Real Estate Market in Asia Embraces Hope Amidst Lackluster Sentiments, says ULI and PwC’s Emerging Trends in Real Estate® Report

HONG KONG & SINGAPORE, 24 November 2022–(BUSINESS WIRE)–The 17st issue of the Emerging Trends in Real Estate® Asia Pacific Report, the regional property forecast jointly published by the Urban Land Institute (ULI) and PwC, highlights a decline in investor sentiment due to concerns over the rising cost of debt, higher inflation and a looming global recession. The report is based on a survey of 233 real estate professionals and 101 interviews with investors, developers, representatives of real estate companies and lender brokers.

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The persistence of global inflationary trends, a recessionary economy and weakening global indicators have led investors to hold off on buying until the effects of synchronized global rate hikes become clearer. A decline in local deal volumes is evident, with the number of third-quarter deals in the Asia-Pacific falling 38 percent year-on-year to US$32.6 billion, marking the lowest third-quarter volumes for a decade in the record region. China accounted for the largest decline with a 23 percent year-on-year decline.

David Faulkner, President of ULI Asia Pacificsaid, “Rising interest rates and the slowing global economy are beginning to affect local asset valuations and change the way investors evaluate potential deals. As a long-term inflation hedge, real estate will continue to attract capital, but the industry is also likely to experience significant change undergo over the coming years, due to the evolving economic environment and changes in the ways in which people use the built environment.”

The top markets for investment prospects in the region were characterized by deep, liquid markets and a flight-to-safety approach. Singapore, Tokyo and Sydney continues to rank as the top three markets. With the ongoing liquidity crisis in mainland China’s property sector and persistent pandemic restrictions, Singapore has benefited from the redirection of capital that could otherwise be placed in assets in China and Hong Kong SAR. Tokyo continues to enjoy a near-zero interest rate environment, ensuring lower borrowing costs and a more positive spread over the cost of debt. Despite the easing of COVID restrictions in Hong Kong SAR, its status as the most expensive commercial and residential market in the Asia Pacific has made it vulnerable amid the current high-inflation recessionary environment.

Stuart Porter, Asia Pacific Property Tax Leader said: “The persistence of fragmented market conditions has allowed Singapore and Tokyo to retain their top positions as the cities with the brightest investment prospects, although the factors that complement each city differ significantly. When exploring opportunities in the region, investors should have a more cautious approach to new asset purchases in some Asian markets, turning their focus from conventional asset classes to a variety of niche areas with better prospects, including defensive havens and new-economy themes, which are likely to divert attention from mainstream assets; such as, for example, the office and retail sector, which has traditionally been popular.”

Investors have begun to realign strategies towards defensive properties that are more resistant to unusual economic pressures, and towards assets that can offer features such as rent indexation, shorter lease terms and reliable recurring income. The multifamily, hotel, senior living and logistics sectors are considered defensive havens. New economy sub-sectors such as data centers, cold storage infrastructure, life science facilities and the self-storage space have gained increasing attention as recession-proof investment vehicles, due to a confluence of factors: growing 5G use, structural undersupply to meet demand, and the evolution of more sophisticated supply chains. With US$16 billion of new capital raised for opportunistic strategies across these subsectors in Asia Pacific – more than three times the total raised for 2021 – logistics are likely to remain tough for investors heading into 2023.

With inflationary pressure and interest rates increasing the development risk, development projects that are longer dated are being shelved. Investors are also adjusting their underwriting by allowing for higher exit cap rates, reducing the use of debt, purchasing materials up front, as well as using a “value engineering” approach – seeking economies through more rigorous analysis of design brief parameters.

The office sector remains the largest asset class in the region. Prime assets in business areas and districts are always in short supply and are constantly the targets of regional core funds competing to place capital. At the same time, large price gaps between buyers and sellers are expected to persist for some time.

The full report is available here.

About the Urban Land Institute

The Urban Land Institute’s (ULI) mission is to shape the future of the built environment for transformative impact in communities worldwide. ULI has more than 2,600 members in the Asia Pacific region. For more information about ULI Asia Pacific, visit asia.uli.org.

About PwC – Worldwide

At PwC, our goal is to build trust in society and solve important problems. We are a network of firms in 152 countries with nearly 328,000 people committed to delivering quality in insurance, advisory and tax services. Learn more and tell us what matters to you by visiting us at www.pwc.com.

PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.

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