrarian play for just this reason.
Its promise was not necessarily as
a conversion play for higher andbetter uses, or as a platform to add
experiential features, but simply areflection, as one fund manager put it,that “if you look at retail cap rates, themarket is mispriced. Go back 10 to
15 years, especially the big shopping
malls, retail was the most trophy asset
you could own. Now, it’s a dirty wordand has probably been oversold
relative to other sectors.”

Distress: Giving Up?
Investors waiting since 2020 for theappearance of distress in Asia Pacificmarkets have for the most part beenleft empty handed, with most now
discounting the prospects for widespreadpandemic-induced distress. Whether
an impending recession might throw
up better opportunities is a question
probably dependent on the extent andduration of an elevated interest rateenvironment.
This decline in sentiment was reflected inour survey, which showed just 7 percent
of respondents expecting “significantly
higher” returns from distress strategies,
compared with 10 percent surveyed lastyear and 17.7 percent in our 2021 report(see exhibit 1-15).

especially where deals have been
underwritten on the basis of highleverage and low interest rates.
Anecdotally, some of the many recent
deals structured in this way are now
underwater and may therefore bevulnerable to some type of involuntary
disposition.
In addition, interviewees suggested thatvarious asset classes and markets may
still offer potential for distress, including
the following:• Hotels. Despite high hopes, significant
levels of hotel-sector distress have so
far failed to materialise, and with travel
once again picking up, prospects
have receded as cash flows begin
to revive. Australia, for example,
identified last year as a prime sourceof potential hospitality-sector distress,
is now a “roaring” market, according
to one Australian source, as domestic
and international demand rebounds.
“If anything,” the investor said, “it’simpossible to get a room, particularly
at a rate you’d like to pay.”
Still, even as financing conditions
ease, investable opportunities are
emerging. Japan, for one, wasidentified by several interviewees

That said, economic downturns arealways likely to produce distress,

Exhibit 1-15 Change in Targeted Returns for Distress Strategies in 2021, 2022,
and 2023
2021

2022

2023

Significantly lower Somewhat lower

Same

Somewhat higher Significantly higher

50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%

Source: Emerging Trends in Real Estate Asia Pacific 2023 survey.

Emerging Trends in Real Estate® Asia Pacific 2023 15

Chapter 1: Uncharted Waters

Japan: Key Themes
If rising interest rates are the key reason
that investment in most Asia Pacific realestate markets has slowed in 2022, theBank of Japan’s (BOJ) ongoing Yield
Curve Control policy, which caps the yieldof the 10-year Japanese Government
Bond (JGB) at just 0.25 bps and, in turn,keeps bank borrowing rates low, is one
reason Japan remains so popular amonginternational investors.
With bank lending for commercial
real estate still both cheap and freely
available (at around or less are 100 bps),
Japan now offers the only market in the
Asia Pacific—apart from China—where
foreign buyers enjoy a reliable spreadover the cost of debt (i.e., around 200 to
300 bps).
According to one locally based investor:“In the last couple weeks, I’ve had
numerous meetings with foreign investors
looking to invest in Japan. Some looking
for platforms, some looking for deals,
but it’s on every institutional real estate
investor’s radar—if it wasn’t before,
it is now.”
Overseas investment in Japanese assets
rose 11 percent in the first three quartersof 2022 to US$8.1 billion, according to
MSCI—a figure that would havereached over 30 percent if not for the
weakening yen.
This rush of foreign capital to Japan
has revived the common pre-pandemic
problem of excessive available capital
pointed at a shortage of available assets.
One reason for this is that owners haveno incentive to sell Japanese assets
as they wait for a resolution—or atleast some clarity—on both global anddomestic market volatility. Another reason
is that if U.S. dollar–denominated funds
were to sell assets and then repatriate theproceeds, currency depreciation would
work against them—an outcome they are
in no hurry to realise.
However, with domestic REITs now net
sellers, and with some foreign investors

16

also looking to offload assets as fundlives end, more stock is expected tocome to market.
Even as office rentals decline, pricing
remains predictably high, with cap
rates tight at around 2.2 percent for
CBD offices. “In fact,” according
to one investor, “we’re seeing more
cap rate compression than we are areversal, which is again a reflection of
too much capital rather than of market
fundamentals.”
Among the asset classes, investment
in office assets has seen a revival, withtransactions up 25 percent year-on-year
through mid-2022. This reflects a peakin a two-year trend of steadily rising
office vacancies caused by a surprising
affinity for home working among young
Japanese workers apparently now
liberated from the protocols of traditional
working practices.
As one Tokyo-based investor observed:“The reason people are working fromhome is that the commutes are very
long—if you’re on the move one-and-ahalf hours each way every day, working
from home has an appeal. So I was
surprised because I thought they would
want to return, but all the companies I’m
speaking to are struggling to get theirstaff back to the office.”
Another consequence of Japan’s workfrom-home trend is that some companies
in central Tokyo are now starting to giveback space, partly because less isneeded if employees are working flexibly,and partly because more companies areleasing satellite offices in the suburbs,
closer to where people live. Japanesebanks, for example, are now using theirdistributed branch networks to host backoffice workers nearer to where they live,
according to one interviewee.
Hotels are another area where bothforeign and domestic capital is active.
Japanese hospitality assets were hard
hit by the pandemic, given especiallythe absence of large numbers of foreign
tourists, just as a wave of overbuilding in

Emerging Trends in Real Estate® Asia Pacific 2023

anticipation of the Tokyo Olympic Games
created a supply glut.
The recent reopening of the country
to foreign tourism, together with thesteep decline in the value of the yen, iscreating a rush of new visitors that has
finally provided relief to hotel owners. It
seems also to have broken the logjam
in transactions, with more than US$1
billion in deals—especially three-star andfour-star regional assets transacted—in
the third quarter of 2022, often on a
distressed basis.
One reason for this is simple exhaustion
after almost three years of hardship.
Another is the extra burden created byrising interest rates, which is amplifying
the extra debt load carried by underused
facilities.
“Hotels are going to need to trade,” said
one fund manager. “The question is atwhat price? At the moment, there’s still apretty good gap on the bid/ask. A lot ofguys are looking for stress or distress,
and the sellers, especially as the country
opens up, are thinking they’ll be running
80 percent occupancy. So that gap will
have to be filled. But I still think it’s a goodspace if [investors] know the businessand can bring an operator in, andespecially if they get some economies ofscale with an operating platform.”
The residential sector in Japan continues
to see strong demand from foreign
institutional investors, who have now
largely priced out local REITs. As the
only mature multifamily market in the Asia
Pacific, Japan has for several years beena magnet for institutional investors willingto tolerate increasingly compressed
yields by levering their deals and hopingthat rental increases and more cap ratecompression will get them over the line.
In addition, as macro risk increases,
investors are drawn to multifamily as adefensive asset class. According to one
institutional investor active in the space:“It has relatively short leases and isalso very granular, so that if one or two
tenants leave then it’s not the end of thecombine multiple smaller projects intoa single package, or to buy assets on a
forward-purchase basis via a deal with alocal developer. These can then be spun
off to international core funds. Large,
cash-rich institutions will often offer to buy
assets on a full equity basis, and thenrefinance the deal after closing.

Japan Tourism Arrivals, 2010–July 2022

35
31.1

30

28.6

Millions of visitors

25

24
19.7

20
15
10
5
0

31.8

13.4
10.3

8.6

8.3
6.2
4.1

0.4
0.1
Jan– May–
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 April July
0.2

2022 2022
Source: Japan National Tourism Organization (JNTO).

world, whereas if you have a large officebuilding with one or two big tenants, if
one leaves it’s a major impact on yourcash flow.”
Another factor working to the advantage
of multifamily assets is that, as rising
construction costs push the purchaseprice of for-sale properties out of reach,as a potential venue for discounted
purchases, as noted in the “Japan:
Key Themes” section on page 16. Over
US$2.4 billion worth of hotels wereacquired for redevelopment (primarily
for residential purposes) in the firsthalf of 2022, according to MSCI,
representing a quarter of all hotel
investment regionally.
In addition, according to a Thailandbased hotel investor, there is renewedinterest among institutions now pivoting
away from areas such as logistics due
to concerns over cap rates, saying,“They’re looking at buying assets thatwould otherwise not be on the market.
These are quality assets at a decent
price, but it’s not at a distressedpricing. They can’t buy the notes either,so they’re buying good assets they can

the appeal of rented accommodation
has increased.
Because most large multifamily portfolios
were bought up long ago, finding
projects big enough to satisfy the scaleneeded for institutional buyers has
become problematic. This has resulted
in opportunistic funds stepping up to

Despite the enduring popularity ofmultifamily as an asset class, someinvestors are sceptical, pointing out that
previously positive net migration flows
into Tokyo that once ensured strong
demand for residential space have, forthe first time, turned net negative, most
likely on the back of the above-mentioned
shift to working from home by Japaneseyouth.
On top of that, the compressed cap
rates (currently 3.00 to 3.25 percent) for
Tokyo multifamily assets are regarded
as somewhat precarious, especiallyas interest rates rise. A slight shift tounderwritten assumptions could easily
turn yield spreads negative, especially
if deals are highly leveraged, which
they often are. Risk is therefore notinsignificant (see chapter 3 for more on
the multifamily debate).

reposition, clean up, generate better
return, and then sell.”

you’d expect, given what you read in
the press.”• China. The government’s “Three
Red Lines” liquidity squeeze (now in its
third year) has led to an accelerationof developer bond defaults, both
domestic and foreign currency. Stressand distress are now widespread
across the development sector.

Still, some notable transactions
have been seen, and more are
expected. Typical projects involve
unfinished mass-market multifamily
developments, whose prospects
have been undermined by a loss of
public confidence in the longstanding
upward trajectory of home pricing.
With home sales transactions fallingfor 14 consecutive months in the
period preceding September 2022, thesqueeze on developer cash flows
is ongoing.

Despite this, opportunities for foreign
investors have again fallen shortof expectations. “You’d think there
would [be opportunity], and I guess
we are seeing some of that, but I feellike there’s always a bid/ask [spread]between buyers and sellers,” said one
fund manager. “There seem to be a
lot of bullish sellers in China still, so
you’ve probably seen less of it thanAnother popular way to participate
in distress scenarios in China is
via provision of floating-rate debt,
which often offers more attractive

Emerging Trends in Real Estate® Asia Pacific 2023 17

Chapter 1: Uncharted Watersrisk-adjusted returns than equity
investing. Such opportunities havespread from the residential sector to
include commercial developments,
where there is now “a pretty broad
extend-and-pretend element at work,”
according to one investor active inthe market.
This is not an exercise for the faintof heart, however. With transaction
volumes down, price discovery isthin, and there are many ways for theunwary to come undone. One HongKong–based consultant reported
returns of 30 percent on provision of
mezzanine debt to incomplete mixeduse development projects. “If it goes
wrong, though, you inherit someassets,” he said, “and they may not be
assets you particularly want to have,given issues like exit, etc. So, the 30
percent reflects that it’s a high-riskgame.”• South Korea. Perhaps surprisingly
in light of its recent popularity among
investors, South Korea may now also
become a venue for distress. Deeppocketed Korean institutions were big
investors in Western markets in recent
years. But pandemic-related travel
restrictions, combined with a steep
fall in the value of the Korean won,
led them to invest at home from 2021.
With so much capital to deploy, prices
became frothy.
Meanwhile, aggressive hiking by the
Bank of Korea forced borrowing costs
to a level that now exceeds averagecommercial property yields of 4.2
percent. With construction costs alsosoaring, many investors are now
discovering they have overpaid for
assets and may soon be forced todivest. As one foreign fund manager
with experience in South Korea said:“So much local capital was alreadyin the market, and it got incredibly
aggressive during COVID when it
couldn’t invest abroad. So I think if welook across our markets, we see morestress in Korea than anywhere else.”

18

A Net Zero Future
The importance of environmental, social,and governance (ESG) issues has grownexponentially in the Asia Pacific region
over the last few years, to the extent thatany significant commercial real estate
investment must consider it as part ofdue diligence protocols. While social
issues are now front-and-centre in the
United States, and governance factors
are increasingly important in Europe,
environmental considerations remain by
far the most important ESG factor in Asia
Pacific markets.
Until recently, the main emphasis among
investors and owners was simply forbuildings to be “green” in the overarchingsense of greater sustainability, withattention directed to a range of themes
including energy efficiency, health, use ofmaterials, and water consumption.
Today, however, while these all continue
to be important, the focus has condensed
around the issue of net zero carbon. As
the head of sustainability at one large
Asia Pacific fund said: “Two years ago,
it was more a theoretical exercise ofwhat we’d have to do to get to net zerocarbon by 2050, and people were juststarting to get their heads around it. But
in the last two years, the thing that’s reallytaken off is the reporting and regulatory
requirements as people start toget serious.”
As with ESG requirements, the adoptionof net zero reporting standards has
been driven by developments outside
Asia—in particular, by the European
Union’s 2021 Sustainable Finance
Disclosure Regulation (SFDR). For realestate purposes, this requires fundmanagers to disclose how they haveassessed relevant sustainability risks
embedded in a building (e.g., efficiency
and performance characteristics) andhow ultimately that assessment has been
quantified in financial terms. Because the
SFDR has extra-territorial affect, it means
it applies to any Asia Pacific fund that has
at least one European investor—which inpractice means most private-equity funds
operating regionally.

Emerging Trends in Real Estate® Asia Pacific 2023

The problem with SFDR and equivalent
regulations is that the system in place forassessing carbon efficiency in buildings
is intimidatingly nonspecific and still verymuch a work in progress. According to
one investor: “It’s tough, because thevarious regulatory standards and thethings they want you to do are not alignedthat well, other than generally towards the
net-zero-carbon-by-2050 goal. How you
get there, and what you have to report,
is all over the place. So, it’s a bit of aminefield in the sense that you want tocomply with these different measures, butthey’re all going at different speeds.”
Local regulatory frameworks are alsoin place in some countries. Australia is
one of the most carbon-efficient markets
in the world, and rapid progress has
also been made in Singapore. China,
meanwhile, had until recently lagged, but
is now undergoing rapid change due toits commitments to various multilateralcarbon emission–reduction programmes.
In 2022, it introduced pilot regulationsin Shenzhen that are unprecedentedly
strict, although, as with the SFDR, they
have also come under fire as sometimes
inflexible and arbitrary. Adapted versionsof the Shenzhen rules will probably berolled out in other Chinese cities
over time.
While net zero as a concept is therefore
beginning to take root, Asia has so
far lagged Western—and particularly
European—markets in its commitment
to carbon efficiency. “They’re talking thetalk but not walking the walk,” as one
interviewee commented.
But while awareness may still be low,market forces are beginning to nudge
owners towards compliance, at leastat the top end of the market where
investment funds are most active.
According to one fund manager: “We
think we’re way ahead of the regulators
because we have to rent [buildings] on totenants, a lot of whom are corporates with
their own carbon requirements. Or else
we have long-term investors who may
hold for 20 or 30 years and who knowthat net zero carbon is not going away.”will be removed from the prime section of
the TSE as of April 2024.

