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Commercial real estate investment activity in Asia Pacific moderated  22 percent year-on-year (YoY) in the third quarter of 2023, recording the lowest quarterly figure since Q2 2010. According to data and analysis by global real estate consulting firm JLL, investment activity in  Asia Pacific fell to US$21.3 billion as investments in office and retail continued to experience sharp contractions, while industrial & logistics and living & multifamily sectors remained resilient.

“Despite a strengthening return to office narrative and low vacancy rates in many markets, investors remain generally more cautious on the office sector. The high cost of debt has also exerted repricing pressures and most markets remain in price discovery mode as investors adjust their targeted returns for acquisitions. We maintain our confidence in the longer-term attractiveness and resilience of Asia Pacific’s commercial real estate but remain realistic that investors are seeking more clarity on pricing and the macroeconomy,” said Stuart Crow, CEO, Asia Pacific Capital Markets, JLL (pictured above).

Across the third quarter, China emerged as the most active market in Asia Pacific. Investment volumes bucked the downward trend and totalled US$4.7 billion, up 43% YoY from a low base, despite limited participation from overseas investors. For domestic investors and corporate occupiers, industrial & logistics and assets equipped for R&D were the primary recipients of capital. In Hong Kong, investment activity reached US$0.8 billion, up 15% YoY with most transactions consisting of small lump sum deployments involving strata-title assets for owner occupation.

Japan recorded investment volumes of US$4.1 billion, a 3% YoY growth. Industrial & logistics remained an active sector within the market, with two notable portfolio acquisitions made by domestic investors, and listed  J-REITs acquired hotel portfolios amid a rapid tourism recovery and rising hotel room prices.

South Korea garnered US$4.2 billion worth of transactions, falling 35% YoY as domestic investors exhausted a large portion of their blind funds, along with shrinking office volumes caused by subdued sentiment amongst global core investors. Meanwhile, investment volumes in Australia plunged 47% YoY to US$3.8 billion. The investment market remained slow as price discovery continued amid rapid funding cost changes. Re-allocation into industrial &  logistics and student housing assets took place with conviction growing in these sectors. Singapore investment volumes declined 11% to US$2 billion, with notable acquisitions in the hotels &  hospitality and retail sectors.

“In the region, interest rate hike cycles are nearing their end – the Reserve Bank of New Zealand and Bank of Korea are likely to conclude their monetary tightening whilst the Reserve Bank of Australia may have more work to do. Thus, regional fixed rates are now closely resembling floating rates, apart from Japan as it plans to move towards policy normalisation,” said Pamela Ambler, Head of Investor Intelligence, Asia Pacific, JLL (pictured above).

“As we approach the end of 2023, investors will weigh the elevated cost of capital against an uncertain macroeconomic environment. With the Fed’s upcoming decision on adjusting interest rates, we can also  expect investment activity to pick up as the cost of debt eases.”

Asia Pacific’s central business districts (CBDs) will increasingly need to be reinvented as multi-purpose destinations that cater to shifting demands for office space, greater variables in commuting and travel patterns, and a desire for “experience-based” spaces. This is according to new research on the future of CBDs by global real estate advisor JLL.

Return to office rates are over 70% in Asia Pacific – higher than many parts of Europe and the US – with re-entry rates at pre-pandemic levels in Shanghai, Beijing and Seoul, says JLL. However, a longer-than-expected return to pre-pandemic levels of transit usage and footfall will push CBDs and support real estate and infrastructure to go beyond acting primarily as places of work.

JLL analysis points to value-creation opportunities in Asia Pacific CBDs. They hold immense capacity for change due to their infrastructure, accessibility and stock of underused real estate – all of which underscore their resilience. However, with office vacancy at 14.7% in Asia Pacific, as well as the emergence of vibrant mixed-use neighbourhoods in the region’s largest cities which are attracting a growing share of businesses, residents and investment, there is further impetus for CBDs to reinvent themselves to remain relevant.

“How people perceive and use CBDs has shifted dramatically in the past three years due to the pandemic. To be future-proof, cities in Asia Pacific will need to find ways to reimagine the traditional core area to attract visitors, businesses and investment. For the future CBD to thrive as a mixed-use destination, investors and occupiers will need data-based advice and insights to collaborate strategically and make smart decisions,” said Anthony Couse, Chief Executive Officer, JLL Asia Pacific.

To take advantage of long-term real-estate opportunities, CBDs in Asia Pacific will need a balanced mix of uses, with improved amenities and investment in sustainable design. According to JLL analysis, refurbishing existing buildings is more sustainable than developing new buildings, as renovations can come with carbon impacts of less than 500kg of CO2 per square metre – well below that of new developments, which can be up to three times greater.

According to the JLL report, reinventing CBDs requires partnerships between the private sector and governments. Investors can employ a strategic, long-term mindset toward repositioning and diversifying their portfolios to cater to shifting preferences and reduce exposure to external shocks. Developers should proactively consider locations based on the potential for future growth and proximity to demand, the quality and age of buildings, and the ability to meet regulatory requirements regarding energy efficiency and sustainability.

Finally, governments must anticipate demand changes and provide greater flexibility to developers and investors, including through expanding tax credits to offset the cost of conversion and streamlining the planning process to reduce the lead time for delivery of new products. Notable examples of the private sector and governmental partnerships helping to reinvent CBDs include Singapore’s CBD Incentive Scheme, which provides developers with 25% to 30% increases in developable areas on assets at least 20 years old when converted from office to mixed-use. Likewise, Melbourne’s West Side Place district, which includes pedestrian areas lined with retail and green spaces to break up office-dominated “superblocks” of core business districts, has been successful in attracting footfall and investment.

“Any reinvention of Asia Pacific’s CBDs requires a long-term commitment of investors and developers, plus consistent governmental support. The office will remain core, but for a CBD to genuinely thrive, greater support of leisure and green spaces is a necessity to ensure continued relevance,” said Roddy Allan, Chief Research Officer, JLL Asia Pacific.