Geopolitics and high interest rates are likely to weigh on capital flows into regional property markets next year, according to analysts
Global investment in Asia-Pacific property markets stagnated this year while the proportion of capital from within the region galloped, with the trend likely to continue next year, according to Urban Land Institute (ULI). Lingering uncertainties such as geopolitics and high interest rates are likely to weigh on capital flows into regional property markets next year, analysts said.
Western investors deployed US$12.76 billion in the third quarter of this year, practically unchanged from the 10-year first-quarter average of US$12.75 billion, while regional investors boosted theirs by nearly 70% to US$24.56 billion in the same period, according to data from the Washington-based think tank, which has offices in London and Hong Kong.
Investors from the West had invested as much as US$37.87 billion in Asia-Pacific real estate as recently as the second quarter of 2022, compared to regional investment of US$21.93 billion, the ULI data showed. That trend is corroborated by JLL data, which showed Western funds’ proportion of investment in Asia-Pacific real estate had shrunk from 16.9% in 2019 to 9.9% in the first three quarters of this year.
“The dynamic here is more a function of lack of buying by global funds,” said Alan Beebe, CEO of ULI Asia-Pacific. “Regional investors have more confidence in regional economies, while global investors tend to revert to home jurisdictions in times of stress.” Elevated interest rates have made investors more risk-averse, he said.
Most central banks, including the US Federal Reserve and the European Central Bank, have recently paused rate hikes, but they are still likely to maintain their tight monetary policies for at least the early part of next year to prevent consumer prices from heating up again. Funds from Singapore were the top investors in the region’s property markets. They invested US$7.6 billion in the first nine months of the year, exceeding the US$7.2 billion in 2022, according to ULI, which cited data from MSCI Real Estate. Japan, India and South Korea received the bulk of the investment.
Mainland China, meanwhile, was the biggest recipient of capital flows from Hong Kong, the third-largest investor after the US. Japan, came at the fourth spot, invested US$2.2 billion in Asia-Pacific real estate in the nine months to September, double the previous historic high of US$1 billion in 2018.
“They (global investors) are also subject to portfolio rebalancing requirements,” Beebe said. “The ‘denominator effect’ will oblige funds that have specific allocations to real estate, say 15 per cent, to stop buying or even sell real estate assets if falling values of other asset classes in their portfolios, such as bonds, cause real estate to become a disproportionately large part of the value of their overall holdings. They now have higher return thresholds – due to higher interest rates – for the type of big-ticket office and retail assets they have traditionally favoured.”
Next year, the investment patterns are likely to mimic 2023 amid lingering uncertainties in the global economy, said Beebe. “Many investors are waiting for the other shoe to drop in terms of a potential global recession before they feel comfortable deploying more capital,” he said.
In the long-run, however, Western capital is likely to find a way back into the region, but in the meantime global fund managers are only focused on assets in Japan given the ultra-low interest rates in the world’s third-largest economy. “There is likely to be a reversion to the mean,” he said.
China and Hong Kong, on the other hand, have to contend with geopolitical issues, a factor that is likely to weigh heavily on investors’ options, Beebe added. In the July to September period, investment in Hong Kong’s commercial property, including offices, logistics, retail and hotels, amounted to US$800 million.
Meanwhile, the anticipated loosening of monetary policies towards the latter part of 2024 should boost global fund activity in the region, analysts said. “The Asia-Pacific capital markets are poised for resurgence in activity in the coming quarters,” said Christine Li, head of research for Asia-Pacific at Knight Frank. “While rate cuts are anticipated to inject optimism into the currently stagnant market, investors will closely evaluate whether these expectations are already fully reflected in current prices, signalling the opportune time for market re-entry.”
Investors, however, are still likely to be selective on where they deploy capital, said Pamela Ambler, head of investor intelligence and strategy for Asia-Pacific at JLL. “Investors may continue to diversify geographically to minimise concentration risk due to geopolitics,” she said. “Stable geographies, such as Japan and Australia, and emerging markets, such as India and Vietnam, could benefit from the predominant de-risking trend.”