Exhibit 1-16 Percentage of Grade A, Green-Certified Office Stock, by GFA
100%
80%

90%

60%
40%

48%

40%

38%

20%
0%

Singapore

JakartaBeijing35%

Bangaluru Bangkok

31%

30%

28%

Mumbai

Seoul

Hong Kong

Source: JLL.

Unless investors make their holdings
comply, therefore, by providing disclosure
on issues such as the amount of capital
invested for carbon efficiency purposes
and how much future investment may berequired, investors risk holding stranded
assets. “A couple years ago, evenopportunistic guys would say, “We don’t
have to worry about stuff that’s happening
in 2050,” the fund manager continued.
“But that’s not the case anymore—if you’reselling on to a long-term holder they’regoing to ask, so ignore it at your peril.”to an investor in Australia: “I think[compliance] is seen as business as
usual in Australia—it’s not really regarded
as asset management anymore, it’s justsomething any manager should be doing
as opposed to something special. So I’m
not sure you get a premium on the buy,
but you definitely get a penalty on
the sale.”

Making Net Zero Happen

Exactly how sustainability and carbon
reduction goals can be accomplished isThis suggests that values of assets
a big subject that is beyond the scope
unable to meet the required standardof this report. At its most basic level,
will eventually be discounted by
however, the drive towards net zeropotential future buyers (i.e., the “brown
discount”). Or worse, that future regulatory carbon starts by creating a baseline
to quantify building carbon emissions,frameworks will prohibit owners fromand thereafter crafting an emissions
leasing buildings that fail to meet energy
reduction strategy whose progress canintensity targets. Such regulations are
be tracked over time. Collecting accurate
already in effect in some European
jurisdictions, and although the targets set and comprehensive data (via utility bills,
are not ambitious, they will almost certainly energy audits, and building management
systems, for example) is therefore vital.
be tightened over time.
Exactly how such a brown discountshould be measured remains a vexed
question, in the same way that values of“green premiums” applying to compliant
buildings are also hard to calculate giventhat so many Asia Pacific buyers are still
willing to invest in assets whether they
comply or not.
Nonetheless, even though it remains acontingent liability, the existence of thebrown discount is very real, and willprobably only grow over time. According

Across the region, many new officebuildings are being constructed to a net
zero standard. Australia, in particular, isthe leader. In Japan, too, the government
has recently raised the sustainability torch
and is pushing forward aggressively withmeasures requiring carbon efficiency,
according to one investor on the ground.
The Tokyo Stock Exchange (TSE) has
introduced measures that require listedcompanies to comply with Taskforce on
Climate-related Financial Disclosures(TCFD) requirements, failing which they

As a result, all the country’s large
developers have taken a long view and
now undertake all new developments
on a stand-alone net zero basis. Rental
premiums paid by occupiers are
generally in the range of 10 to 20 percent,according to a locally based investor,and because financing costs are so low,developers are able to absorb the extra
expense without affecting returns.
However, getting Asian cities to a net
zero standard on a widespread basis will
be difficult, if not impossible to achieve
given their overall density and energy
intensity. According to one consultant,achieving even 50 percent carbon
efficiency on existing buildings by wayof retrofits may not be feasible in the vast
majority of cases, although in principle
the gap could be bridged, either partially,
through purchase of green energy fromelectrical utilities (now possible in a
growing number of cities), or in full bybuying carbon offsets.
Currently, buying offsets for real estate
assets is a Wild West world, with little
standardisation or regulation of thequality of the credits on offer. Many
potential buyers are therefore dubious
about participating in the market, and forthe time being are under no pressure to
do so, meaning supply exceeds demand.
That will change, however, in a few years.
According to the head of development at
one pan-Asian fund: “As you get closer
to 2030, a lot of these commitments will
be starting to kick in, people will haveto have 50 percent savings and all therest. But in 2030, the price of carbon
is going to be more standardised andprobably higher than it is today because
everybody is going to be chasing after
quality carbon offset providers. So, if allof a sudden you have to start buying
those offsets because regulators requireit, how much would it cost you? Thatcan be quite a scary story for a fundmanager.”

Emerging Trends in Real Estate® Asia Pacific 2023 19

Chapter 2: Real Estate Capital Flows“No one is daring to make the call that cap rates should be moving out andthat values are declining. So we are in a vicious circle: the last few months
has been a stalemate.”
Compared with surveys from the previous
two years, this year’s Emerging Trends
city investment prospects rankings
show an uptick in positive sentiment,with seven regional cities scoring in
the “generally good” range (comparedwith six last year), one in the “generallypoor” range (compared with three lastyear), and overall scores that registeredsomewhat higher levels than either the2021 or 2022 reports.
While this probably reflects a morepositive investor outlook resulting froman end to lockdowns and the return of amore business-as-usual vibe, it is difficult
to reconcile with the potential downside
implied by today’s higher cost of capitaland impending recessionary outlook. It
does, however, tally with our survey’s
relatively positive view on profitability
noted in chapter 1 (see exhibit 1-2).
In terms of individual city rankings, thisyear sees the usual suspects occupying
the top places. The most popular
destination is Singapore—a city that hasfeatured either first or second in each of
the previous three reports, with this year’svote also registering the highest points
tally for the last 10 years.
Singapore has benefitted from theredirection of investment capital thatmight otherwise have been placedin assets in China. It has also seena significant number of businesses,
including offshore asset managementcompanies, opt to set up in the city rather
than Hong Kong. As a result, according
to one locally based developer,“headwinds on the [construction] costside have been offset by tailwinds on therevenue side.” Full-year office rents for
2022, for example, are projected to growsome 8 percent, according to CBRE, oneof the biggest increases regionally.

year to October 2022, according to JLL.
Although this represents an 87 percent
year-on-year increase, the upside reflects
more a very low base in 2021 than it
does exceptional volumes in 2022. A
large proportion of that deal flow wasfrom global investors buying officeassets, often at tight yields, although inthe second half of the year momentum
appears to have slowed, with a growing
bid/ask spread developing. According toa manager at one regional fund: “We see
a lot of appetite for office in Singapore,with many companies relocating,including from Hong Kong. But cost offinancing is now going up—so while themarket is still active, it’s probably much
more selective.”
The other noteworthy aspect of thesurvey’s top-ranked cities is the
popularity of Japan. While Japan has
always been a draw for international
capital due to its deep and liquidmarkets, it has particular appeal this year
because domestic interest rates—and
therefore cap rates—have remained
stable even as global rates rise sharply.
The commitment of Bank of Japan (BOJ)
to maintaining a near-zero interest rateenvironment makes assets easier tovalue while also preserving a positive
yield spread over the cost of debt. As
one analyst commented: “Talking to ourclients, everyone is worried about pricing,
about debt, so the one market that stands
out is Japan—all the other markets aredown substantially in Q3 because they
don’t know what the pricing should be, or
how interest rates are going to change.”
Not only that, but the commitment to lowinterest rates has brought with it a sharp
decline in the value of the yen, meaningthat domestic assets priced in U.S. dollar
terms are today considerably cheaper
than in previous years.

Exhibit 2-1 City Investment Prospects,
2023
Generally poor

Fair

Generally good

1 Singapore

6.48

2 Tokyo6.15

3 Sydney

6.06

4 Osaka

5.82

5 Seoul

5.82

6 Melbourne

5.79

7 Ho Chi Minh City

5.74

8 Shenzhen

5.25

9 Jakarta

5.23

10 Shanghai

5.23

11 Bangkok

5.11

12 Mumbai

5.08

13 New Delhi

5.03

14 Kuala Lumpur

4.96

15 Auckland

4.86

16 Manila

4.84

17 Taipei

4.80

18 Hong Kong

4.69

19 Beijing

4.69

20 Guangzhou

4.66

21 Bangalore

4.66

22 China—second-tier cities

3.94

Source: Emerging Trends in Real Estate Asia Pacific2023 survey.

Another grouping that has gained groundthis year includes cities in Southeast
Asian emerging markets such as
Vietnam, Indonesia, and the Philippines,
all of which have migrated upwards in the
rankings. This may seem counterintuitive
given that developing markets havehistorically fared poorly in times of global
economic stress. On the one hand,foreign investors will often retrench,
withdrawing capital from local capital
markets. On the other, as developing
market currencies fall against the U.S.
dollar, the cost of servicing U.S. dollar–
denominated debt increases, as does thecost of agricultural commodities, which
are also priced in dollars.

Singapore received more than US$11
billion in real estate investment in the

Emerging Trends in Real Estate® Asia Pacific 2023 21

Chapter 2: Real Estate Capital Flows

Today, however, Southeast Asianemerging markets—though not thoseelsewhere in the world—are less reliant
on foreign currency investment, having
learnt their lesson in the past and also
given the abundance of local capital forthem to tap. While their currencies havefallen against the dollar, therefore, theextent of foreign debt is today far lower
than it was during the Global Financial
Crisis.
In addition, while ticket sizes continue to
be too small for global funds, emerging
markets today have more appeal forforeign investment in general given
their high rates of economic growthand emerging consumer classes. As
one Singapore-based interviewee said:“Niche markets in Southeast Asia,
especially Vietnam, Thailand, Malaysia,
and particularly Indonesia, are seeing[foreign] capital go in for a wide range of
purposes. You’re seeing some of the big
corporates in private equity, and you’realso seeing infrastructure, which could
be anything from toll roads to telecoms
to electricity infrastructure. They might
not be real estate investments per se,
but there will be other real estate plays
coming as a result of that.”In particular, Vietnam continues tobenefit from a long-term trend of thediversification of global manufacturing
facilities away from China. While theMainland continues to be vital to
manufacturers due to the depth andcomplexity of domestic supply chains,the migration of new industrial capacity
to other jurisdictions has accelerated
in 2022 due to ongoing COVID-related
travel and operational restrictions.
The problem, as ever in markets
undergoing rapid growth, is theaccumulation of overcapacity as capitalrushes to satisfy new demand. Industrial
parks featuring ready-built factories
have recently been a focus in Vietnam,
especially in second-tier provinces,after real estate in prime locations wasbought up in earlier rounds of supplychain migrations. A supply glut has
emerged in 2022, in part the result of
newly completed projects delayed from22

2021 as a result of COVID shutdowns.
According to one fund manager: “A lot
of foreign investors and the prime equity
funds piled in to ready-built factories
for rent in Vietnam, but there’s now
oversupply [caused by] a big slowdown
in end users–the smaller component
manufacturers who are a bit lighter on
their feet. So I think those will struggle.”Indonesian data centres are anotherarea where rapid construction of new
facilities has raised fears of overcapacity,although in that case the long-term
dynamics of the industry meansthat surplus supply will probably beintermediated more easily.

The bottom of the table features a mix ofcities, in particular from Mainland China.
As already explained (see the “China:
Key Themes” section on page 12), China
is currently drawing less foreign capital
due to concerns over the economic
impact of the country’s zero-COVID
policies. Hong Kong has also suffered
for the same reason. To be fair, COVID
restrictions in Hong Kong have now
eased considerably, although its status
as the most expensive commercial andresidential market in the Asia Pacific has
made it more vulnerable in the current
high-inflation, recessionary environment.

Exhibit 2-2 Historical Investment Prospect Rankings

2023 2022 2021 2020 2019 2018 2017 2016 2015 2014
Singapore

1

2

1

1

2

3

21

11

9

7

Tokyo

2

1

2

2

4

7

12

1

1

1

Sydney

3

3

3

4

3

1

9

2

4

5

Osaka

4

6

8

8

5

10

15

4

3

9

Seoul

5

5

4

10

9

19

17

7

7

15

Melbourne

6

4

6

5

1

2

16

3

5

13

Ho Chi Minh City

7

8

5

3

7

5

4

5

13

19

Shenzhen

8

9

9

6

8

6

5

18

19

10

Jakarta

9

18

16

18

15

14

7

6

2

3

Shanghai

10

7

7

7

6

4

6

9

6

2

Bangkok

11

16

14

11

11

16

8

19

16

11

Mumbai

12

17

15

12

13

12

2

13

11

22

New Delhi

13

19

18

15

17

20

13

16

14

21

Kuala Lumpur

14

22

20

21

22

21

19

21

12

14

Auckland

15

11

13

19

20

9

14

10

15

17

Manila

16

21

19

17

19

18

3

8

8

4

Taipei

17

13

11

14

21

22

22

17

18

16

Hong Kong

18

14

22

22

14

13

18

15

21

18

Beijing

19

12

12

13

12

11

11

14

10

8

Guangzhou

20

10

10

9

10

8

10

20

20

6

Bangalore

21

20

21

16

16

15

1

12

17

20

China—second-tier cities

22

15

17

20

18

17

20

22

22

12

Source: Emerging Trends in Real Estate Asia Pacific surveys.

Emerging Trends in Real Estate® Asia Pacific 2023

Development Prospect
Rankings

South Korea, on the other hand, which
has been the focus of a wave of buildto-core projects in recent years, is now
Sentiment for development projects
seen as problematic for development.
was stronger this year, though thisAccording to one regionally focuseddoes not appear to tally with an overall
fund manager: “Korea is the one mostpoorer outlook expressed in interviews,
exposed [to global macro issues] andwhere investors cited materially higher
most similarly mirrors the inflationary
construction costs, together withtrends seen elsewhere in the world—
uncertainty over future occupational
rising interest rates, reduced bankand cap rate trends as deterrents.
lending activity, substantially higher
Many interviewees reported widespread
construction costs—all of which mean
postponement of Asia Pacific development that the build-to-core trend that had
projects as a result.
been active in Korea to build higherquality stock across the logistics andoffice space is really diminishing as an
Exhibit 2-3 City Development
attractive opportunity.”
Prospects, 2023
Generally poor

Fair

Generally good

1 Singapore

6.10

2 Ho Chi Minh City

5.78

3 Sydney

5.74

4 Tokyo

5.68

5 Seoul

5.59

6 Melbourne

5.54

7 Osaka

5.52

8 Jakarta

5.29

9 Bangkok

5.15

10 Mumbai

5.14

11 New Delhi

5.05

12 Shenzhen

5.05

13 Shanghai

5.03

14 Manila

4.92

15 Kuala Lumpur

4.91

16 Bangalore

4.79

17 Auckland

4.72

18 Taipei

4.63

19 Beijing

4.59

20 Hong Kong

4.52

21 Guangzhou

4.49

22 China—second-tier cities

4.22

Source: Emerging Trends in Real Estate Asia Pacific2023 survey.

