PGIM Real Estate: Asia Pacific set to be the most resilient

July 12, 2023

According to Cuong Nguyen, Head of Asia Pacific Investment Research at PGIM Real Estate, Asia Pacific is set to be the most resilient real estate region in the world with an expectation that values will only fall by about 7% peak-to-trough. That said, there are some differences behind this, says Nguyen. 

'Australia and South Korea are recording rising yields, in contrast to Japan, where interest rates remain very low, and China, which is moving into a cyclical growth recovery phase. Several major retail and logistics markets, including in Singapore and Japan, are recording positive capital value growth, while most office markets are recording falling values as demand weakens.

Given our assessment of the outlook for the Asia Pacific economy and real estate market, we identify the following four structural opportunities as being among the most attractive on a risk-adjusted basis over the next 12 months.

Rental housing: rising urban density and worsening housing affordability continue to underpin strong growth of demand for rental housing across major Asian cities. Rental housing opportunities for income-focused core investors will remain largely in Japan. But for investors willing to take on greater risk, the combination of favorable leasing conditions, strong rental growth prospects and policy incentives is supporting development opportunities. We consider major and gateway cities of Sydney, Melbourne, Hong Kong and Tier 1 cities in China among the most attractive. These markets are expected to continue growing and maturing in the coming years.

Data centers
Data centers: demand for data centers remains structurally strong, driven by the secular growth of digitalization across all major economic sectors. Leasing fundamentals are improving. Vacancy rates are falling in Singapore and Hong Kong and stabilizing in Sydney and Tokyo, driving expectations of improving rental growth prospects. With capitalization rates likely to stabilize within the next 12 months, returns are expected to start improving, with income returns and rental growth being the main drivers of performance.

Logistics: demand for logistics space remains solid, but occupiers are shifting to focus on prime submarkets. Despite the emergence of some leasing softness in the near term, we expect structural demand for quality logistics space to remain solid. But we also expect the trend toward modern and centrally located logistics centers to continue, in support of the adoption of new technology and automation to improve warehouse productivity. Following this occupier trend, investors should become more selective in forming their logistics strategies with an increasing focus on choosing the right submarkets and asset attributes.

Grade A, ESG-compliant office: tight supply and affordable rents support favorable recovery prospects for offices in the medium term. Office leasing activity has shown a solid recovery since developed Asian economies started reopening. Nevertheless, a shift in occupier demand to include environmental considerations and the desire to provide modern workspaces to attract and retain employees is clearly leading to a bifurcation in leasing demand, with new take-up strongly focused on prime, ESG-compliant and centrally located office space. The strategy for office should apply for both acquiring new and existing buildings, as well as via value-add strategy, targeting asssets with need for capital to retrofit otherwise obsolete offices across major cities in the APAC region.'