Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 471

Three opportunities in property in Australia and APAC

Although the worst of the Covid-19 pandemic has passed, its effects on the global economy and real estate markets continue as legacies of supply chain disruptions and inflationary pressures interact with a fresh source of geopolitical tensions and uncertainty. Although volatility is elevated, recent performance suggests commercial real estate in Asia Pacific (APAC) are well positioned to weather whatever comes next.

In the past year, inflation forecasts have been consistently revised upward but do not spell disaster for property values, as rents tend to keep pace with inflation over time. With real estate yields at historical lows, constructing a commercial real estate portfolio that can deliver consistent Net Operating Income (NOI) growth will be crucial to mitigating the risks associated with a transition toward a higher interest rate environment.

Real estate debt, like any income-based asset class, is highly sensitive to inflation's potential to erode returns. Investors are increasingly concerned about what a transition to a higher interest rate world might mean for real estate. Clearly, the current combination of slow growth and rising bond yields poses a threat to sentiment, capital flows and pricing, although the effect was limited during the first quarter of the year.

Key factors supporting the outlook

The outlook for the Asia Pacific economy is well supported by broad border reopenings and the strength of the region's domestic economies. Real estate demand is improving, with strong labor markets underpinning growth in office demand, and the structural demand for logistics and rental housing remains robust.

In terms of a sector snapshot, supply is struggling to keep up with rapidly-rising demand for data center capacity, thereby boosting prospects of attractive NOI growth over time. Investors remain increasingly keen on the sector, especially as they focus on digital assets and infrastructure with a view to future-proofing their portfolios.

The rental housing market is expected to grow significantly in the next decade across major Asian markets with the lack of institutional depth in markets outside Japan presenting investors with an attractive opportunity to participate in the secular growth of the sector.

In the logistics sector, opportunities for stronger and more-robust growth are expected for Australia, Mainland China, Hong Kong and Singapore. In Japan, the development of modern assets in regional markets outside Tokyo is also appealing.

For the office sector, declining vacancy and limited supply in the near term are supportive of a stronger rental-growth outlook. Nevertheless, occupier demand continues to prioritise higher-quality and centrally located offices, with prime buildings that have strong green credentials being the most sought after.

Highlighting Asia Pacific opportunities

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

1. Rental housing

Housing affordability has been deteriorating, with house prices outpacing income growth during the past decade. House prices in major Asian cities are now among the least affordable in the world, with the ratio of median house price to household income reaching approximately nine times in Sydney and Melbourne.

As a result of the drop in affordability, home ownership rates have been declining consistently across the region. Housing rental expenditure has been growing fast and is expected to continue rising rapidly with major cities in Mainland China and Australia such as Beijing, Shanghai, Sydney and Melbourne forecast to see their total rental markets double in size during the next decade.

We also expect rental housing markets to grow significantly in other regional gateway cities like Hong Kong, Seoul and Singapore which seems to support the strong secular growth of Asia's rental housing sector in the coming years. Co-living, a segment of the rental-housing sector, is also drawing strong inflows of institutional capital, which is driving investment activities in Hong Kong, Singapore and Mainland China.

2. Logistics

In the logistics sector, the outlook for rental growth is improving, and growth momentum is expected to accelerate in a number of major markets. With the supply pipeline remaining relatively limited outside Tokyo and Seoul, robust demand underpinned by broadening and secular shifts toward e-commerce will drive stronger leasing fundamentals and rental growth in the Australian, Mainland Chinese, Hong Kong and Singaporean markets.

Looking ahead, the leasing fundamentals are set to shift favorably for asset owners in a number of major markets. Indeed, the latest data in the first quarter of 2022 confirms an accelerating rental growth momentum, with annualized uplift of about 13% on average in Melbourne and Sydney, and about 7% in Singapore.

As such, we continue to prefer modern logistics assets that are located within established submarkets offering good transportation links and proximity to urban residential catchments. Among logistics occupiers there is also a growing emphasis on ESG-compliant assets that offer smaller carbon footprints and that have sustainability initiatives in place.

