A confluence of factors, including the redirection of capital that might otherwise have been deployed to North Asia, sees Singapore pull ahead of Tokyo as the most favoured Asia-Pacific property investment destination in 2023, according to a new report.
Although 2022 has seen most Asia-Pacific markets, with the exception of China, relax Covid restrictions, investors, as they head towards 2023, find themselves confronted with a different, but no less precarious, set of threats, including high inflation, rising interest rates, unsustainable levels of public and private-sector debt, and a looming 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 of 2022 to step away from the market and wait for events to play out, says the report, Emerging Trends in Real Estate Asia-Pacific 2023, published jointly by accounting major PwC and the nonprofit Urban Land Institute (ULI). As a result, third-quarter transactions in the region fell 38% year-on-year to a 10-year low, the report adds, citing MSCI analysts.
While Asia-Pacific has remained relatively isolated from the economic turmoil that has swept global markets in 2022, concern over ongoing rate hikes, together with the potential fallout from impending recessions, is prompting investors to protect themselves in two main ways.
First, by stepping away from the plate and holding off on new asset purchases. Second, by pivoting away from conventional asset classes and into new-economy and defensive themes that offer better protection during a period of economic retrenchment.
Mainstream assets such as offices are becoming less popular. Traditionally, they 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.
Investors are also rotating out of the retail sector and into new-economy themes such as logistics, although retail yields and values have rerated to such an extent that a growing number of investors are looking at prime, well-located retail assets as contrarian plays.
Markets to watch
Next year’s top markets for investment prospects in the region are characterized by deep, liquid markets and a flight-to-safety approach, with Singapore, Tokyo and Sydney ranked as the top three markets.
With the ongoing liquidity crisis in China’s property sector, coupled with the stubborn and ongoing pandemic restrictions, Singapore has benefited from the rerouting of capital that might otherwise have been placed in assets in China and Hong Kong.
Tokyo, meanwhile, continues to enjoy a near-zero interest rate environment, which ensures lower borrowing costs and a more positive spread over the cost of debt.
Despite the lessening of Covid restrictions in Hong Kong, its status as the most expensive commercial and residential market in Asia-Pacific has made it vulnerable amid the current high-inflation, recessionary environment.
The top 10 city investment prospects for 2023, according to the report, are (in descending order): Singapore, Tokyo, Sydney, Osaka, Seoul, Melbourne, Ho Chi Minh City, Shenzhen, Jakarta, and Shanghai.