The world’s economic outlook has taken a turn for the worse, but real estate in Asia Pacific continues to offer opportunities for investors.

Politicians in the US have been arguing over whether two quarters of falling growth is really a recession or not, while Germany saw zero growth in the second quarter of the year, stoking fears that Europe’s largest economy could fall into recession. Meanwhile, inflation in the US hit 9.1% and the European Central Bank hiked eurozone interest rates for the first time in more than a decade in order to fight rising inflation.

Asia Pacific economies are not immune; the International Monetary Fund recently downgraded its APAC 2022 growth prediction by 70 basis points to 4.2%. More recently, fears of a US spat with China over Taiwan have escalated. Furthermore, Goldman Sachs has put the chance of recession in Australia and New Zealand at 25% and 35% respectively, but argues that a sharp US downturn would push those chances to more than evens.

“Real estate in Asia Pacific is not immune to the macroeconomic winds from across the world,” says Simon Smith, Head of Asia Pacific Research and Consultancy at Savills. “However, investors can fortify their portfolios to weather the storm.”

Real estate investors around the region have already been flocking to higher grade assets, recognising that, for example, multinationals and tech firms are seeking modern smart offices with ESG and wellness characteristics. These high grade office properties attract higher rents – Savills estimates an 8-10% rental premium for greener offices and should better retain tenants in a difficult leasing market.

The growing economies of India and Southeast Asia might stutter, but they have growth on their side. “Nations such as Vietnam and Indonesia have a young demographic which will drive growth as the workforce swells,” says Smith. “And wealthier populations will need more and better real estate.”

However, mature economies need not be ignored. For example, while Japanese inflation hit 2.1% earlier this year, the government does not expect a rise in interest rates will be needed to keep inflation at or below its long-term target of 2%. This means the positive spread between Japanese real estate yields and borrowing costs will continue. Global investors continue to target sectors such as multifamily and more are turning to Japan as an inflation haven.

Market upheaval creates difficulties but it also creates opportunities. For example, a growing gap between the prices of secondary and prime assets is tough for owners, but may offer the opportunity to acquire properties at below replacement cost and upgrade them. Office properties could benefit from measures to reduce their carbon footprint or to improve health and wellness for end users. 

“The economic outlook is murky, but Asia offers relatively calmer waters and the underlying growth needed to drive returns in the long term,” says Smith.

Further reading:
Savills Asia Pacific Investment Quarterly Q2/22

Contact us:
Simon Smith