3. Offices

With developed Asia Pacific economies continuing to ease mobility restrictions, employment growth and office leasing demand showed sharp bounces over the past 12 months. Centrally located, well-connected offices in central business districts (CBDs) that offer amenities and proximity to clients and business partners are attracting stronger occupier demand. That trend is reflected by the latest office net absorption data in Hong Kong, Seoul and Singapore.

With supply remaining tight in most markets leasing fundamentals are turning supportive of a stronger rental growth outlook for CBD office across the region. Data on effective rents in the first quarter of 2022 implies an annual growth rate in the range of 10% in 2022 for a number of markets, including Singapore, Hong Kong, Seoul and Sydney. In addition, we strongly believe in green buildings' premium and outperformance. Office space with certified green credentials offering energy efficiency will likely draw stronger occupier demand and achieve higher occupancy rates and stronger rental uplift in the longer term.

Final comments

Undoubtedly, risks around cyclical sectors have increased, making life more challenging for investors in Asia Pacific. The key is to manage threats to the economic outlook by shifting emphasis toward defensiveness and focus on structural growth. Recent events such as rising inflation and interest rates, supply pressures, renewed Covid-19 challenges and geopolitical tensions mean the focus is on assets in sectors and markets like those above that deliver dependable cash flows and in which demand is structurally supported by favourable underlying trends.

 

Cuong Nguyen is Executive Director at PGIM Real Estate and Head of Asia Pacific Investment Research. This article is general information and does not consider the circumstances of any person.

 

RELATED ARTICLES

Has Australian commercial property bottomed?

Population density trends and what they mean for housing

How AI will transform the real estate sector

banner

Most viewed in recent weeks

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

UniSuper’s boss flags a potential correction ahead

The CIO of Australia’s fourth largest super fund by assets, John Pearce, suggests the odds favour a flat year for markets, with the possibility of a correction of 10% or more. However, he’ll use any dip as a buying opportunity.

2025-26 super thresholds – key changes and implications

The ABS recently released figures which are used to determine key superannuation rates and thresholds that will apply from 1 July 2025. This outlines the rates and thresholds that are changing and those that aren’t.  

Is Gen X ready for retirement?

With the arrival of the new year, the first members of ‘Generation X’ turned 60, marking the start of the MTV generation’s collective journey towards retirement. Are Gen Xers and our retirement system ready for the transition?

Why the $5.4 trillion wealth transfer is a generational tragedy

The intergenerational wealth transfer, largely driven by a housing boom, exacerbates economic inequality, stifles productivity, and impedes social mobility. Solutions lie in addressing the housing problem, not taxing wealth.

What Warren Buffett isn’t saying speaks volumes

Warren Buffett's annual shareholder letter has been fixture for avid investors for decades. In his latest letter, Buffett is reticent on many key topics, but his actions rather than words are sending clear signals to investors.

Latest Updates

Investing

Designing a life, with money to spare

Are you living your life by default or by design? It strikes me that many people are doing the former and living according to others’ expectations of them, leading to poor choices including with their finances.

Investment strategies

A closer look at defensive assets for turbulent times

After the recent market slump, it's a good time to brush up on the defensive asset classes – what they are, why hold them, and how they can both deliver on your goals and increase the reliability of your desired outcomes.

Financial planning

Are lifetime income streams the answer or just the easy way out?

Lately, there's been a push by Government for lifetime income streams as a solution to retirement income challenges. We run the numbers on these products to see whether they deliver on what they promise.

Shares

Is it time to buy the Big Four banks?

The stellar run of the major ASX banks last year left many investors scratching their heads. After a recent share price pullback, has value emerged in these banks, or is it best to steer clear of them?

Investment strategies

The useful role that subordinated debt can play in your portfolio

If you’re struggling to replace the hybrid exposure in your portfolio, you’re not alone. Subordinated debt is an option, and here is a guide on what it is and how it can fit into your investment mix.

Shares

Europe is back and small caps there offer significant opportunities

Trump’s moves on tariffs, defence, and Ukraine, have awoken European Governments after a decade of lethargy. European small cap manager, Alantra Asset Management, says it could herald a new era for the continent.

Shares

Lessons from the rise and fall of founder-led companies

Founder-led companies often attract investors due to leaders' personal stakes and long-term vision. But founder presence alone does not guarantee success, and the challenge is to identify which ones will succeed in the long term.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.