Japan Continues Growth Streak Even Rest Apac Commercial Property Sales Contracted 1Q2024
Commercial property transactions in the first quarter of 2024 continued to slow down, due to the high interest rate environment and a decrease in deals for apartments, office spaces, and senior housing.
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However, the data centre sector in Asia Pacific saw a strong start to the year, as investors showed a growing interest in assets that support the digital economy.
Overall, the commercial real estate deal volume in the region fell by 13% year-on-year to US$31.3 billion ($42.1 billion). While the decline was steeper than the previous quarter, it was not as significant as the past five quarters. Japan was one of the few markets that performed well, with an increase in office investments and strong acquisition momentum in other sectors, showing that changes made to the country’s interest rate policy had little impact on investor sentiment.
Despite the slowdown in the first quarter, many major markets in Asia Pacific showed resilience in both deal activity and performance returns. While the high interest rate environment has affected these markets, returns were still positive for many sectors in 2023. Investors have also continued to focus on growth areas such as data centres and emerging living sectors.
The retail sector was a bright spot for the region, as investor appetite for retail properties started to pick up after several quarters of subdued activity. This trend suggests that investors are looking for value in a sector that has seen the most significant repricing in recent years. In fact, retail deals accounted for almost a quarter of total commercial real estate sales in the first quarter, the highest proportion in five years.
On the other hand, office volume continued to decline across most of Asia Pacific, dropping by more than 20% compared to the first quarter last year. This was the only sector that saw a significant decrease in deal activity over the past 12 months, primarily due to muted activity in markets such as Singapore, Hong Kong, and Osaka.
While acquisitions for apartments fell by over 40%, investors were still able to gain exposure to this sector through the conversion of hotel properties, a trend that was observed in several markets. However, in Japan, acquisition momentum for multifamily properties slowed down further. It remains to be seen whether low yields in Tokyo’s CBD and other major cities can be maintained in the face of the Bank of Japan’s exit from its negative interest rate regime in March.
Despite concerns over declining foreign interest and domestic liquidity, Seoul’s office market continues to defy expectations, at least for now. Offices remain the most invested sector, with a spate of new deals announced in March, thanks to lower prices. However, this was only marginal, and it remains to be seen if this trend will continue.
The industrial sector continued to be driven by Japan and China, where borrowing costs remain low. Logistics portfolios were traded in both markets, and there was significant yield decompression for industrial assets in countries like Australia and South Korea, which helped spur activity.
Cross-border investment flows into Asia Pacific remained subdued, with slightly higher inflows from outside the region balanced out by lower activity from regional investors. The share of cross-border investment on a rolling four-quarter basis remained around 25%, the lowest level in a decade. However, the fact that investment from global players has stopped falling is a positive sign. Several of these investors were also involved in multiple deals across various markets.
In Hong Kong, activity in the retail sector picked up, thanks to yield expansion, which stimulated deal activity for shopping centres in the first quarter. However, high pricing has limited the recovery in demand for high street shops and offices. One notable exception was the sale of a newly completed office building on Hong Kong Island, which sold for substantially lower than other en bloc deals in recent years. Despite marginal yield compression in 2023, Hong Kong’s office yields have started to rise again this year.
In Singapore, the retail sector saw the most activity, while office market activity has slowed significantly, with fewer office deals in the past year than in the industrial and retail sectors. The focus has shifted to the residential and co-living sectors, with three hotels acquired for conversion in the first quarter. Meanwhile, suburban malls continue to transact, despite pricing being near peak levels and yields still in line with longer-term averages. The largest deal in the first quarter was the sale of a fully occupied mall at a yield of close to 4%, which was 18% higher than its appraised value in mid-2022.
China remained the most active market in the region, with US$40 billion of assets traded in the past 12 months. While activity in China slowed down by 19% from the first quarter of 2023, there were strong year-on-year gains in volume for industrial and retail sectors. The office sector continued to lag, with investment in Shanghai offices dropping by almost two-thirds, putting it behind Beijing in the first quarter. However, Shanghai remained the biggest retail market, with nearly US$900 million in deal volume.
Japan continued to perform well, with the first quarter of 2024 being no exception. Recent changes to the country’s interest rate policy have had little impact on investor sentiment, with a deal volume of JPY1.35 trillion (US$11.2 billion), similar to the five-year average of JPY1.44 trillion. Tokyo remained the top metro market in Asia Pacific, with over US$5 billion in transactions in the first quarter alone.
Japan’s office sector ended the financial year on a high note, after a slowdown in investment appetite in the previous nine months. Cross-border interest in Tokyo’s offices was reignited when five floors of a Marunouchi office tower were sold for over JPY40 billion. The industrial sector also saw significant activity, with multiple major logistics and data centre deals in the quarter. In the multifamily market, a portfolio of 29 residential properties was sold to a group of offshore investors.
South Korea bounced back in the first quarter, with a surge in volume compared to last year’s low base. However, activity was lower than the five-year average, and Seoul remains one of the few office markets that are still seeing significant deals, despite the high interest rate environment. The office volume over the past 12 months was slightly higher than the previous period, and there are several outstanding deals for offices priced at over US$100 million.
As we look to the second quarter of 2024, it seems that the decrease in investment activity is approaching its lowest point. The deal pipeline, which tracks outstanding deals with signed contracts, has remained stable over the past few quarters. Additionally, yield expansion has started to taper off for key sectors such as Korean and Australian offices and warehouses. However, we are still at the bottom, and it is uncertain when the recovery will happen.
For most markets outside Japan and China, yields are still thin or negative compared to borrowing costs. This means that many deals that were profitable before 2022 may not be as attractive now. The timing and extent of US-led interest rate cuts will play a significant role in the market’s recovery, but it remains to be seen whether these cuts will even happen. Overall, the recovery may be bumpy, but there are positive signs, such as the stability of the deal pipeline and the resumption of cross-border investments.