That said, the situation varies widely
according to market and asset class.
Singapore, for example, has seen
demand for office space rise this year
as more businesses migrate to the city.
Japanese cities are also widely regarded
as less at risk—even as construction
costs rise significantly, investors
have been drawn by an interest rateenvironment expected to remain ultra
low for at least the medium term.

However, development in asset classes
where occupier demand remains
high, and that otherwise offer suitably
defensive characteristics, will continue
to appeal, especially given ongoing
structural shortages. Build-to-coredevelopment has therefore continued in
sectors such as multifamily, especially inJapan and Australia.
Logistics is another asset class seen as
evergreen. Australia, for one, continues
to experience a severe shortage of
warehouses, with rents forecast to growby double digits for several years.
It should be noted, though, that opinions
on both the multifamily and logistics
spaces are polarised, with someseeing them as increasingly risky given
highly compressed cap rates that may
undermine underwriting assumptions
as interest rates rise. Opportunities are
therefore often location-specific.
Investors have responded to greater
uncertainty in build-to-core development
projects by looking to offload risk,
especially as more contractors resist
fixed-price construction contracts.
According to one fund manager: “We’ve
been much more effective in transferring
more of the development approval risk
to the seller. So we’ll lock down the landand option it, but the condition precedent
to closing the deal will be [the seller]delivering a complete set of approvals.
That will reduce the risk of extended
financing, because from an IRR clock

perspective, you’ve managed risk by not
putting money in. So it does give us a
cushion in the underwriting.”
Ho Chi Minh City was highly ranked fordevelopment purposes this year, rising
to second place from last year’s fifth
position. Rapid GDP growth, together
with the emergence of an affluent
middle class, makes Vietnam an obvious
destination for development capital,
given the overall shortfall of most typesof building stock. One Vietnam-based
developer, for example, pointed out that
Shanghai recently registered around 25
times more warehouse space than Hanoi,
and 13 times more than Ho Chi Minh City.
Nonetheless, development in Vietnam
is not straightforward given its
propensity for both overbuilding andprice bubbles. The domestic housing
market—historically a favourite offoreign investors—is no stranger to thisphenomenon and is currently subject
to various types of speculative excess.
In particular, land prices have soared.
According to CBRE, prices for landed
properties in Ho Chi Minh City rose aremarkable 48 percent in the year to
August 2022. To address the problem,
the government has directed banks to
reduce credit for both developers andhomebuyers, leaving many struggling
to obtain loans. Land sale approval
processes have also been tightened.
While this may provide opportunities
for the adventurous, risk is high.

Uptick in Cross-Border Deals
The decision by many regional real estate
investors to suspend buying until the
economic outlook is less opaque led toa nearly 50 percent year-on-year decline
in local buyer activity across the Asia
Pacific in the first nine months of 2022.
By contrast, cross-border activity saw asignificant rebound in the third quarter,
leading to a 24 percent year-on-yearincrease in transactions over the same
period. This boosted the share of crossborder purchasing to 29 percent, thehighest level since the beginning of 2021,
according to MSCI.

Emerging Trends in Real Estate® Asia Pacific 2023 23

Chapter 2: Real Estate Capital Flows

Exhibit 2-4 APAC Investment by Source of Capital
Domestic

Cross-border within APAC

Cross-border from outside APAC

% cross-border

$240

40%

200
30%

USD billions

160

120

20%

80
10%
40

0

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

0%

Source: MSCI Real Capital Analytics.

Overseas investment rose by doubledigit figures in Japan, Singapore, India,
and South Korea. It remained stable (athigh levels) in Australia, and dropped
significantly in China.
Most interviewees expected little
disruption to the long-term trend of rising
capital flows into the region from global
sources given that institutional funds
remain mostly underweight in Asia Pacificmarkets and are committed to increases
in weighting over time (see also exhibit
2-6).
Still, a prolonged or deep recession in theWest would probably result in a severe
decline in outward flows, according to a
manager at a large North American fund.
Two reasons were suggested: “First,
the home field advantage, where U.S.
institutional investors look in their own
backyards, see deep value, and allocate
more capital there than abroad. Second
is the portfolio allocation question, where
investors’ public-equity portfolios are

24

Exhibit 2-5 Cross-Border Investment Targets
Q1–Q3 2022

Q1–Q3 2021

Australia
Japan
Singapore
China
India
South Korea
Hong Kong,
SAR, China
Rest of APAC
0$2

Source: MSCI Real Capital Analytics.

Emerging Trends in Real Estate® Asia Pacific 2023

$4

$6
USD billions

$8

$10

$12

marked to market substantially down,
preventing them putting additional capital
to work in private markets [i.e., becauseof portfolio allocation limits].”
In terms of the sources of cross-border
capital, investment from the United States
has continued to be strong, no doubt
due to the strength of the dollar, but also
because it hosts many global funds withmandates to allocate on a global basis.
All things being equal, flows to Australia,
which was the main target of U.S. funds
in the Asia Pacific in the first nine monthsof 2022, will continue. Japan is also
expected to draw substantial amounts ofexternal capital.
With China largely dropping off theradar as a recipient of U.S.- and Europebased investors, some fund managers
suggested that South Korea will be afocus for more foreign capital, thanks toan industrialised, export-driven economy
that in many ways is similar to China’s,
and despite tightening in domestic
credit markets and stiff competition fromdomestic institutional funds. Indeed,cross-border deals nearly doubled (albeit
from a low base) in the first nine monthsof 2022. In addition, both Incheon andPangyo are expected to receive more
foreign investment going forward asinternational buyers look to areas outside
the capital.
Within the region, outward flows fromSingapore—mainly from its integrated
developers and sovereign funds (though
not its REITs)—were almost as high as
those from the United States, boosted by
new accounts from the growing numberof family offices and other regional capitalsources that have recently set up in
the city. Australia continues to be a big
destination for Singaporean capital.
Japanese capital, meanwhile, which
previously had been directed mainly
towards the United States, has been
increasingly channeled into Asia Pacifictransactions, with a particular focus on
Australia. In part, this is because Westernmarkets were less accessible during the
pandemic. But the gradual exodus ofJapan’s enormous store of pension fund

Exhibit 2-6 Expected Change in Capital Flows into Asian Markets over the Next
Five Years
2023

2022

2021

2020
6.62

Asia Pacific
5.74

Americas5.02

Europe4.94

Middle East/Africa
01Large decline

2

3

4

5
6
Stay the same

7

8
9
Large increase

Source: Emerging Trends in Real Estate Asia Pacific surveys.

Exhibit 2-7 GPIF Real Estate Portfolio Allocation by Country

Others 8%
Germany 3%
France 5%

U.S.A. 39%

Australia 6%
U.K. 10%

Japan 29%
Source: GPIF.

holdings into international markets is
now increasingly apparent. The largestof these funds, the Government Pension
Investment Fund (GPIF), increased its
allocation to real estate by 43 percent in
the year to March 2022 (i.e., from ¥544
billion to ¥773 billion), with 71 percentof this investment made outside Japan(primarily in core logistics and officeassets), according to the fund’s mostrecent annual report.

The GPIF’s internal rate of return (IRR)
on foreign real estate investments since
inception in 2018 has been 10.3 percent,but that figure will have increased in
2022 due to substantial depreciation of
the Japanese yen. With its allocation toalternatives still well short of targeted
levels, outgoing GPIF real estate
investments can be expected to risesignificantly from its current U.S. dollar
value of over US$5 billion in coming years.

Emerging Trends in Real Estate® Asia Pacific 2023 25

Chapter 2: Real Estate Capital Flows

Currency Volatility

so it’s been an opportunity for offshore
investors to be more aggressive inJapan.”

Currency movements have emerged
as a major issue for investors in 2022
due to the unexpected rise of the U.S.
dollar against most regional currencies.
Nowhere is this more evident than inJapan, where U.S. dollar strength has
been reinforced by corresponding yen
weakness, producing a year-on-year
divergence of almost 30 percent as ofNovember 2022.
This U.S. dollar discount is one reason
for Japan’s current popularity among
foreign funds, despite the conventionalview that currency swings should be
ignored when underwriting deals. As
a manager at one large global fundsaid: “We always hedge because it’s
not part of our strategy to make moneyfrom currency. But opportunistic players
often don’t hedge and so they’re quite
happy to be aggressive on their pricing[in Japan] because they anticipate asignificant gain on currency. If you’re a
U.S. dollar–denominated fund looking tohold for three or four years, the likelihoodof making money from currency is high,Another issue is the price of hedging,which can vary widely depending on
the currency. Yen hedging costs formany Western currencies are currently
negative, thereby creating investment
gains for incoming capital. Eurodenominated investors, for example, nowreap more than 150 basis points (bps) in
hedging gains for Japanese investments,
according to asset manager DWS. Other
currencies must pay positive hedging
premiums that then weigh on returns—
currently 200 bps for the Australian
dollar, and 100 bps for capital fromSingapore and South Korea.
Currency volatility can also be disruptive.
The South Korean won, for example,
has fallen more than 20 percent in theyear to November 2022. According to
one Hong Kong–based fund manager:“Koreans were huge exporters of capitalover the last few years, but have slowed
down in a major way. There are a few
reasons—changes in terms of regulations

Exhibit 2-8 Asia Pacific Currencies, 2022 YTD Change versus U.S. Dollar*
Ho

ng

Au

str

0%

ali

a

Ch

ina

Ko

ng

SA

R

Ind

Ind
ia

on

es

ia

Ja

Ph

pa

n

So

ilip

ut

pin

h

es

Si

Ko

re
a

ng

ap

or
e

Vie

tn

am

–0.68%–5%–5.13%–10% –8.60%–15%–9.80%–8.17%–9.12%–12.95%–13.32%–16.45%

–20%

–25%

–22.38%Source: AsianBondsOnline.
* Data as of 4 November 2022.

26

Emerging Trends in Real Estate® Asia Pacific 2023

for some investors, as well as changes
within the [domestic] credit market. But
currency has also been a major factor
in the slowdown of capital coming out of
Korea—it’s just difficult for them to makeinvestments stack because they have tounderwrite everything back to the won.”
While dollar strength is often seen
as a windfall for dollar-denominatedinvestors, currency volatility may also
be symptomatic of latent distortions infinancial markets. In the case of Japan,
current yen weakness is fundamentallythe result of levels of public debt thathave grown so large that interest
repayment obligations would exceed
government revenues if returns on
Japanese government bonds (JGBs)
were allowed to float.
This has left the BOJ hostage to a nearzero (or even negative) JGB interest
rate policy for the last seven years, andhas correspondingly been the major
cause of yen weakness as global interest
rates rose in 2022. The BOJ has drawn
a line in the sand at ¥150 yen/dollar
and is defending it via sales of U.S.
dollar reserves, but given the dubious
track records of currency intervention
strategies generally, there is no
guarantee that the yen will not continue todecline should the U.S. Federal Reserve
maintain its rate hike policy.
On the other hand, should the BOJ blink
and allow JGB yields to rise, the whiplash
effect could be painful for investors. As
one fund manager observed, “On theface of it, there is currently an attractive
opportunity to place capital—but it brings
with it the possibility that if the BOJ shifts
strategy, the move from a 2-cap to a
3-cap is far more crushing than a movefrom a 6 percent to 7 percent yield inother markets.”
This is an example of how thereversion to the mean of global interest
rates is causing a chain reaction ofconsequences, exposing imbalances
previously hidden behind a wall ofcheap debt. As one investor said:“Everyone’s talking themselves into theidea that nothing will change and thecurrency problem will go away. But thisExhibit 2-9 APAC-Focused Real Estate Historical Fundraising
Aggregate Capital Raised (USD bn)

15

USD billions

USD billions

2

1.5

10

1

5
0

0.5

2013

2014

2015

2016

2017

2018

2019

2020

2021

Source: Preqin.
* Through October 2022.

2022
YTD*

0

Exhibit 2-10 APAC-Focused Dry Powder, 2000 to Q1 2022
$70
60
50
40
30
20

1/1/2022

1/1/2021

1/1/2020

1/1/2019

1/1/2018

1/1/2017

1/1/2016

1/1/2015

1/1/2014

1/1/2013

1/1/2012

1/1/2011

1/1/2010

1/1/2009

1/1/2008

1/1/2007

1/1/2006

1/1/2005

1/1/2004

0

1/1/2003

10

1/1/2002

According to one Hong Kong–based fundmanager: “Overall, there are a lot fewergroups interested in investing in Asia now
compared to when times were good. I
think it’s because of geopolitics, because
as people are starting to retrench theywant to invest in places closer to home,
and also because historically Asia has
always had a risk premium compared tomarkets in the West. And the groups thatare still actively interested are wanting tohave more control over how and where
their capital is invested, so you’re seeing
more club deals and joint ventures withthe big LPs.”

2.5

1/1/2001

If smaller funds are therefore lessprominent in the market, those thatremain are less likely either to go it alone
or to provide capital to blind pool funds,
instead looking to deploy it as part ofclubs, joint ventures, and partnerships.

3

20

USD billions

Other noteworthy trends are all-timehigh levels of dry powder, which should
provide long-term support to cap rates,
as well as ballooning amounts of capital
now being raised for opportunistic
strategies (see exhibit 1-10), even as
fundraising for other strategies falls
steeply. This reflects the popularity of
new-economy themes such as data
centres, logistics, and living asset
classes, as discussed in chapter 1.

3.5

25

Fundraising and Dry Powder
While fundraising for investments in
Asia Pacific markets was relatively soft
through 2022, a total of just over US$22
billion raised in the year to November
is comparable to figures from previous
years (see exhibit 2-9). What is morenotable, however, is that the averageamount raised was significantly larger
than in previous years, indicating the
emergence of large global funds as thedominant force.

Average Size (USD bn) (right-hand side)30

1/1/2000is a different scenario than we’ve seen
before—the dollar strength is uncharted
territory, especially when you look at
the fundamentals. But historically, when
you’re in these types of situations,nothing good happens and it tends to getworse before it gets better.”

Source: Preqin.

Such structures present a certain degreeof hazard due to potential non-alignmentof interests among participants, butthey also function to diversify risk andadd flexibility. In addition, the shortened
capital-raising window involved can leadto faster assembly of assets, providing
first-mover advantage when buying into
popular new-economy assets.

Other ways in which fund management
may be affected by a changing
macro environment is via investment
time horizons and reduced return
expectations. Some investors spokeof building longer hold periods into
their underwriting, at least where fundstructures allow it, to ride out a cyclical
downturn.

