APAC's real estate markets run out of steam with US$27b in Q3: report

The last time the region recorded a quarterly decline was in Q2 2016.

Asia Pacific’s (APAC) real estate investment markets appear to have lost momentum in Q3 with a 27% decline to US$27b after two years of strong growth, according to Real Capital Analytics (RCA) Asia Pacific Capital Trends report.

Q3 volumes were however saved from a steeper decline thanks to all-time high volumes seen in South Korea. Q3 investment volume increased by 76% YoY and 23% YoY for the last 12 months driven mainly by domestic institutional investors, the firm noted.

Hong Kong, Tokyo and Seoul dominated the APAC market, claiming nearly 44% of the volume of income-producing assets, the report report revealed. Hong Kong took the reins from Tokyo in early 2017, whilst Seoul is the region’s emerging star.

“For the past decade the APAC real estate investment market has been characterised by rising prices and steady yield compression, enabling capital gains for most players,” RCA senior director of analytics for APAC Petra Blazkova said. “With property yields at historic lows and tighter financial conditions looming, or already encroaching in some markets, activity seems to be shifting into a lower gear as investors determine whether the next stage of the invesment cycle is on the horizon.”

China registered the lowest quarterly level of transactions in five years declining 16% YoY as it reined in lending to investors and developers, whilst Japan experienced its quietest quarter since the Global Financial crisis a decade ago with a 4% YoY slip in Q3.

“Key investor groups in China, which remains Asia Pacific’s largest market, became more sensitive to prospective tightening in global financial conditions,” RCA said.

Continuous yield compression combined with interest rate increases has pushed commercial real estate (CRE) spreads to the risk-free rate to the narrowest gap in five years, the firm added, with the rate hikes by the US Federal Reserve prompting currency weaknesses in emerging Asian markets.

“India, the Philippines and Indonesia, and more importantly Singapore and Hong Kong, responded by raising rates, hence increasing the cost of real estate funding,” it noted. “Conversely, the Bank of Japan indicated if would commit to keep lending rates low for longer.”

Industrial properties, particularly distribution warehouses, remained an investor favourite at a sector level. The rate of growth for development site sales waned as well, although it was 20% higher YoY for Q3. Overall, investment in the industrial sector has ebbed.

Hong Kong topped the ranks for the office, industrial and retail sectors in the first nine months of 2018 due to large deals closed by domestic and mainland Chinese investors.

“After Hong Kong, the second-placed industrial market is Singapore, attracting US$1.3b of investment YTD,” RCA said. “Much of this was due to the sale of CWT portfolio to Mapletree Logistics Trust in Q3 2018.”

Meanwhile, the largest growth across the sectors happened in the hotel sector in Tokyo, which may be attributed to the upcoming Olympics and investor expectations for increasing demand for hotel accommodation.