Asia Pacific Cap Rates Report | Q4 2023 (Colliers)

There are signs that interest rates have peaked in some markets in APAC with expectation on more market activities and a gradual recovery in 2024.

The APAC real estate sector was experiencing a low transaction environment in Q4 2023. Owners, investors, and occupiers remained cautious about real estate investments with a lot longer due diligent process. However, the signs of peak interest rate in some APAC markets are resulting a more positive sentiment towards investments in 2024.

Key Highlights in Q4 2023:

Office Sector

• Transaction volume continued to be low across all major Australian office markets. The sales that have begun to complete are predominantly secondary grade assets with value-add potential. These sales are primarily being undertaken by syndicates. These transactions require a significant amount of time to complete due diligence and raise the required capital. The further interest rate rise that occurred in November 2023 continues to put pressure on capitalisation rates. The number of assets being listed and subsequently withdrawn due to pricing disconnect between vendors and purchasers suggests that there is still further cap rate softening to come in 2024.
• The rental rates for office segment have increased slightly in some micro markets of Bengaluru. This improvement was attributed to the commencement of the Mass Rapid Transit System and the overall improvement in connectivity. However, property values have not moved in tandem due to low transaction volume. As a result, the cap rates on the higher end of the range have decreased.
• No en-bloc office sales were transacted in Jakarta last quarter. Office assets along with the new phase of the public light rail transit have triggered investor interest. A huge supply is expected to enter the market. Corporate users have started looking for newly built offices either acquiring the whole building or leasing more space for expansion purposes.
• Office demand in Manila remains lethargic and there is an increase in supply pressure with new office buildings coming onto the market.

Retail Sector

• Retail has been experiencing a consistently low transaction environment for Australia as the market recalibrates based on the increased interest rate environment. Consumer confidence appears to be falling, impacting non-discretionary spending. We expect further cap rate softening into Q1 and Q2 2024 as the price differences between vendor and purchases expectations continues.
• In Bangkok, there were no significant retail transactions in the past quarter to evidence value movements. Retail rents have increased following the opening of some premium malls in core locations, which has pushed the cap rates up slightly. However, the rise in rental value for those premium stock is still yet to be seen whether it will establish a continuing upward trend in the immediate term.
• In the fourth quarter, rental rates in prime areas in Beijing and Shanghai have shown improvements. This upturn can be attributed to the resurgence of consumer engagement in these areas. Despite the overall growth in total retail sales, it will take some time for rental rates to fully adjust and align with the improved consumption. Property owners and landlords are taking a cautious approach to rental growth, allowing adequate time for rents to align with evolving consumption patterns and market condition.
• The retail occupancy and rental performance in Hong Kong have generally remained healthy, thanks to robust domestic consumption. However, investors exhibit caution towards the retail sector due to its high vacancy rate.

Industrial Sector

• Australian industrial market drove the movement in the industrial sector in this survey. The current rental levels are expected to peak in 2024 as a result of tenants’ gross occupancy costs hitting their limit. Nonetheless, vacancy rates are still low across Western Sydney, prime industrial area, which should see rents hold at current levels throughout 2024. However, incentive levels are starting to creep upwards.
• The transactions concluded in Q4 have resulted similar cap rates as the last quarter in Jakarta. Major logistic players have been observed looking for land or joint venture partners.
• The industrial cap rates remained flat owing to stabilization of yields and asset values as sustained demand from the third party logistic (3PL) players, eCommerce and fast-moving consumer goods (FMCG) sectors is countered by new supply in Mumba

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