Emerging Trends in Real Estate® Asia Pacific 2023 27

Chapter 2: Real Estate Capital Flows

Whether this scenario is widely accepted
by investors seems questionable,
however. Survey responses show
investment time horizons to be littlechanged from previous years (see exhibit2-11), while targeted returns are at least
on a par with levels from recent years.
(see exhibit 2-12). Possibly, the bullish
sentiment reflects an anticipated relief
rally after nearly three years of COVID
restrictions. Whether that is realistic in
the context of higher interest rates and apotentially extended period of slow, no,or negative growth that most interviewees
are expecting, is open to question.

Exhibit 2-11 Time Horizon for Investing
2023

50%

28

2020

2019

34%
30%
25%
20%

10%
3%
0

1–3 years

3–5 years

5–10 years

10-plus years

Source: Emerging Trends in Real Estate Asia Pacific surveys.

Exhibit 2-12 Investors’ Targeted Returns between Survey and End of 2023

2023

50%

2022

2021

30%

27%
21%

20%

10%

0

7%

5%

0%–5%

5%–10%

10%–15%

Source: Emerging Trends in Real Estate Asia Pacific surveys.

Emerging Trends in Real Estate® Asia Pacific 2023

2020

40%

40%
Percentage of respondents

REIT values tend naturally to fall in higher
interest rate environments, as interest
expense eats into their net income. In
addition, they have less scope to use
leverage to purchase new assets, andother types of yield-driven investments
become more competitive. That said,
the decline in Asia Pacific REIT prices
throughout 2022 has been significant,with the S&P Asia Pacific REIT Index
down almost 30 percent in the year
to November. Australian REITs have

2021

39%

Public Markets Sell Off
While real estate values held by privateequity owners have so far held up well in
the Asia Pacific, shares of publicly listeddevelopers and REITs have declined
significantly in 2022. This should bea harbinger of cap rate declines inprivate-equity because the extra liquidityof listed assets means they reflectmarket fundamentals more directly andefficiently.

2022

40%
Percentage of respondents

In addition, as market conditions
normalise after some 14 years of easing,it seems unlikely that the high returns ofrecent times will be so easy to replicate.
As one experienced fund manager
observed: “Everyone’s been weaned onsuper-good returns on the back of a lowinterest rate environment and cap ratecompression, so they’ve been making
money for the last 10 years or more. But
the good old days are over. Besides, therisk is too high—if you now want low risk,
you’re going to have to accept quite asubstantially lower return.”

15%–20%20%+

performed the worst regionally as a resultof currency depreciation and a relatively
high interest rate environment.
Many REITs across the region are now
trading well below net asset value (NAV).
By sector, industrial REITs have seen
the biggest correction, falling 35 percent
in the first three quarters of 2022 andhighlighting again how higher interest
rates erode profitability of assets that
trade at thin spreads over the cost of debt.
At current prices, though, REIT distribution
yields are becoming increasingly
attractive, and several interviewees
suggested that buying REITs tradingat current yields of 5 to 6 percent (or4 percent in Japan) was preferable tomaking a bet on riskier private-equity
assets.
Beyond that, with so many REITs now
trading below NAV, they have becometargets for takeover or privatisation,
especially given the region’s chronic
shortage of prime assets and with somuch dry powder waiting on the sidelines.
Notably, the first J-REIT privatisation took
place in early 2022. More are currently inthe pipeline.

Banks Tighten Terms
Cheap and easy debt has been
the lifeblood of some 14 years ofoutperformance for real estate investors,
but as interest rates normalise globally,bank lending is likely to be pricier, harderto get, and subject to more restrictive
terms. Survey responses confirm thatdifferent types of real estate finance will
not be as readily available as last year,
although the quantum of anticipated
reductions is not large, with only debt fordevelopment expected to register evena small decline in real terms (see exhibit2-15).
In practice, debt availability seems to vary
widely according to market and individual
circumstances. In Japan, the BOJ’s
commitment to holding down government
bond yields means that the cost of bankfinance remains largely unchanged, withdebt still available at sub-1 percent levels.

Exhibit 2-13 2022 YTD Performance of APAC REITs by Sector (as of October 2022)

Ho

sp

ita

lity

0%
–5%

Re

Re

sid

ta

il

en

He

alt

Of
fic

tia

e

l

h

Di

ca

re

ve

rs

Ind

ifie

d

us

tri

al

–3.8%

–10%
–15%
–20%

–20.2%–25%–21.9%–25.6%–26.8%–30%–28.5%–35%–34.8%

Source: S&P Capital IQ, S&P Asia Pacific REIT Index USD total return.

Exhibit 2-14 Asia Pacific Policy Interest Rates

MarketRate

Singapore
Vietnam

As of 1 November 2022 (%)

YTD change

3M SORA

3.89

369 bpsDiscount Rate

6.00

350 bpsHong Kong

3M HIBOR

3.50

324 bpsAustralia

Cash Rate

2.85

275 bps

New Zealand

Cash Rate

3.50

275 bpsPhilippines

Reverse Repo Rate

4.25

225 bpsSouth Korea

Base Rate

3.00

200 bps

India

Policy Repo Rate

5.90

190 bpsIndonesia

7–Day Repo Rate

4.75

125 bps

TaiwanDiscount Rate

1.63

50.5 bps

Thailand

1–Day Repo Rate

1.00

50 bpsJapan

Key Policy Rate

–0.10

StableMainland China

Loan Prime Rate

3.65–.15 bps

Source: Trading Economics.

Emerging Trends in Real Estate® Asia Pacific 2023 29

Chapter 2: Real Estate Capital FlowsAt the same time, lending terms havegenerally tightened. Seventy percent
leverage is no longer widely obtainable,
especially for borrowers with higher credit
risk or for deals deemed to be riskier.
One fund manager reported securing
only 40 percent leverage for a recent
hospitality deal, for example. According
to another: “A number of the big
Japanese lenders are nervous about theresidential sector, because they don’t see
the rent growth. And a lot of them havebeen very bullish on logistics, but now as
rents start to soften a bit, vacancies start
to increase a tad, or the leasing period
is taking longer on some of these newfacilities, [banks] are going to get moreconservative on lending, especially fordevelopment.”
The other side of the coin is that, withcorporate debt also harder to secure,small and midsized Japanese companies
that in the current environment are having
problems securing the same access tobank lending are increasingly willing todivest noncore assets, thereby boosting
the market for sale-and-leaseback deals
that have been fashionable in Japan forseveral years.
Interest rates in China have also bucked
the rising trend, with the government

currently looking to ease rather thantighten. Bank loans are therefore bothcheaper (by about 150 bps, according
to one fund manager) and moreaccessible. The government has recently
also handed domestic banks minimum
lending quotas, partly as a way to kickstart development and partly to drive
consolidation in the market, with only
larger and stronger players—mostly,
though not exclusively, domestic—having
preferential access.
An important difference introduced bythis policy, according to one privateequity investor, is that whereas in thepast banks preferred to lend (at rates ofbetween 5 and 6 percent) to residential
developers because loans would be
repaid immediately once the properties
were sold, today priority is given tocommercial properties that repay loans
over time via cash flow from rents or
strata title sales.
In Hong Kong, according to a locally
based consultant, developers are able toborrow 50 percent of the land value andperhaps 50 percent of construction costs(at around 4 percent), whereas previously“you could probably get the bulk of yourland value, and certainly the whole of theconstruction costs.”

Exhibit 2-15 Expected Change in Availability of Debt and Equity Finance

2023

2022

2021

2020
5.35

Equity for financing
or new investment

5.31

Debt for refinancing
or new investment

4.84

Debt fordevelopment
01
Large decline

2

3

4

5
6
Stay the same

Source: Emerging Trends in Real Estate Asia Pacific surveys.

30

Emerging Trends in Real Estate® Asia Pacific 2023

7

8
9Large increase

Finally, bank lending in Australia
remains freely available to bigger
and creditworthy borrowers, althoughborrowing costs are significantly higher(i.e., at around 4 percent, according
to a local fund manager) given the risein the local cash rate from almost zeroat the start of 2022 to 2.85 percent by
November. The big four Australian banks
are “quite selective, though, with a strong
focus on track record and the quality
or potential of the building.” For those
who don’t make the grade, for borrowing
on construction projects, or where loan
tenure extends beyond five years, banks
tend to be reluctant.

Nonbank Debt Thrives
The rapid tightening of bank lending
terms in 2022 has served as a catalyst forthe development of a nonbank lending
market, which until recently had beenrelegated to niche status—apart fromin Australia—due to the easy liquidity
provided by regional banks. With banks
now in retreat, private-equity investors
are looking increasingly at the prospectof providing real estate debt instead.
According to one investor active in thespace: “If you look at where investor
appetite and market opportunity is, I thinkcredit is certainly a key focus. People
have shifted some of their fixed-income
portfolios over to real estate or real assets
over the years and I think a portion ofreal estate portfolios can also then be
invested in credit-specific strategies—
especially in a market like we’re in today.”
While the cost of nonbank borrowing
will almost always be higher thanthat charged by banks, it is still bothcompetitive and available across thecapital stack. As the investor continued:“Access to traditional credit has dried up
pretty significantly, so that presents anopportunity for some of these nonbank
private credit strategies to come intoplay. So it’s something you’re seeing
around the world, whether it’s stretch
senior strategies, mezz opportunities, orconstruction-style lending—it depends onthe market and there’s probably space
for all of them as long as there’s a good

objectives, especially in markets
where verification was difficult. Today,
though, as reporting requirements
become stricter, borrowers must report
performance indicators and building
metrics, often at significant time andexpense.

Exhibit 2-16 Availability of Debt by Type of Lender
2023

2022

2021

2020
5.05

Nonbank
institutions*4.76

Mezzanine
lenders

5.10

Banks
4.67

Debt funds
Alternative
lending
platforms**

4.63

4.84

Sovereign
wealth funds
01
Large decline

2

3

4

5
6
Stay the same

7

8
9
Large increase

Source: Emerging Trends in Real Estate Asia Pacific surveys.
* Insurers or pension funds.
** Examples include peer-to-peer lending and crowdfunding.

risk/return balance.”

Thin Margins for Green Debt
As real estate fund managers and owners
are compelled by regulators, their LPs,
and their occupiers to make buildings
comply with ever-stricter environmental,social, and governance (ESG) mandates,
there is an increasing focus on the useof green finance to complete asset
purchases, to upgrade properties, orotherwise to pursue an ESG agenda.
The green bond market in the Asia
Pacific accelerated in 2021, with arecord US$129.5 billion in green debt
issued during the year, according to
the Climate Bonds Initiative (CBI), a
figure equivalent to about one-third of
all green bonds issued in the region inprevious years. Governments are issuinggreen debt to drive clean energy andsustainable infrastructure investments,
while commercial banks and institutional
investors are investing in decarbonisation
projects in a number of sectors, including

increasingly in sustainable real estate
projects. In addition, a smaller market(roughly US$10.5 billion in the Asia
Pacific) exists for green loans.
Around 25 percent of Asia Pacificgreen bond proceeds were devoted todevelopment of green building projects
in 2021, according to CBI, including
for building upgrade purposes such asenergy efficiency improvements, building
systems electrification, and on-site
renewable energy generation.
However, while green debt has broadly
taken off in Asia, some real estate
investors are questioning whether themarginal benefit received in the formof lower interest rates are worth theperceived reporting costs associatedwith green debt issuance.
In the past, the steps borrowers wererequired to take to verify compliancewith their green borrowing were often
rudimentary and not closely monitored.
As a result, many such loans didn’t
achieve all of their sustainability

The discount offered by green finance is
not large. According to a 2021 study by
Citi, for example, green bonds offereda cost benefit in Asia averaging 11 bps.
But not all fund managers are receiving
even this, and with no pressure from LPs
to require funds in which they invest touse green finance, they see little incentive
to sign up. As one fund manager
observed: “In our world right now, having
green financing is not a big deal, so
we’ll start to sign up for it once I get a
bit of a discount to comply with all thisstuff they’re asking for. In the U.S. and inEurope, you are getting a bit of savingson the interest rate, but in Asia
so far, not really.”
That said, the situation varies bymarket. In Japan, for example, one fundmanager reported banks were offering
discounted green finance terms to local
REITs at costs of 20 to 30 bps all-in for
10 to 12 years, compared to normal
REIT financing costs of 60 to 80 bps.
He added: “We haven’t done a green
financing yet, but we’re seeing there’s
enough of a discount to make it work.
And not just in the spreads, but in thefact that you can get term on it of up to
20 years. So for us, doing longer-termsale and leaseback, we could put thisin place and it would be co-terminus on
fixed-rate green bonds, which would bea great coupon clipper for institutions to
do it with”.
One area where green finance mightoffer greater benefits to a borrower
would be where a bank has a quota forgreen lending that, while not significantly
cheaper than conventional lending,offers other benefits in kind. This might
include provision for higher leverage,
better terms, or simply the fact that it
is available at all if the bank has noheadroom as a sponsor in its otherloan portfolios.

Emerging Trends in Real Estate® Asia Pacific 2023 31

Chapter 3: Property Type Outlook“If you’re looking at what’s driving all the sectors, it’s either densification of
wealth in cities, it’s digital disruption, it’s the obsolescence of existing stock,and then it’s that build-to-core piece: everyone wants yield at the back end.”
While the Asia Pacific remained relatively
isolated from the economic turmoil thatswept global markets in 2022, concern
over ongoing rate hikes, together
with potential fallout from impending
recessions, is prompting investors toprotect themselves in two main ways.
First, by stepping away from the plateand holding off on new asset purchases.
Second, by pivoting away fromconventional asset classes and rotating
instead to new-economy and defensive
themes that offer better protection during
a period of economic retrenchment.
The inertia referenced in the first theme isreadily apparent from the data—the third
quarter of 2022 saw regional transaction
volumes drop an eye-catching 38
percent year-on-year, according to MSCI,
as discussed in chapter 2. The second
theme is evident from more granular data
relating to individual asset classes. Asia
Pacific office transactions, therefore,
long the staple source of deals for coreand value-add investors, fell year-onyear by almost half in the third quarter of2022 (see exhibit 3-3), with big declines
also recorded in other go-to types ofcommercial properties.
According to an investor in China:“In the traditional sectors, office is no
good, especially in Shanghai becauseof oversupply. And retail is also
struggling because of the pandemic
and e-commerce, so a lot of people arelooking at logistics—it’s been a major
investment theme in the past, but yields
are coming down to a level where they
may not be sustainable. That means
the major field for China is the new
economy.”These new-economy themes include
industries driven directly or indirectly
by digital disruption or changing social
habits, and include, as discussed inchapter 1, areas such as logistics, data
centres, cold storage, life sciences,

Exhibit 3-1 Prospects for Commercial Property Types
2023

2022

2021

2020
6.59

Industrial/
distribution

6.16

Multifamily/rented
residential
5.47

Hotels

5.19

Office

5.15

New for-salehousing

4.98

Retail0Abysmal

1

2

3

4

5
Fair

6

7

8

9
Excellent

80%

90%

Source: Emerging Trends in Real Estate Asia Pacific surveys.

