Japan Continues Growth Streak Even Rest Apac Commercial Property Sales Contracted 1Q2024
Commercial property transactions in the first quarter of 2024 saw a decline, as the high interest rate environment and a retreat from deals in the apartment, office, and seniors housing sectors weighed down the market. However, the data centre sector in Asia Pacific saw a brisk start to the year, driven by a growing interest in assets that support the digital economy.
According to the MSCI Real Assets’ Asia Pacific Capital Trends report, deal volume fell by 13% year-on-year to US$31.3 billion ($42.1 billion) in the first quarter of 2024. While this decline was steeper than the previous quarter, it was less severe compared to the previous five quarters. Japan stood out as a bright spot, with an increase in office investments and strong acquisition momentum in other sectors, indicating that changes in the Bank of Japan’s interest rate policy had little impact on investor sentiment.
Despite the slowdown in the commercial real estate market, many major markets in Asia Pacific maintained stability in deal activity and positive performance returns in 2023, despite the high interest rate environment. In the first quarter of 2024, investors continued to focus on growth areas such as data centres and emerging living sectors.
The retail sector was a standout performer in the region, with an increase in activity after several quarters of slow growth. This trend suggests that investors are seeking value in a sector that has seen significant repricing. Retail deal activity accounted for nearly a quarter of total commercial real estate sales in the quarter, the highest proportion in the past five years.
On the other hand, office volume continued to decline in most of Asia Pacific, falling by more than 20% in the first three months of the year. This was the only sector where deal activity remained significantly lower compared to previous periods, due to subdued activity in markets like Singapore, Hong Kong, and Osaka.
While acquisitions of apartments fell by over 40%, investors continued to gain exposure to the sector through conversions of hotel properties. This trend was observed in several markets, including Singapore. In Japan, the momentum for acquisitions in the multifamily sector slowed down, with yields remaining stable in Tokyo’s CBD and other major cities. With the Bank of Japan’s recent exit from its negative interest rate regime in March, the sustainability of low multifamily yields remains uncertain.
Despite concerns over waning foreign appetite and domestic liquidity, Seoul’s office market continues to defy the odds. It remains the most invested sector, with a rise in deals announced in March, thanks to price reductions from contract to deal closure. The industrial sector was driven by Japan and China, with acquisitions of logistics portfolios in both markets. Yield decompression in Australia and South Korea also spurred activity in the industrial sector.
Cross-border investment into commercial real estate in Asia Pacific remained low, with a slight increase in flows from outside the region being offset by dampened activity from regional investors. On a four-quarter rolling basis, the share of cross-border investment remained at 25%, the lowest level in a decade. Nonetheless, the fact that investment from global players has stabilized is a positive sign, with multiple investors conducting deals in multiple markets.
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The deal activity in Hong Kong showed a mixed picture, with an increase in retail sector deals based on yield expansion, but a stagnant demand for high street shops and offices due to high prices. One exception was the sale of a newly completed office building in the CBD of Hong Kong Island, which was acquired at a lower price compared to other en bloc office deals in recent years.
In Singapore, the retail sector saw the most activity. Office market activity, including strata sales, slowed significantly, bringing the number of office deals over the past year below that of industrial and retail. However, the focus shifted to the residential and co-living sectors, with three hotels acquired for conversion in the first quarter. Suburban malls continued to see deals despite peak pricing and yields in line with longer-term averages. The biggest deal in the quarter was the sale of a fully occupied mall at a yield close to 4%, which was 18% higher than its last known appraised value in 2022.
In China, commercial real estate activity slowed by 19% compared to the first quarter of 2023, but it remained the biggest market in the past 12 months, with US$40 billion in assets traded. There were significant year-on-year gains in volume for both industrial and retail sectors, while the office sector continued to face challenges. Investment in Shanghai offices fell by almost two-thirds, placing it behind Beijing in the first quarter of 2024. On the other hand, Shanghai saw a significant increase in retail sector activity, with almost US$900 million in deals.
Japan continued its strong run in 2023 and remained at the top in the first quarter of 2024. Recent changes in the Bank of Japan’s interest rate policy had little impact on investor sentiment, with the first-quarter deal volume of JPY1.35 trillion (US$11.2 billion) in line with the five-year average of JPY1.44 trillion. Tokyo remained the leading metro in Asia Pacific, with over US$5 billion transacted in the first quarter alone. Notably, Japan’s office sector ended the financial year on a high note after a slowdown in investment appetite in the previous nine months. Cross-border interest in Tokyo offices saw an increase in early 2024, with the acquisition of five floors of a Marunouchi office tower for over JPY40 billion.
The industrial sector in Japan flourished, with several major logistics and data centre deals in the quarter. In the multifamily market, a 29-asset residential portfolio was sold to an offshore investor consortium. South Korea saw an 80% surge in deal volume in the first quarter, bouncing back from a slow 2023. However, activity was still down 30% compared to the five-year average. Seoul remains the only office market globally where major deals are being struck despite the high interest rate environment. The pipeline for eight office deals, each priced over US$100 million, remains strong as of the end of March.
As we approach the second quarter of 2024, various indicators suggest that the decline in investment activity is reaching its lowest point. The deal pipeline has remained stable in recent quarters, and yield expansion in key sectors has started to taper off. However, the thin or negative yield spreads to borrowing costs in most markets outside Japan and China suggest that many deals that were attractive before 2022 may no longer be as appealing.
Much depends on the timing and extent of US-led interest rate cuts, and in recent weeks, there have been doubts about whether they will even happen. The trough in the market is likely to be bumpy, and a recovery in investment activity may take some time.