The global commercial real estate (CRE) market, including the United States, has entered a period of sharp price adjustments following the coronavirus pandemic. Domestic institutions and asset managers are facing significant risks due to the high proportion of commercial real estate investments in the stagnant markets of the U.S. and Europe. Consequently, there is a growing recognition of the need for analysis of commercial real estate unlike ever before.
According to global consulting firm McKinsey & Company, structural changes in commercial real estate have occurred in major global cities since the pandemic. There has been an increase in the proportion of hybrid work arrangements, where employees can choose between remote and in-office work, leading to decreased demand for traditional office spaces. There is a growing preference for spacious suburban homes over urban residential areas near downtown office spaces. The increase in online shopping and stricter environmental regulations have led to a preference for high-quality spaces, causing a shift in demand from Grade B to Grade A spaces within cities.
Recent price adjustments in global commercial real estate have stemmed from changes in demand for offices and the reassessment of properties that experienced a surge in popularity during the pandemic. Furthermore, various uncertainties, including rising capital costs due to sustained economic tightening and slowing growth rates, have been reflected in the market. Commercial real estate is considered a risk factor, particularly concerning the U.S. economy, with a record vacancy rate of 19.8% and a price index that dropped by 21.4% as of April 2022, according to the International Monetary Fund (IMF).
Despite the global commercial market facing tough times, the Asia-Pacific (APAC) region, from Australia to Singapore, Japan, and South Korea, stands out with robust growth. These advanced APAC markets boast low unemployment rates and strong labor markets, driving increased transaction volumes despite the global commercial real estate crisis. Chosunbiz interviewed Tim Graham, Global Head of International and Strategic Capital and Capital Markets at JLL, a comprehensive global real estate solutions company. Graham oversees investment and transaction advisory services for global real estate assets and analyzes various investment areas.
Could you briefly describe the key characteristics of real estate in the Asia-Pacific region?
“Major countries in the Asia-Pacific region boast a robust real estate market fueled by healthy demand fundamentals and exposure to resilient sectors, thereby enjoying positive rental growth and emerging values. Having an Asia real estate allocation helps to strengthen diversification and boost risk-adjusted returns for investors. The attractiveness of Asia real estate is further bolstered by the strength of the U.S. dollar, with several Asian currencies like the Yen and Yuan trading at significant discounts. This increases the buying power of cross-border investors who leverage the strong U.S. dollar for transactions. Commercial real estate deal volumes in Asia Pacific have been rapidly gaining momentum, attracting cash-risk and opportunistic investors who recognize the region’s strong return to office. In 2023, we saw office attendance return to 110% in some Asian cities as opposed to 90% in Europe and up to 60% in the U.S.
Asia Pacific investment volumes registered $30.5 billion in the first quarter of this year, gaining 13% year-on-year, marking the second consecutive quarterly increase. Office remained the most active sector, while logistics and industrial and retail all recorded volume growth at 36% ($7.8 billion) and 8% ($5.7 billion) year-on-year, respectively.”
Why are office vacancy rates lower in the Asia Pacific region than in the United States?
“In the United States, we are observing an increase in the number of flexible work shifts, and major tenants are already reducing their office space significantly. In particular, technology companies, which have been significant office occupants, are steadfastly dedicated to flexible working and will persist in utilizing hybrid offices with a centralized office base. Conversely, most Asia-Pacific organizations choose office-based work. Office demand has largely recovered compared to pre-pandemic levels, and occupiers are now seeking newer and higher-quality offices. Consequently, rents for high-quality offices are being driven upward by a growing preference for safe-haven, premium offices, which are valued not only for the use of the office but also for the asset itself.”
The investment value of each asset will differ due to changes in the real estate asset structure. What are the most promising areas?
“We anticipate a rise in the demand for real estate assets that can accommodate the population growth in Asia. ‘New Economy’ assets, including life sciences centers such as medical offices and artificial intelligence (AI) data centers, are classified by the industry. Although South Korea has been slow to develop, life sciences is a valuable asset gaining prominence in the Asia-Pacific market to address the increasing healthcare needs and aging population. The region is experiencing an unprecedented increase in the number of individuals aged 60 and older, with an estimated one in four individuals being over the age of 60 by 2050.
PGGM, a Dutch pension fund, and Lendlease, a global real estate developer, are among the entities investing in life sciences-related assets in Singapore, Japan, and Australia. Additionally, JLL’s survey revealed that over 70% of investors currently investing in the sector anticipate an increase in their AUM. There is also a growing demand for AI data centers. Specifically, the design and sourcing of new data center infrastructure will be influenced by the fact that generative AI, such as ChatGPT, necessitates substantially more energy than traditional AI.”
In contrast, are there any assets that appear hazardous to invest in at this time?
“Asset classes that are already saturated and offices located outside of urban centers.” An example is the price correction scheduled for 2023 for South Korean distribution centers. The supply has reached saturation, and vacancies are increasing at an alarming rate. Investment demand has dampened, and prices and rents have fallen in China’s office and retail centers, which are also oversupplied.
How do the real estate markets in China and Hong Kong, which have recently experienced a decline, look ahead, and how is demand evolving?
“In the first quarter of 2024, China’s GDP expanded by 5.1%, surpassing market expectations. Production and manufacturing investment were the primary drivers of this growth, while retail sales and real estate investment remained relatively weak. It is likely that China will need an extended period of correction to sustain its recovery momentum. The economic and rental market recovery is anticipated to slow down, resulting in further declines in investment returns in the Chinese market. Additionally, Hong Kong’s investment appeal is gradually diminishing. Political instability has undermined companies’ confidence in their long-term strategies despite appealing tax incentives.”
Investors from China and Hong Kong are seeking to diversify their portfolios by investing in Japan, India, and Southeast Asian countries. Japan is an appealing market due to its robust fundamentals, expanding debt market, and reduced currency risk from a weaker yen. Financing conditions remain permissive, and although interest rates in Japan have recently increased for the first time in 17 years, the impact is expected to be modest. India is one of the largest and fastest-growing economies, with a robust rental market that attracts both domestic and international demand. Furthermore, India’s fundamentals as an IT outsourcing destination are expected to remain strong, stimulating additional development and increasing the demand for office space.
Finally, what are the conditions and characteristics of the commercial real estate market in South Korea?
The investment value in South Korea is high, with promising opportunities for high-end corporate assets. The largest real estate transaction in Korea thus far in 2024 was the sale of Ark Place, a prominent office asset in Seoul, by Blackstone to Koramco REITs for $588 million. The office market in South Korea remains robust due to the increasing demand for high-quality commercial real estate in prime locations both domestically and internationally. Additionally, the demand for modern, well-equipped offices is being driven by the aggressive expansion of the country’s major conglomerates. However, the office investment sector in the Asia-Pacific region has been adversely affected by falling rents and quantitative easing policies. In Seoul, Class A office space is in short supply and has experienced double-digit growth over the past two years.