Exhibit 3-2 Sectors in Which Investors Are Active or Plan to Be Active
2023

2022

2021

2020
75%

Industrial/
distribution

72%

Multifamily/
rentedresidential

69%

Office55%

Retail55%

Hotels46%

New for-salehousing
0%

10%

20%

30%

40%

50%

60%

70%

Source: Emerging Trends in Real Estate Asia Pacific surveys.

Emerging Trends in Real Estate® Asia Pacific 2023 33

Chapter 3: Property Type Outlook

and self-storage. In addition, investors
are also focused on assets that tend
to be resilient to rising inflation (viashorter lease terms or rent indexation,for example) or alternately, themes thatoffer reliable recurrent income or anelement of stickiness, such as build-tosuit developments. Given the element ofspecialisation most or all of these asset
types offer, they often come with theadded benefit of higher rents than theirconventional counterparts, especially ifcompleted stock is in short supply, which
is often the case.

OfficeThe large decline in office transactions
recorded in the third quarter of 2022,
as well as the decline in sentiment as
reflected in survey responses (seeexhibits 3-1 and 3-2), might be seen
by some as marking a changing of theguard, but is probably just a one-off.
Office remains by far the largest asset
class in the Asia Pacific, and will no
doubt remain a mainstay for the legion ofregional institutions looking for core, longterm assets.
There are various reasons behind thedrop. One is the impact of sometimes
substantial depreciation of regional
currencies on transaction data measured
in U.S. dollars. Another is that generally
long office leases do not easily reset
to cater to rising inflation. A third is thata standoff has developed between
willing buyers who need to underwrite a
profitable exit cap rate and often wellheeled owners accustomed to morepositive fundamentals.
Finally, offices are probably more
representative of the overall economy
than other asset classes, and are
therefore exposed to a double whammyof uncertainty over occupier demand. On
the one hand, requirements for space
will likely fall as economies slow. On
the other, tenants are unsure how many
employees will continue to work remotely
in a post-COVID environment.
According to a Sydney-based fundmanager: “From our perspective, we’re
not able to see if longer-term demand is34

Exhibit 3-3 Asia Pacific Transaction Volume by Property TypeQ3 2022 Volume

Q1–Q3 2022 Volume

USD billions

YOY

USD billions

YOY

Office

14.9

–45%

60.0

–12%

Industrial

8.7

–24%

29.2

–30%

Retail

4.2

–54%

22.2

–27%

All commercial

27.8

–42%

111.4

–20%

Hotel

2.4

–8%

11.6

19%

Apartment

1.6

–13%

7.0

16%

Senior housing and care

0.8

241%

2.0

105%

Income properties

32.6

–38%

132.0

–16%

Development sites

174.1

2%

436.1

–2%

Grand total

206.7

–8%

568.1

–6%

Source: MSCI Real Capital Analytics.

in need of recalibration. There’s currently
a dichotomy between the big corporates
that are heavily influenced by their HR
departments and the SMEs [small andmedium enterprises], which are now
back to pre-COVID attendance levels. So
it makes it hard to underwrite things likerental growth going forward.”
In terms of individual markets, South
Korea has seen the most significant
volume drop. Cap rates in Seoul had
been in steady decline for years before
reaching a low of just over 3 percent inearly 2022—on a par with properties in
traditionally expensive markets such as
Hong Kong and Singapore (see CBD
Office Yields chart on page 14). But
Korean cap rates are now unwinding
rapidly as interest rates shoot up. Witha current bid/ask gap approaching 10
percent, and buying from domestic
institutions drying up in 2022, several
foreign fund managers were positive on
office deal prospects in Seoul, including
possibly on a distressed basis.
Of the other large Asia Pacific markets,
Sydney and Melbourne have seen anumber of deals at the top end of themarket (sponsored mainly by global
funds), Tokyo has remained relatively
resilient (although bid/ask spreads
are widening), and activity in China—

Emerging Trends in Real Estate® Asia Pacific 2023

specifically Shanghai—remains slow due
to oversupply issues as well as ongoingquestions over the impact of zero-COVID
policies on the economy.

Remote Work Drives Change
Still, while office as an asset classremains very much in play, uncertainty
remains as to how, and also how
much, employees will physically use
office buildings in the future. Changing
employee work habits mean that buildinguse patterns are undergoing profoundchange, with long-term implications
for asset values of both offices andassociated real estate.
The main reason for this is that remote
working has become firmly entrenched
as a component of the workplace.
This is illustrated by survey responses(see exhibits 3-4 and 3-5), which show
significant numbers of employees
spending between one and three days
per week working remotely, as well
as some 44 percent of businesses
embracing a long-term commitment tohybrid working practices.
Experience differs widely by country,
though, and results are sometimes

Exhibit 3-4 Average Days per Week Spent Working from Home after the Pandemic

2023

2022

2021
25%

None

26%

1 day

32%

2 days7%

3 days4 days5+ days
0%

4%

5%

5%

10%

15%

20%

25%

30%

35%

Source: Emerging Trends in Real Estate Asia Pacific surveys.

surprising. Usually independent-minded
Australians, for example, seem tohave a relatively high “return-to-office”
commitment, while Japan—despite an
historically office-oriented culture—
has seen younger employees opt for
greater self-determination in choice ofworkspace. In general, though, anddespite a preference among employers
for office-centric working, the staying
power of remote work has been
unexpectedly resilient in cities where
homes are often regarded as being too
small for workers to be productive.
In part, the ongoing commitment toremote working is a reflection of tightlabour markets that currently give
employees the stronger hand. Thatmay change if the initiative passes to
employers as economies deteriorate,
but for now it means that companies arelooking to structure real estate portfolios
with an eye to employment retention
among remote workers.
There are a number of consequences
to this. First, it is helping drive a tenantmigration to modern, high-quality
buildings that offer a range of attributes,
be they gyms, quiet rooms, or green

building credentials. According to one
office developer: “Our research showsthat as COVID started to take off, thelast buildings to drop off with utilisation
were the premium buildings—andafter it did drop off, the first ones to getleased [again] were [also] the premiumbuildings.”
In addition, the current occupier focus
on the higher end of the market is in turn
attracting attention from buyers. This has
added to preexisting demand among
investors for the same buildings as “portin-a-storm” assets where they can rideout an economic downturn, and also frombuyers seeking ESG-compliant buildings
for the purposes of LP mandates or SFDR
disclosure requirements (see chapter 1).
Another factor contributing to higher
demand for modern buildings is that,with fewer staff in the office at any
given time, many larger companies are
beginning to increase the ratio of total
staff to floor space. This has been a slow
process because, with the exceptionof a few high-profile early movers,
many companies have opted to retain
space that is now clearly surplus torequirements as they wait for clarity on
the direction of office-use preferences.

According to an executive at a prominent
Australian developer: “While we aren’t
seeing companies come into the market
with a lower footprint requirement, we areseeing that when they leave older stock,instead of creating new offices for thosepeople, they are combining them with
offices they are already in.”In other words, companies that previously
rented 100,000 square metres of spacefor 10,000 people are now using thesame space for perhaps 14,000 to
15,000 people, giving up their older
buildings in the process, and upgradingor reinventing retained space out ofassociated cost savings. “What thatmeans,” the developer continued, “isa flight to quality, to technologicallyadvanced buildings, to sustainablebuildings particularly, and either locations
or buildings that can offer great customer
experience. These are the three areas weare focused on, because we can see that
if you get those right, you’ll get tenants.”

The Evolving Workspace
Another way in which workspaces are
evolving to adapt to flexible workforces
is by changing offices’ purpose andfunctionality. There are various aspects tothis, and once again, markets in Australia
are probably more advanced thanelsewhere in the region:• Upgraded layouts. One part of thisis reduced staff density. This may
seem counterintuitive given that
employers are also increasing theratio of total staff to floor space, butwith fewer staff attending the officeat any given time, they can do both
simultaneously. Reduced staff density
is provided partly for well-being
purposes and partly to ensure that
more staff can be accommodated onbusy days (although our survey alsosuggests this issue is less a priority
today than it was a couple of years ago[see exhibit 3-5]).
In addition, companies are now
prioritising office time and space sothat it puts more emphasis on social

Emerging Trends in Real Estate® Asia Pacific 2023 35

Chapter 3: Property Type Outlook

and business connectivity than for
performing “focus” work. As a result,desk space is shrinking dramatically.
Similarly, because workers now interact
more on a remote basis, offices now
offer facilities better adapted forholding online meetings. Otherwise,
how the design of post-COVID offices
will evolve is subject to widespreadexperimentation and remains an open
question, other than that it will require
a new geometry of space to optimise
both hybrid working and the types ofwork that employees are commuting
into CBDs to perform.

Exhibit 3-5 How will your organisation’s workplace model change as a result of
COVID-19?
2023

2022

2021

Will adopt a hybrid
model with both remoteand office-based work

44%
15%

Will reduce staff
density in workplace

13%

Will not change
Will use more coworking
space (including serviced
offices and coworking)Will use (more) satellite
offices to cater todecentralised workforce

12%

6%

• The rise of what one developer called
the “portfolio as a platform,” in which all
5%
Will consolidate officebuildings owned by a single landlord
locations to cut costs
across a variety of locations are made4%
available for use by its tenants: “OverWill reduce open-office layout
time, we may start to see workspaces
Will use less coworking space2%
in our shopping centres, for example,(including serviced offices
and when you combine that with ourand coworking)office and build-to-rent [residential]
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
space all having opportunity for people
to work from, they can then use tech to Source: Emerging Trends in Real Estate Asia Pacific surveys.
say: ‘Today I’ll be at the build-to-rent,
tomorrow in the city HQ, and next week
Exhibit 3-6 How important currently is flexible workspace for accommodating
I’ll be in Melbourne.’ And they are alllinked—a unified platform to work from.” employees of your organisation?
Aligned with this concept is thecreation of shared space. This includes
2023
2022
2021
traditional coworking facilities, but the28%
concept of sharing has also morphed
Very important
to include other types of sharedenvironments, such as library-type
36%
focus spaces or collaborative, techImportantenabled spaces where teams can24%gather for meetings or workshops.
Slightly important• Perhaps unsurprisingly, a greater
emphasis on well-being, both physicaland psychological. This would include
not only the type of touchless accessnow becoming standard in high-end
buildings, but also requirements foropen and outdoor spaces (such as
rooftops), and for activities to activate
those spaces in support of wellbeing—perhaps yoga or mental
health services.
• As millennials and gen-Zers assume
numerical superiority over boomers,
office users will be defined by a cohort

36

12%

Not important
0%

5%

10%

15%

20%

25%

30%

35%

40%

Source: Emerging Trends in Real Estate Asia Pacific surveys.

of digital natives who will demandand be literate in the language oftechnology. Buildings will therefore
need both to embody technology andoffer it on a simplified and frictionlessbasis. An example of this would
be what one building owner calleda “dynamic people-management

Emerging Trends in Real Estate® Asia Pacific 2023

system” that uses AI to help
employees plan their time efficiently
vis-à-vis colleagues’ workloads andschedules, or “flow-to-work” operating
models that create pools of (usuallyhuman) resources that can be
deployed flexibly and as required. So
far, tenants and building owners have• Sustainability—and especiallycarbon efficiency—will become key.
There are multiple components to this,many of which have already been
discussed. Tenants will require it
because current or future employeesdemand it of them. Investors wantsustainable buildings because of the(albeit unquantifiable) green premium
they receive when they sell. And
owners need to make their buildingssustainable, either because the poolof potential buyers will otherwise
shrink, or because shifting regulatory
requirements will compel upgrades
anyway. In the words of an investor
in Japan: “They are either ESG
compliant, in which case they willtrade, or otherwise, those where stuff
can’t be done, you’re going to have a
lot of institutions that won’t buy them—
they just won’t be a tradable asset atsome point in time.”

Decentralisation Picks Up
Tenant migration away from older,second-tier buildings is having a wider
impact than simply boosting demand formore modern offices in the CBD. One
is that decentralised working habits are
driving demand for buildings locatedoutside city centres, in city fringe or
suburban areas. By moving outward,
companies are not only seeking tobring the office closer to where criticalmasses of employees live, but also to pay
lower rent for good-quality office stockin outlying locations. Growth of thesesuburban-oriented trends is confirmed by
the data, with outlying offices attracting
almost half of all office investment
regionally in the first half of 2022,
according to MSCI (see exhibit 3-7).
However, the process and extent of CBDdecentralisation varies city by city. In
Australia, the idea has been slow to gain
traction, as noted previously. According
to one Sydney-based fund manager:“During the pandemic, there was a theory

Exhibit 3-7 Office Investment Volumes by Subtype
Suburban office

CBD office

60
50
40
USD billions

been slow to pursue this theme, but
demand is such that uptake is likely to
become increasingly common over the
medium term.

30
20
10
0

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

Source: MSCI Real Capital Analytics.

that decentralisation would be a thing inAustralia and the corporates would lookto have city or suburban metropolitan
satellites. But what we’re actually seeing
is just the opposite—a consolidation into
quality office space in a single location.
So the more prominent core assets areseeing a fair bit of leasing happening.”
In Hong Kong, secondary CBDs have
evolved in Kowloon East and Quarry
Bay that draw back-office departments
and, increasingly, professional service
firms fleeing the city’s notoriously highrents. In Shanghai, large peripheral
clusters have also opened in multiple
locations, but notably around the Railway
Station, North Bund, and Qiantan areas.
As often happens in China, growth has
been so rapid that oversupply problems
have arisen, though these should bedigested in a period of two to three years,
according to an investor in Shanghai.
In Japan, secondary office locations arealso thriving. One Tokyo-based fundmanager, identifying it as a preferredinvestment strategy, said: “Ideally, I’dlook at large floor plate B-class officein noncentral locations with goodtransportation that’s large enough to
put in ESG and do energy retrofits.

Shinagawa is a perfect example, witha lot of residences nearby and goodtransportation.”

Repurposing the Old
A second issue arising from thedepopulation of second-tier buildings
is that it produces a significant body ofunderused and unwanted stock (perhaps
10 percent of the overall market) that now
needs to be redeveloped or repurposed.
But while this creates an obvious andunique opportunity to reimagine suchlarge amounts of city centre space, theavailable options for repurposing older
stock (mostly built on tight budgets intimes when regional economies were lessdeveloped) may be limited. In principle,
a value-add approach would be ideal,
given the embodied carbon (i.e.,
greenhouse gas emissions associatedwith the manufacturing and transportationof key building materials and thegreenhouse gas impacts of construction)
contained in the original structures. But
while upgrading older offices has beena lucrative option for many investment
funds in recent years, demand for new
office space is now questionable given

Emerging Trends in Real Estate® Asia Pacific 2023 37

Chapter 3: Property Type Outlook

the rise of remote working. Beyond that,conversion plays may anyway be hard to
finance in an environment where interest
rates might remain at elevated levels for a
prolonged period of time.

type of ESG upgrades quickly becoming
the norm in private-equity deals. Thismeans that repurposed assets may beleft stranded when current owners look tosell in the future.

