Core assets investment volume is expected to reach new highs
By Joseph Wong
As we enter 2024, the Asia-Pacific commercial real estate market is set to experience a significant impact from the strategic involvement of private capital. According to Knight Frank's New Horizon Outlook 2024 Part 1: Asia-Pacific Tomorrow report, the enduring influence of private capital, with a particular emphasis on the active participation of High Net Worth Individuals (HNWIs), remains a key highlight in the commercial real estate sector. This active engagement is not solely a financial pursuit, but rather, it stems from a deliberate decision to safeguard capital amidst economic uncertainties.
A pivotal factor contributing to the robust presence of private capital is the substantial increase in investment exposure witnessed in 2023. HNWIs, in particular, have emerged as proactive players, elevating their stakes in commercial real estate. In contrast to heavy reliance on debt, these investors utilise their significant cash reserves, enabling them to swiftly secure assets at competitive prices. This strategy reflects a broader trend that prioritises capital preservation over aggressively pursuing higher yields.
"The sustained prominence of private capital, particularly the heightened participation of HNWIs in the commercial real estate sphere, reflects a strategic shift towards stability-focused investment strategies. As we navigate a dynamic investment landscape, the significance of capital preservation cannot be overstated.
“The region's commercial real estate market is witnessing a trend where investors with substantial cash reserves are strategically leveraging their positions to secure assets at competitive prices, positioning themselves favourably amidst the prevailing higher-for-longer interest rate environment," said Knight Frank Malaysia group managing director Keith Ooi.
Navigating a changed landscape
The investment landscape has undergone a noticeable transformation, primarily propelled by a significant increase in bond yields. According to Capital Markets global head Neil Brookes, this shift has altered the appeal of various asset classes. Despite the challenging macroeconomic backdrop, there is still an abundance of capital available for deployment. Markets have adapted to the realisation that central banks are unlikely to ease policies in the short term. Consequently, assets are expected to re-price in the region, offering opportunities for private credit and attractive entry points for assets.
In an environment of higher-for-longer interest rates, private capital is anticipated to remain a driving force. While interest rate cuts might be expected in late 2024 and into 2025, they are likely to be a response to weak economic conditions. Investors will need to navigate a delicate balance between short-term cyclical effects and the broader impact of a sluggish economy with rising unemployment. The prevailing economic conditions will influence borrowing capacity, cash flows for existing mortgages, and overall market sentiment.
Challenges in the market
Despite the generally optimistic outlook for private capital, the Asia-Pacific investment market is grappling with challenges that have resulted in a contraction in transaction volume. Higher financing costs, global economic uncertainty, and a misalignment between seller and buyer price expectations are contributing factors. The present environment has triggered a noticeable withdrawal of both domestic and international investors, reflecting a hesitancy to deploy capital in a high-interest rate setting. The yield spread has tightened, and certain markets are experiencing negative risk premiums.
Refinancing risks have also influenced market dynamics, leading to some assets being placed on distressed sale. However, with the right strategy and timing, investors can leverage favorable assets that offer both capital appreciation and positive rental reversions. This is particularly evident in thematic sectors such as living sectors, life sciences, and data centers.
In the pursuit of stability amid market turbulence, investors are increasingly turning to core assets as a safe haven. The report underscores that nearly half of the respondents in a survey prefer core investment strategies, marking the highest level since 2014. Core assets, renowned for their stability, lower risk profiles, long-term appreciation, stable cash flow, and inflation hedge, are gaining prominence in the current inflationary environment.
An emerging asset class
A notable trend in the commercial real estate landscape is the escalating interest in the living sectors as a distinct asset class. These living sectors encompass a diverse range of real estate categories designed to meet the needs of individuals at various life stages, including student housing, co-living spaces, multi-family properties, and senior living facilities. Investors are increasingly directing capital towards this sector due to its defensive characteristics influenced by demographic changes, evolving lifestyles, and technological advancements.
The report highlights the Chinese mainland as an emerging market for the living sectors, particularly in senior living. Despite being in its nascent stage, the Chinese living sectors market holds substantial growth opportunities. The vast population of 1.4 billion and the challenges faced by families and young professionals in purchasing apartments make it a promising market. Institutional players have already entered the Chinese market, seizing the evolving needs of elderly care and establishing a first-mover advantage.
China is proactively addressing the evolving needs of elderly care, placing a strong emphasis on integrated healthcare solutions for the new age silver generation. The Chinese senior living market is anticipated to grow by over 12% from now to 2027, responding to the rising elderly population and increasing wealth, which fuels the demand for upscale senior communities.
2024 outlook
In summary, the outlook for the Asia-Pacific commercial real estate market in 2024 is dynamic and multifaceted. Private capital, particularly from HNWIs, will continue to be a driving force, navigating challenges posed by a changed investment landscape, higher interest rates, and market turbulence. Core assets will remain a stronghold for investors seeking stability, while the living sectors present new and exciting opportunities, especially in emerging markets like the Chinese mainland.
As the market adapts to evolving economic conditions, investors will need to stay agile, strategically leveraging their positions to secure assets at competitive prices and capitalise on thematic sectors that exhibit resilience and potential for growth. The interplay of economic factors, investor strategies, and emerging trends will shape the trajectory of the Asia-Pacific commercial real estate market throughout 2024 and beyond.
“The region's
commercial real
estate market is
witnessing a trend
where investors
with substantial
cash reserves
are strategically
leveraging their
positions," said Ooi.
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