Asia Pacific Real Estate Marks Turning Point Selective Value Add Opportunities
The outlook for real estate is becoming more positive, with 2025 expected to be a turning point for capital values. According to PGIM Real Estate, a leading investment research firm, there has been a notable improvement in sentiment towards real estate. However, compared to the last cycle, debt and equity liquidity remain subdued (see Exhibit 1).
The combination of declining values and higher interest rates has led to a debt funding gap, which has put pressure on existing capital structures. As a result, investors can find opportunities to acquire assets that are undervalued and can generate immediate profits. This is especially true for properties that face cash flow challenges, such as buildings with short lease expiries or those that require further capital investment.
Looking to invest in overseas properties? Explore the range of projects currently available for sale around the world. Low liquidity in the market can often lead to mispricings, as reflected in the disparity between yields and rental growth (see Exhibit 2). This presents an opportunity for investors to achieve enhanced returns, particularly in the logistics and retail sectors.
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One indicator of mispricing is when there is a difference between the standard deviation of yields and the standard deviation of rental growth. This has been observed in the Asia Pacific market, indicating that there are opportunities for investors to capitalize on this discrepancy.
Institutional-quality real estate often requires significant capital expenditure (capex), particularly to meet higher sustainability standards. However, over the past decade, the amount of non-institutional real estate capex has lagged far behind institutional investment (see Exhibit 3). This means that a large portion of the Asia Pacific real estate market, particularly properties owned by smaller investors, will require modernization and institutionalization.
Due to tighter credit conditions, higher interest rates, and stricter ESG requirements, accessing financing has become more challenging. This presents an opportunity for well-capitalized investors with expertise to stand out in the market. The funding shortfall in the market is expected to create a substantial opportunity in the upcoming cycle, particularly as tenants gravitate towards high-quality properties. The extent of this opportunity will vary by city. As shown in Exhibit 4, cities like Hong Kong and Sydney have more older properties compared to Beijing or Shanghai.
In Japan, recent reforms have prompted corporations to divest under-managed real estate assets. Office and retail properties make up a larger portion of older stock compared to logistics, which is relatively modern. This presents an opportunity for investors to acquire and modernize these properties.
Since the global financial crisis, there has been a shortage of new supply in the market. This is due to high building costs, limited access to financing, and weak investor sentiment towards development. While this has been rational in weaker segments like suburban office or retail, it has also constrained supply in high-demand sectors such as housing, CBD offices, data centres, senior living, and hotels.
As a result, landlords will have greater pricing power to drive rental growth due to the resulting supply shortages.
Two significant shifts are expanding the value-add landscape: sectoral diversification and geographic expansion. Investment is moving beyond traditional office, retail, and logistics into sectors such as multifamily housing, hotels, student accommodation, co-living, senior living, and co-location data centres. The share of investment in operational sectors has increased from 7% in 2014 to 17% in 2024.
Geographically, institutionalization is increasing in countries like Australia and Japan, while second-tier cities like Nagoya, Fukuoka, and Perth are becoming more liquid. Other countries like South Korea and Japan have a high proportion of non-investable stock, presenting opportunities for value creation through modernization.
However, there are also current challenges that investors should be aware of. Interest rates remain elevated, and while short-term rates are falling, long-term rates are expected to remain above last-cycle averages. This reduces the potential for yield compression, meaning returns will be driven by rental growth and cash flow resilience rather than leverage.
Investing in traditional assets is also expected to yield limited returns, with core assets only likely to deliver around 2% annual returns. Achieving higher returns will require investing in non-traditional assets and sectors, as well as repositioning under-managed properties.
There are five main value-add investment strategies that will shape the market in the next cycle, each with its own risk-return profile. A balanced portfolio is likely to combine these strategies, including investing in operational platforms, development in sectors with strong structural demand, targeting mispriced assets, and active asset management. Opportunities also exist in institutionalisation plays, such as upgrading privately-held properties or family-owned hotels.
Institutional activity in the Asia Pacific real estate market remains concentrated, with five countries accounting for nearly 90% of transactions since 2008 (see Exhibit A1). These countries, which also rank highest in terms of investment size, financial development, and transparency, are the most popular destinations for investors. At the city level, just 10 cities have captured nearly 80% of all transaction volume over the past decade (see Exhibit A5). This is due to their high liquidity and market size (see Exhibits A6–A7). However, liquidity is improving in second-tier cities like Nagoya and Fukuoka, which are becoming increasingly institutionalized.
Overall, the Asia Pacific real estate market is entering a more selective but opportunity-rich cycle. While returns will depend less on yield compression and more on rental growth and asset quality, there are still various options for investors to achieve outperformance. By targeting mispriced assets, modernizing under-invested properties, and expanding exposure to operational platforms, investors can capture the potential upside in the coming years.