One suggested option was to repurpose
such stock as “general-purpose space”
that can be used flexibly as the market
requires. Such an approach may befeasible economically because manyolder buildings are owned by deeppocketed local developers (or individualowners) and are therefore not subject
to bank loans. According to a HongKong–based consultant working with
developers in the city: “There seems to
be a shift in trying to second-guess anddictate what the market wants and what
it should be provided. So there will be abuilding envelope that is gutted, madegenerally suitable, and fitted out in termsof escape [facilities] and utilities. But
what happens within the envelope will
be dictated by the market. It might be a
mixture of retail and office, it might be a
mixture of residential as well, and it might
be mixed use within the same building—all in all, a much more spontaneous
approach to occupation.”

According to a Tokyo-based investor:“The big problem for some of these smallbuildings, where at the end of the day[ESG upgrades] can’t be done because
it’s not economically feasible, is that noone will want to occupy them. They can’t
be in them and so you’ll have to tear themdown and rebuild something—but if they
have a really small footprint, what are you
going to do?”In principle, bringing more people tolive in CBD areas would certainly be
conducive to creating a greater sense ofcommunity and vibrancy. According toa consultant in Singapore: “We describe
them as central activity districts, theconcept being that it’s not just about
work, you should be trying to build
something that is mixed. Raffles City,
where I am, is dead on a weekend, eventhough it’s right on the bay, and the URA
here in Singapore is very aware of thatand is looking for ways to inject more
residential into the CBD to try to create
more 24/7 vibrancy. So you’d have fewer
workers, but some of that land use mightevolve to be residential, or more hotels,
which could ultimately have a positiveeffect for retail, too.”That option remains a possibility,
however, as governments across theregion become increasingly proactivein pushing environmental agendas. The
Japanese government, for example,“appears to be pretty aggressive interms of how they’re trying to push thisforward,” one investor commented. “So it
could easily push these smaller guys into
doing something sooner than later—thebanks will just pull the financing and say,‘The government won’t let us continue, so
you have to do something.’”

In practice, however, repurposing mightprove tricky to execute given that the
inefficiency of older, small floor platebuildings commonly found in Asian cities
makes them generally unsuited for the38

One answer to that is to makeredevelopment an aggregation playthat joins adjacent land sites to achievea larger footprint. That solution comeswith other problems, though. Banks areusually hesitant to call in loans for evenpoorly performing buildings (although if
distress becomes commonplace, that
may change). Aggregating sites on asynchronised basis is unlikely to becomecommon, therefore, in the absence ofsome kind of regulatory interventioncompelling it.

Logistics
Seemingly bottomless Asia Pacificdemand for logistics facilities, driven
mainly by the e-commerce andtechnology sectors, as well as by therotation of institutional investment awayfrom conventional retail assets, has
proved resilient even as consumption
and industrial output have stalled.

Emerging Trends in Real Estate® Asia Pacific 2023

The dynamic in regional logistics sectors
differs from that in the West because
structural undersupply of modern
facilities is so pervasive. As one investor
observed: “A lot of the demand formodern logistics isn’t necessarily net
new absorption, it’s upgrade demand
from a company that was previously in an
open-sided facility with a tin roof that is
now looking to introduce automation—orat least cold storage—so the ice creamdoesn’t melt before it gets to the grocery
store.”
So while net new absorption may soften,
demand tends to be resilient because
it offers a cost-effective way to improve
efficiency. “In the case of Japan, it’s
been that way for 20 years,” continued
the investor. “So the idea that China or
Korea or markets that are further behindin the development curve from a logistics
fulfilment perspective wouldn’t be able tofollow that same trend doesn’t hold water
for me.”In terms of individual markets,
e-commerce penetration rates in South
Korea (50 percent) and China (43percent) are some of the highest in
the world, creating enormous ongoing
demand for fulfilment capacity over andabove that required by their traditionally
export-oriented economies.
Australia also has a deep supply/demand
mismatch stemming from historically low
e-commerce penetration that has been
rapidly catching up to global norms.
Warehouse vacancies in Australia aresome of lowest in the world, standing at
0.8 percent in the third quarter of 2022,
according to CBRE. And with relatively
little new space under construction(equivalent to just 2 percent of existing
stock), rental growth is correspondingly
high, registering an increase of 13
percent in the year to June 2022, witheven higher rent hikes in the pipeline.This
explains why Australian logistics assets
have been some of the most prizedtargets of global institutional investors forthe last several years.
A further shift in the regional logistics
sector landscape is caused by

an overarching trend of industrial
diversification away from China. As
economic problems from China’s ongoingzero-COVID policies mount, inboundforeign investment is increasingly
heading to other markets, with one inthree respondents to an October 2022
poll by China’s American Chamber ofCommerce saying that investments
planned for China had been directed
elsewhere during the past year.
This deficit in terms of new Chinese
industrial capacity becomes a surplus forother markets, adding to a preexistingslow bleed of outgoing factory capacityfrom companies pursuing a “China PlusOne” diversification policy. Although
the outflow accounts for only a minutepercentage of total factory space in
Mainland China, it still represents verysignificant inflows for recipient Southeast
Asian countries such as Cambodia,
Thailand, Indonesia, and in particular
Vietnam.

Yield Compression Bites
However, while the overarching structural
shortfall across the Asia Pacific shows nosign of ending, transactions of regional
logistics assets fell sharply in 2022.
After record volumes in 2021, deal flow
dropped 25 percent year-on-year in
the third quarter, according to MSCI.
Although the 2021 base was admittedly
high, the 2022 figure was propped up
by a single large deal in China, without
which the total would have been thelowest in five years.
The reason for this is that the popularity of
the logistics theme has driven cap rates
to levels (sub-3.5 percent in Australia, forexample) that some find hard to justify. “Ifyou compare office, retail, and logistics,
they’re trading almost at the same [caprate] level,” said an investor in Japan. “I
don’t think that makes sense if you look at
the value of the land and other real estateparameters of the deal.”
As interest and bond rates rise, logistics
yields have been squeezed below 100
bps in several major markets (see exhibit

Exhibit 3-8 Industrial Yield Spreads to 10-Year Government Bond Yields
Q2 2021

Q2 2022Japan
Singapore
Australia
South Korea
New ZealandHong Kong
0

100

200

300

400

500

600

Basis points
Source: MSCI Real Capital Analytics.

3-8), although those in Japan and China,
where interest rate movements havebeen flat or negative, remain close tohistorical norms.
Despite these issues, however, there isa significant body of opinion to the effectthat the fundamentals of the industry still
justify currently compressed cap rates
because shortages of warehouse stock
will continue for years to come, with theregion’s projected incoming supply (i.e.,of 20 million square metres per year)
falling short of new demand (i.e., at 23
million square metres) for the logistics
sector alone, according to CBRE. Thisis driving a trend of long-term rental
growth that will increase profitability andeffectively push out cap rates without
affecting asset valuations.
While this argument is plausible, it may
not be as appealing as it seems giventhat creditworthy tenants are commonly
offered incentives in the form of long-term
rent rebates that run as high as 15 to 20
percent of the sticker price, according
to one Singapore-based investor. “Youhave to buy these guys to get them tocome in. So they say there’s a rent rise,
but you have to effectively bring it backand understand exactly what is the net
net these guys are getting?” he said.

“And it’s not nearly as much that they’resaying, certainly to get the best-quality
tenants.”
In addition, even though the long-term
trend is upwards, the cyclicality ofdemand for logistics space can swing
significantly, bringing with it cashflow disruptions. During COVID, many
e-commerce operators opted to overinventory products (partly out of concern
over supply chain disruptions) and sellthem off over time.
But as COVID disruptions fade,demand growth for online retailing has
slackened with it. “This is a cycle,” said
the Singapore investor, “so when thatcomes back off, you’ll find there’s a
lot of [vacant] space because people
aren’t going to have need for all theinventory. You have to keenly understandthe needs of the clients—the 3PLs andthe e-commerce operators—and what
the implications are for demand forwarehouse space. Because how muchthey’ll take will be very cyclical, and it’s aquestion of riding it out.”
In any event, cap rate compression
across the region appears now to haveended and is showing signs of outward
movement, especially in markets where

Emerging Trends in Real Estate® Asia Pacific 2023 39

Chapter 3: Property Type Outlook

further driving demand for new capacity.
Around US$5.2 billion in stabilised data
centre transactions took place in 2021,
according to JLL (excluding development
projects), up some 61 percent from 2019
levels. Of this, trades of assets in Chinareached more than US$3.7 billion, morethan double the 2020 total and five times
that in 2017.

Exhibit 3-9 Industrial Sector Yield Changes for Select Markets, Q3 2022
Previous 6 months

Past 6 months

15
10
5
0

Australia

New Zealand

Japan
South Korea–5–10Hong Kong SAR

Despite these secular tailwinds, however,the scale of new demand for data
centre capacity is causing a variety ofproblems, even as existing infrastructureis struggling to keep up with growing
network traffic. As a result, transaction
volumes have slowed in 2022, with fewer
assets trading and development projects
also facing delays.

–15
–20
–25
–30
–35
–40
Source: MSCI Real Capital Analytics.

Problems Mount

Exhibit 3-10 Data Centre Market Size, 2021 (megawatts)

Virginia

One reason for slowing activity is thatmost new data centre capacity iscreated on greenfield sites that (forlatency reasons) need to be locatednear city centres. These days, such sites
are increasingly scarce. In addition,
development is a capital-intensive
exercise that in the current environmentbanks are less inclined to finance, evenfor such a sticky, relatively recessionproof sector.

1,650

London

840

Tokyo

815

Shanghai

610

Singapore

610
0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Source: Cushman & Wakefield.

yield spreads have shrunk the most (seeexhibit 3-9). In South Korea, where rising
construction costs, a growing supply
pipeline, and falling institutional buying
have combined to erode sentiment,
yields moved almost 20 bps over the year
through September 2022. Anecdotally,
October transactions in Australia are also
showing signs of cap rate expansion.

Data Centres
Demand for new networking capacity
across Asia Pacific markets appears to40

be bottomless, with huge amounts ofcapital now being directed at the sector.
Not only is the data consumption in theregion growing from a lower installedbase of infrastructure than in the West,but penetration of e-commerce retailingand high-speed 5G connectivity is
generally higher—and often muchhigher—than anywhere in the world.
On top of that, governments across the
Asia Pacific are increasingly requiring
mandatory storage and control of data
relating to their domestic economies
to be held within sovereign borders,Emerging Trends in Real Estate® Asia Pacific 2023

Not only that, but the economics ofbuild-to-core projects generally are
becoming fragile. In part, this is due tohigher financing costs, but it also reflects
problems in the construction processitself. According to one Japan-based
analyst: “Typically, contractors would
be able to give you a fixed price, buttoday they are less eager to do that, andmight only do it for their longest-standing
clients—there are just a lot of projects
undergoing that same phase, looking
in the same pool of contractors. As aresult, prices have gone up—in Korea,
construction costs have risen 30 to 40
percent; in Japan, it’s 40 to 50 percent.”
Another, more important problem is thatdata centres use so much energy thatobtaining a reliable supply source fromlocal utilities can be problematic. In
China, the sector is expected to consume

782 billion kilowatt-hours of electricity by
2035, or 5 to 7 percent of national power
consumption, according to a report byGreenpeace published in April 2022. This
compares to 2.7 percent in 2020.

Average annual PUE for large data
centres globally stands at around
1.57, but regulatory limits in the Asia
Pacific region are pushing this figure
downwards.

With power shortages in some partsof China common since at least 2021,
ensuring reliable supply—or sometimes
any supply—is becoming difficult. Data
centres must now apply for energy
quotas that in theory guarantee themadequate energy, but even with quotas
in hand, investors reported delays in
obtaining power connections for newly
completed projects during the summer of2022, when the country was affected byanother bout of energy scarcity.

China, in particular, has introduced
exacting thresholds. Although local andcentral governments historically tried
to incentivise data centre construction,authorities are now tightening regulations
for both existing and new projects.
According to one data centre investor
in China, new projects in Shanghai mustreach a PUE of 1.3, while in northern
China levels have been set as low as 1.2,
and in south China (where the climate
is hotter) the level is 1.35. Existing
facilities will be shut down if the PUE
exceeds 1.7, and all data centres arenow subject to real-time monitoring andsnap inspections. “So basically, therequirement is high,” he said. “It’s still
doable, but requires at the design stage
to have the best team to help with design,and the MEP [mechanical, electrical,
and plumbing] also has to be very
energy efficient.”

Even in more developed markets, power
delivery is complicated. According to
one investor: “Especially around metros
like Seoul’s and Tokyo’s CBD, it does
seem to be a challenge—not necessarily
that there’s a shortage of supply, but theability to connect it to large amounts ofsupply for a long period.”

Cutting the Carbon
An additional issue inherent to operating
facilities that are as energy-intensive
as data centres is that governments
have zeroed in on the high carbon
emissions they generate. Under pressure
from regulators (as well as from theirown tenants and investors), operators
are scrambling to reduce operational
footprints, which are still well behind
standards set in the United States andEurope. As they do so, they are having
to reconsider whether prospective
investments measure up to the newstandards. Very often they do not, or else
the risk is too high, leaving many projects
that would have passed muster a year or
two ago unable to meet the higher bar.
Indeed, energy efficiency has today
become the most prominent issue fordata centre feasibility. Power usage
effectiveness (PUE) is the applicableefficiency standard, measuring therelationship between the total amountof power a facility uses and the amountused by the compute environment.

Another environmental factor now in play
is water usage effectiveness (WUE),
and a third is renewable energy use.
Increasingly, data centres are seeking
to cut energy consumption by using
rechargeable batteries and installing
rooftop solar panels, according to an
executive at one major data centre
operator. Others are turning to innovative
solutions, with one Japanese data centre
using snow piled outside the facility tocool piped antifreeze.
In Singapore, meanwhile, wheredata centres were responsible forfully 7 percent of the city’s electricity
consumption in 2020, the government
introduced a moratorium on new
construction in 2019 as a direct resultof concerns over power consumption
and sustainability issues. Although themoratorium was lifted in 2022, newproject bids are now subject to strict
evaluation requirements.
These include provisions that appear tofavour interconnected retail operatorswith global footprints rather thanhyperscalers and smaller operators. In
addition, specifications focus on PUE(set at a maximum of 1.3) as well as
innovation in energy use that may havesignificant impact on future designand operation of facilities throughout
the region. Current proposals include
use of “cold energy” from Singapore’s
LNG gasification terminal, as well as
construction of a floating data centre
using seawater for cooling.

RetailThe consensus view towards brickand-mortar retail continues to bepervasively negative in most markets andsubtypes—an obvious result of years
of cannibalisation from e-commerce
platforms, even before COVID diverted
yet more discretionary customers toonline stores. As a result, asset prices
remain at or near a bottom, whiletransaction volumes also have softened.
The retail sector experienced the biggest
contraction in transactions of all asset
classes in the third quarter of 2022,
according to MSCI, with the volume ofboth closed and pipeline deals falling by
more than half compared with the same
period in 2021. Australia was the only
market where volumes held firm.
At the same time, the extent of sellingin retail assets over the last few years
provides appeal to bottom-fishers who
now see it as oversold, especially as
in-store buying in many markets hasrebounded to a point, according to anindustry consultant, that is “not far off
pre-COVID levels.” Not only that, butwith rerating in the sector essentiallycomplete, cap rates probably have lessroom to fall than in other asset classes
where yields have now sunk to near oreven under the cost of capital.
According to one fund manager: “We still
think retail is a needed asset class andhas been oversold, so there’s opportunity
there. A lot of investors or market
participants think retail’s a dirty word—for
us, I’d say you have to understand thespecifics.”

Emerging Trends in Real Estate® Asia Pacific 2023 41

Chapter 3: Property Type Outlook

Nor are such investors necessarily
looking to reinvent assets, taking the viewthat properly positioned properties haveenduring quality and can be profitable
more or less as they are, given reduced
prices and cap rates.
This contrarian perspective is probably
the reason behind the recent rise ininterest in discretionary retail assets inAustralia. Last year, nondiscretionary
subtypes were the focus, with cap
rates compressing significantly inneighbourhood, subregional, largeformat, and big-box categories, while
discretionary-type assets languished.
That made sense, because people
always need places to buy groceries andother essentials. But just as discretionary
became oversold, nondiscretionary
subtypes now seem priced to perfection.
As a result, as shoppers begin returning
to their old haunts, interest in city centre
malls and other discretionary venues has
revived, with transaction volumes in 2022
rising substantially above 2021 levels(see exhibit 3-11).
Still, calling a bottom in retail iscurrently a precarious strategy because
discretionary retail will be one of thefirst to falter if economic growth turns
negative or slows steeply. China provides
an example. As one Shanghai-based
fund manager, commenting on the local
retail environment after city lockdowns
ended in early 2022, said: “The reboundhas certainly come in, and from trafficand sales perspectives we are largely
back. But it’s harder to sustain giventhat the velocity of growth has comedown compared to where we would haveexpected in 2019, for example. And whatthat means is that over the next six to 12
months we will see returns continue tobe OK, but at a greater expenditure ofwork and effort. Beyond that, it becomesa macro question of how the economy
looks in terms of employment, wage
growth, and consumption.”

Reinventing the Wheel
Ultimately, many discretionary facilities
will have to be reinvented as e-commerce

42

Exhibit 3-11 Australian Retail Subtypes: Change in Yields and Deal Volume

Yield change, 2021 (bps)

Deal volume, Q2 and Q3 2022, YOY change

Regional centre
Subregional centre
Neighbourhood centre
Large-format retail
City centre
Big box–80 –60–40 –20

0

–100%

0%

100%

200%

Source: MSCI Real Capital Analytics.

continues to cannibalise consumer
spending. The question is: how should“conventional” retail evolve? For Asia inparticular, that question becomes more
complicated because malls have beendeveloped as products of very localisedsocial and urban contexts. So what
may be feasible for stores in the UnitedStates or Australia may not be directly
applicable in, say, Singapore.
Pursuing the experiential theme, which
has been the default strategy of mostmalls, will no doubt continue, butowners are still trying to figure out how
to make this work in what has become
a cutthroat operating environment. Only
so much experience is digestible, after
all. According to a developer in Jakarta:“Before, everyone could just copy
everyone else and everyone got a cut ofthe pie—now, it’s the difference between
winners and losers. The challenge [forexisting malls] is: how do you repurpose
space that’s basically dead? Where doesthe 20,000-square-metre [department
store] go? What happens to the anchor
tenants? And for new malls, you can only
push food so far. If you have a Starbucksof 200 to 300 square metres, then a[department store] will be 20,000 square
metres. Can you really replace one store
with 200 Starbucks?”

Emerging Trends in Real Estate® Asia Pacific 2023

Striking a balance will not be possible
in many cases. As a result, according
to one retail investor, “you have to be
selective about the operator you partner
with, and the asset, and where it’slocated—because the good ones reallywork and the bad ones really don’t.”
Another way for conventional retail tocome to terms with digital commerce is toposition itself at the intersection between
offline sales, online sales, and logistics
fulfilment. Omnichannel strategies havebeen a long time in the making, but
are now gaining critical mass. Under
this model, a retail chain may have an
online presence, a small number of large
stores, and a large number of widelydistributed small stores that function also
as fulfilment centres, delivering to walk-in
customers from stock sent to them fromtheir larger counterparts.
As a consultant based in Singapore
said: “Their logistics system is their store
system, and that increasingly becomes
the way it will work. So every retailer
that’s a chain has to be thinking: ‘How do
I set up an online system and a delivery
system that’s part of my physical retailchain?’ And that’s what we mean when
we say, ‘The future is omni’—in time, a
big proportion of retail will operate inthat way.”Sharing the Retail Pie
The development of this model
requires tenants and landlords torevisit the intractable question of how
to differentiate what part of an onlinetransaction is attributable to the digitalspace, and how much is attributable tothe store. This distinction matters morethan ever today because, as a result of
the pandemic, many stores are paying
a more significant portion of rent on aturnover basis instead of a baseline
norm of perhaps 95 percent base rent
and 5 percent turnover rent. “It’s a tricky
model,” conceded the consultant, “butI think that will increasingly become theway that it works—particularly for online
retailers who move into a physical space,that’s where we’ve seen some success.”
Another potential model that has yet to
be deployed, but that may be adopted
in the future, focuses less on sales
and more on footfall, which today canbe measured with a high degree of
accuracy. On that basis, rents would becharged according to how many people
walk past a store. This may be workable,according to the consultant, “because
the value for some of these stores is often
in the branding, so trying to link eyeballs
to rent might be another way of capturingthat value.” A further element of value isthat it incentivises landlords to performby driving footfall into the mall, thereby
creating a symbiotic relationship with
its tenants.
That said, persuading landlords toaccept such forward-thinking concepts
is a tall order. Although landlords in
China are more willing to adopt moreadventurous rental models, markets suchas Singapore have a very conservative
approach, not least because most malls
are owned by REITs, whose focus is
to maximise day-to-day cash flow withas little change as possible, and are
therefore generally resistant to adopting
high-risk, high-return models.

major beneficiaries of a sustained periodof low interest rates, together with theongoing megatrends of urbanisation,
immigration, and home supply shortages.
Asset prices have risen strongly since2010, far outpacing equivalent increases
in residential rents.

Only Japan, where interest rates remain
at rock-bottom levels, and Singapore,
where private home prices rose 7.8
percent in the year to October, have so
far managed to buck the trend.

Today, however, with interest rates
rapidly moving up in many markets(apart from China and Japan),mortgage-servicing issues are surfacing.
Transactions have stalled across mostmarkets, and home values are beginningto correct downwards. In Sydney, homeprices fell 9 percent in October since
their January 2022 peak, while Hong
Kong home values declined 8 percent in
the year to October 2022, according toGoldman Sachs. In China, they have also

One of the consequences of higher
mortgage rates is that existing-homepurchase prices move out of reachof more people. In addition, thereis less incentive for buyers to enter
the market given that housing prices
have clearly peaked. A further factor
at play in regional housing markets isdemographics. Millennials generally
favour more flexibility in terms of
migration and lifestyle, ideas that were

Exhibit 3-12 UBS Global Real Estate Bubble Index, 2022

Fair-valued(–0.5 to 0.5)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

Residential
Over the last 14 years, residential
markets across the Asia Pacific werereversed, falling 1.5 percent year-on-yearin October, according to official figures.

Overvalued(0.5 to 1.5)

TorontoFrankfurt
ZurichMunichHong Kong
Vancouver
Amsterdam
Tel Aviv
Tokyo
Miami
Los Angeles
Stockholm
Paris
SydneyGenevaLondonSan Francisco
BostonMadridNew York City
Singapore
MilanSão Paulo
Dubai
Warsaw

Bubble risk(>1.5)

Rank change
versus 2021
2.24
2.21
1.81
1.80
1.71
1.70
1.62
1.59
1.56
1.39
1.31
1.22
1.21
1.19

1.14
1.08
0.78
0.75
0.59
0.57
0.50
0.34
0.20
0.16
0.15

0

0.5

1

1.5

2

2.5

Source: UBS.

Emerging Trends in Real Estate® Asia Pacific 2023 43

Chapter 3: Property Type Outlook

alien to a previous generation of Asian
workers more focused on financial
stability, and for whom homeownership
was often a prerequisite to marriage.
Circumstances have therefore combined
to jump-start a new cycle, with growing
numbers of people opting to rent theirhomes rather than buy them. Although
Japan is so far the only country in the
Asia Pacific with a truly institutionalised
market for multifamily assets, these
positive dynamics happen to coincidewith the arrival of a growing number ofinvestors focused on developing new
multifamily projects across the region.

A Global Wave
To a great extent, this initiative has been
led by global institutional investors who
covet long-term, reliable income streams.
They often already own large multifamily
portfolios in the West, and are expanding
into the region to meet global allocation
targets. As such, their hurdle rates are
generally more aggressive than those ofregionally based REITs and investment
funds.
Japan has had a mature multifamily
sector for at least a couple of decades
and continues to be the main focus of thisbody of foreign capital, which collectively
represented more than 25 percent of
US$12 billion in total foreign investment
in Tokyo real estate in the first threequarters of 2022, according to MSCI.
Broadly speaking, there are two typesof participants in the market. First, thelarge global institutions willing to pay a
premium for scale and diversification,
who are looking to buy well-locatedportfolios in the US$200 million to
US$400 million range or more. Given
the level of historical buying, however,appropriate assets have become scarce.
With demand continuing to outpace
supply, a second group of value-add
or opportunistic players now work to
package portfolios of smaller assets, or
to manufacture them through forwardpurchase deals with local developers.
These are then sold to the larger players.

44

According to a locally based fundmanager: “These intermediary-type
investors are now getting aggressive to
get that final step function of scale to beable to exit. Being a dyed-in-the-wool
value investor, I keep waiting for themarket to slow down and see if there aregood opportunities there, but so far themarket’s continued apace, it hasn’t reallyslowed down.”
Japan is no longer the only market
playing the game, however. Overthe last two years, there have beensignificant flows into multifamily projects
elsewhere in the region, almost all on
a build-to-rent basis. These include,in particular, projects in Shanghai,
Sydney, and Melbourne. Although in thefirst nine months of 2022 none of them
represented much more than 10 percent
of total multifamily capital committed inTokyo, they collectively signal a majorcommitment to the creation of newmarkets in other Asia Pacific locations(see exhibit 1-6 in chapter 1).
While investors usually target mid- tohigh-end housing stock, some arealso focused on affordable homes. In
Australia, for example, a large European
institution is developing a build-to-rent
project in association with an affordable
association that targets workers suchas nurses, firefighters, and police
officers—a group that often struggles tofind affordable housing in good locationsin Sydney.
To that extent, projects resonate withthe “social” (or “S” part) part of funds’
ESG criteria. In addition, such strategies
play to a groundswell of support within
Australia for local governments toallocate some of their large holdingsof inner-city land to address a growing
shortage of affordable housing stock foruse by critical public-sector workers.
In China, foreign funds have in the pasttargeted the upper end of the housing
spectrum, but in recent years thegovernment has earmarked creation ofa deep rental market as an important
policy goal. As a result, rental housing
projects accounted for 15 percent of new

Emerging Trends in Real Estate® Asia Pacific 2023

real estate development in China during
the second quarter of 2022, according
to JLL, up from 7.6 percent in the same
period of 2021.
With discounted land packages now
available for Chinese build-to-rentdevelopment, finances are more likely tostack up for projects catering to demandfurther down the housing ladder—usuallyin the form of local white-collar andyoung professional workers. Although, in
general, projects in China are probably
higher risk, the impending launch ofaffordable rental housing REITs has
recently served to reduce risk throughprovision of a viable exit strategy.
According to a Shanghai-based fundmanager: “The yield has traditionallybeen based on the cost of a residential
apartment [i.e., one that’s very low],
whereas given some of the policychanges, we can now base it onaffordable, purposely zoned land that
doesn’t compete with the residential
developers because it can’t be used forindividual sale. So the yield-on-cost isvery attractive on a risk-adjusted basis
relative to other asset classes.”
In addition, with many local developers
now short on cash, opportunities exist—
and will probably increase—to pick up
either stressed residential developmentsor repurposed commercial projects atmuch lower cost than in the past. At least
one such deal in Shanghai was closed
by a large global institutional player in thesecond half of 2022.

Do the Numbers Stack?
Certainly, the rationale for multifamily
investment in the Asia Pacific is plausible.
It ticks the boxes for the type of assetsthat institutional funds seek, providing
scale, term, reliable current cash flow,
short leases, and a granular tenantbase. It also taps an emerging long-term
secular trend in favour of home rentals
across the region. At the same time,
the premise is not without weakness,and interviewees at times questioned
whether Asia Pacific investments willExhibit 3-13 Average Japanese Multifamily Rents, 2013–2022
Tokyo 3 CBDs

Tokyo 23 CBDs

Tokyo metropolitan area

NagoyaOsaka

Fukuoka

18,00016,00014,00012,000Yen

10,000
8,000
6,000
4,000
2,000
0
Jan
2013

Jan
2014

Jan
2015

Jan
2016

Jan
2017

Jan
2018

Jan
2019

Jan
2020

Jan
2021

Jan July
2022 2022

Source: ARES, as of August 2022.

Exhibit 3-14 Japanese Multifamily Occupancy, 2017–2022

Tokyo 3 CBDs

Tokyo 23 CBDs

Tokyo metropolitan area

NagoyaOsaka

Fukuoka

98%
97%
96%
95%
94%
93%
92%
Jan
2017

Jan
2018

Jan
2019

Jan
2020

Jan
2021

Jan
2022

July
2022

Source: ARES, as of August 2022.

Emerging Trends in Real Estate® Asia Pacific 2023 45

Chapter 3: Property Type Outlook

prove as successful as they have beenin the United States and some European
countries.
The biggest issue is around yield.
Multifamily assets in Asia Pacific markets
trade at such low cap rates (in Japan,
3.00 to 3.25 percent) that investors areliving dangerously should underwriting
assumptions depart from script.
One of those assumptions concerns
interest rates and their potential impact
on exit cap rates. Although Japan inparticular seems committed to keeping
rates low, as pointed out elsewhere inthis report, systemic issues exist in theJapanese economy that pose dangers
one way or another. Those issues
have already led to large downward
movements in the value of the yen,pushing investments that are unhedged(as many are) underwater in U.S. dollar
terms. Although, equally, this makes newpurchases by incoming capital cheaper,
it is a clear warning flag of market hazard.
Another assumption touches on rental
growth, which some investors haveunderwritten given the high prices
they are paying for assets. Historically,
however, Japanese residential rent
growth has been slim to nonexistent, andmany long-term investors in Japan see
little chance of that changing, especiallygiven the lack of wage growth and rising
inflationary pressures that are pushing up
the prices of food and other essentials.
In fact, if anything, the pressure on rents
is to the downside. According to a Tokyobased fund manager: “Residential rents
have clearly flattened and started to trend
down. As an example, we’re hearing thaton a two-year residential lease, somemanagers are giving away five months’
leasing commission and three months’
free rent to get a tenant in on a 24-monthlease. So clearly while they may want tokeep face rents up, effective rents aregoing down.”
Assumptions for ongoing positive
net migration into Tokyo are alsoquestionable, given a growing preference
for work-from-home lifestyles among

46

younger demographics that is now
pushing them to move to larger andcheaper accommodation in non-CBD
areas.
And, finally, there are questions about
turnover, which is more common thanassumed and generates re-leasing
and restoration costs. According to thesame fund manager: “If you have a lotof turnover, your net cash flow [NCF]
numbers come down dramatically, andthat assumes rents stay flat. Let’s say
you are 80 to 85 percent leveraged andyou paid a 3-cap for the deal. Then, yourrents are down by 10 percent and you
start to get more turnover. It doesn’t takemuch before your NCF numbers start
to look red and you may have trouble
servicing your debt.”
In Australia, meanwhile, the restartof immigration flows should serve tostimulate the housing market. Butquestions have been raised about
long-term demand for multifamily rental
homes given a cultural preference forhomeownership and the fact that mostbuild-to-rent development is aimed at thepremium end of the market.
According to one locally based fundmanager: “If I own an apartment in abuilding block and I’m leasing it out at$500 per week, these build-to-rent
providers are looking to lease at $600 per
week because they say people will pay
a premium for a concierge, free bikes toborrow, and all the rest. But will they? If
I’m in my late 20s I’m probably going totake the cheaper rent and sort out therest myself.”
In addition, yields are again thin. As thefund manager pointed out: “You’re notgetting rewarded for being a first mover
anymore because—even though noneof those assets have traded yet—to getthem to work now, you’re looking at 4
to 4.5 [percent] exit cap rates. But thathasn’t been tested, so it’s not like you’re
getting an attractive total return upfront
and getting rewarded for taking theplunge—that spread isn’t there anymore.”

Hospitality
Of all the asset classes, the hospitality
sector was hardest hit by COVID travel
restrictions. Although many Asia Pacificmarkets rebounded significantly in 2022
as tourist and business travel resumed,
tourist arrivals in the region significantly
lag those elsewhere in the world, given
the absence of some 126 million tourists

Exhibit 3-15 International Tourist Arrivals as a Percentage of 2019 Totals*
AfricaAmericas

Asia Pacific

EuropeMiddle East

100%
80%
60%
40%
20%
0
Jan
2020

July
2020

Jan
2021

Source: United Nations World Tourism Organization.
* Percentage compared to same month in 2019.

Emerging Trends in Real Estate® Asia Pacific 2023

July
2021

Jan
2022

July
2022

from China still unable to travel abroad(see exhibit 3-15 [note: chart data arevalid only up to July 2022]). As a result,according to hotel analysts STR, while
occupancy and room rates in the UnitedStates and Europe exceeded prepandemic levels in September 2022,
those in Asia were still down (by 18.2
percent and 9.4 percent, respectively).
The pandemic’s disastrous impact on
hotel sector finances has attracted
opportunistic investors on the hunt forregional opportunities to buy assets at
distressed (or at least discounted) prices.
Closed-end funds targeting hotels in the
Asia Pacific have raised US$5.2 billion incapital since 2020, a 72 percent increaseover the pre-COVID period, according to
JLL. In addition, rising positive sentimentfor hotel deals is reflected in our survey(see above, exhibits 3-1 and 3-2).
The anticipated wave of distress has
been slow to materialise, however,partly because hotel owners displayed
unexpected staying power in the hopeof a travel boom once restrictions
were lifted, and partly because banks(prompted also by governments) werereluctant to call in loans and be left
holding large portfolios of unused andunsupported assets.
In the first half of 2022, however,sentiment finally turned as owners beganselling. A total of US$9 billion in hotel
assets traded in the first half of the year,
the second-highest total ever, according
to MSCI, with Australia, Singapore, andSouth Korea all seeing record-high levels
of investment. Of this, more than US$2.4
billion was dedicated to redevelopment
projects, mainly for residential
conversions.
According to a specialist hotel investor:“There haven’t been many actuallydistressed transactions, so they’relooking probably at buying assets thatwould otherwise not be on the market.
[There are] quality assets at a decent
price, but they’re not getting distressedpricing and they can’t buy the notes
either.”Exhibit 3-16 What are your business travel plans once regional travel restrictions
are lifted?
2023

2022

2021
23%

Will travel at
pre-COVID level

31%

Will travel slightly
less than pre-COVID
Will travel some, but only
for priority matters(e.g., live deals/due diligence)

44%

2%

Not planning to travel;
will have virtual meetings only
0%

10%

20%

30%

40%

50%

60%

Source: Emerging Trends in Real Estate Asia Pacific surveys.

Exhibit 3-17 Share of Investment Involving Redevelopment in Asia PacificMarkets
OfficeRetailIndustrial

Hotel

30%
25%
20%
15%
10%
5%
0%

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

Source: MSCI Real Capital Analytics.

One reason for the lack of distress is thatbanks are still reluctant to act. An investor
holding a portfolio including several
underperforming hotels reported that theirbank “just isn’t saying anything” after
being informed of operational and cash
flow difficulties. Another investor basedin Thailand commented: “A lot of thesehotels are way behind on their interest
and principal repayments and the banks
have been very patient. They’re kicking
the can down the road, but the can’s now
pretty much an oil drum, so we’re notquite sure what’s going to happen.”

As already mentioned, South Korea
is one favoured destination for hotel
plays, usually with residential conversion
projects in mind. “In Korea, we’re looking
at buying three-star hotels,” the investor
continued. “And if a three-star hotel isworth, say, $3,000 per square metre,
if we’re then able to convert it to resi
[residential] it’s worth $6,000 per square
metre. So, we’re beginning to look in
Korea in particular because the resi hassuch a premium.”

Emerging Trends in Real Estate® Asia Pacific 2023 47

Chapter 3: Property Type Outlook

In addition, in each of the last two years
Japan has been a magnet for hotel
investors hunting for smaller three- andfour-star regional city or suburban
facilities. Until recently, their efforts were
mostly fruitless. In the third quarter of2022, however, more than US$1 billion
in hotel properties traded in Japan,
according to MSCI. Part of this is down
to the declining value of the yen, which
has made Japan cheaper for both hotelbuyers and for foreign tourists who fill
the rooms. Another reason is that Japan
had been seeing exceptional growth
in incoming tourist arrivals before therise was abruptly cut short by COVID

48

restrictions. Many expect the numbers tobounce back quickly. Today, estimatesfrom Goldman Sachs project spendingby foreign travellers may rise by over athird from pre-pandemic levels to some
¥6.6 trillion (US$45.3 billion) annually.

country opens up, are thinking it’ll beback to normal that, they’ll be running at
80 percent occupancy. So sellers will
have to get realistic and/or the buyers will
have to pay more to buy these assets, notjust on a purely distressed basis.”

For that reason, the strategy in Japanis not for conversion plays, and notnecessarily for distressed assets.
According to a locally based investor:“Hotels are going to need to trade; thequestion is at what price. At the moment,
there’s still a pretty good gap on the bid/ask. A lot of guys are looking for stress or
distress, and the sellers, especially as the

The challenge, of course, will be how tofill the gap left by travellers from China
until they can again travel abroad. In themeantime, though, investors are gambling
there will be plenty of demand from therest of the region, be it Hong Kong,
Taiwan, Singapore, or Southeast Asia.

Emerging Trends in Real Estate® Asia Pacific 2023

Interviewees
Actis
Brian Chinappi

ESCA International
Jean de Castro

ARCH Capital Management
Winson Chow
Eric Manuel

ESR-LOGOS REIT
Adrian Chui

Arthaland
Sheryll Verano
AXA IM Real Assets
Laurent Jacquemin
BentallGreenOak
Dan Klebes
BlackstoneMark Harrison
Nina James
Brookfield Asset Management
Alok Aggarwal
Stuart Mercier
CBRE
Henry Chin
Christopher Johnston
Takashi Tsuji
Cistri
Jack Backen
City Developments
Frank Khoo
Colliers International
Paul Chua
CRE REIT Advisers
Tsuyoshi Ito
Cushman & Wakefield
Claro Cordero
D.M. Wenceslao & Associates
Julius Guevara
Daiwa House Industry
Tetsuo Suzuki
Destination CapitalJames Kaplan
DevinQi Advisors
Dan Cerf

Forum Partners
Andrew Faulk
Frasers Property
Chia Khong Shoong
Gallant Equity Ventures
Katrina Gaw
GPT Group
Callum Bramah
Anastasia ClarkeMark Fookes
Bob Johnston
Highbury Partners
Ben Roberts
Hulic
Yoshito Nishikawa
Invesco Global Real Estate Asia Pacific
Ryuichi Nakata
Investa Property Group
Pete Menegazzo
Japan Hotel REIT Advisors
Shigeo Nakazato
Japan Post Bank
Hiroyuki Tanaka
JLL
Jacob Swan
Andrew Quillfeldt
JPMorgan Asset Management
Tetsuya Karasawa
KaiLong GroupHei Ming Chan
KENEDIX
Takahiro Uchida
KJR Management
Naoki Suzuki

DEXUS
Keir Barnes

LaSalle Investment Management
Tom Miller
Ryota Morioka

Diamond Realty Management Inc.
Ryuta Takeuchi

Leechiu Property Consultants
Alvin Magat

Lendlease
Dale Connor
Simon Dixon
Andrew Gauci
David Hutton
Ng Hsueh Ling
Penny Ransom
M3 Capital Partners
Danny Krefman
MirvacPaul Edwards
Campbell Hanan
Mitsubishi UFJ Trust and Banking
Corporation
Hiroyuki Seki
MoelisBen BoydNEOCharlie Rufino
Raymond Rufino
Ooedo Onsen Reit Investment Corporation
Fuminori Imanishi
PAG Investment Management
Naoya Nakata
Professional Property Services
Nicholas Brooke
Radisson Hotels
Christine Angela Sevilla
RF Corval
Tim Nation
Santos Knight Frank
Rick Santos
Schroder Pamfleet
Andrew Haskins
Andrew Moore
Starr International Investment Advisors
Alison Cooke
Strategic Asset Solutions
Ken Fridley
Xander Investment Management
Arpit Singh

Emerging Trends in Real Estate® Asia Pacific 2023 49

Sponsoring Organisations

PwC’s real estate practice assists real estate investment
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enables it to assemble for its clients the most qualified andappropriate team of specialists in the areas of capital markets,
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The Urban Land Institute is a global, member-driven organisation
comprising more than 45,000 real estate and urban development
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Global Real Estate Leadership TeamThe extraordinary impact that ULI makes on land use decisionmaking is based on its members sharing expertise on a variety
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Thomas Veith
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Australia Real Estate Leader
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Global Real Estate Tax Leader
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LeaderHong Kong SAR, China

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Japan Real Estate Leader
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China
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Mainland China Real Estate Tax Partner
China
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Mainland China and Hong Kong Real
Estate Risk Assurance Leader
ChinaDavid Kan
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Korea Real Estate Leader
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ULI’s interdisciplinary membership represents all aspects of
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More information is available at uli.org. Follow ULI on Twitter,
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Ron Pressman
Global Chief Executive Officer
Urban Land Institutewww.uli.org
David Faulkner
President, Asia Pacific
Urban Land Institutewww.asia.uli.org
ULI Center for Real Estate Economics and Capital Markets
Anita Kramer
Senior Vice President
Urban Land Institute2001 L Street, NW
Suite 200
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United States
1-202-624-7000
www.uli.org

50

Emerging Trends in Real Estate® Asia Pacific 2023

Front cover photo: PARK ROYAL COLLECTION, Pickering, Singapore.
Image courtesy of UOL Group Limited.
Page iii photo: Lenovo Global Headquarters (Beijing) Campus, Beijing.
Image courtesy of CallisonRTKL/Lenovo Group.
Page 20 photo: Olderfleet, 477 Collins Street, Melbourne.
Image courtesy of Mirvac Group.
Page 32 photo: Wesley Place, Sydney.
Image courtesy of Charter Hall.

Emerging Trends in Real Estate®
Asia Pacific 2023

Highlights

What are the expected best bets for investment and development in
2023? Based on personal interviews with and surveys from 233 of themost influential leaders in the real estate industry, this forecast will
give you a heads-up on where to invest, which sectors and markets
offer the best prospects, and trends in the capital markets that willaffect real estate. A joint undertaking between PwC and the Urban
Land Institute, this 17th edition of Emerging Trends Asia Pacific is theforecast you can count on for no-nonsense, expert insight.

Lets you know how investors are positioning for a
post-COVID environment.

ULI is the largest network of cross-disciplinary real estate and land use
experts who lead the future of urban development and create thriving
communities around the globe. As a ULI member, you can connect
with members around the world in Member Directory (members.
uli.org), find ULI opportunities to lead and volunteer on Navigator(navigator.uli.org), and explore ULI’s latest research and best practices
on Knowledge Finder (knowledge.uli.org), including all the Emerging
Trends in Real Estate® reports published since 2003. Visit uli.org/join
to learn more about the Institute’s exclusive member benefits.

Reports on how the economy and concerns about
credit issues are affecting real estate.

www.uli.org

Tells you what to expect and where the best
opportunities are.
Elaborates on trends in the capital markets, including
sources and flows of equity and debt capital.
Indicates which property sectors offer opportunities
and which ones to avoid.

Discusses which metropolitan areas offer the mostand least potential.
Describes the impact of social and geopolitical trends
on real estate.
Explains how geographical and sectoral preferences
are changing.

www.pwc.com