The commercial real estate sector in the Asia-Pacific region hit a rough patch in the third quarter of 2023 as deal volumes fell 37 per cent on year to $25.7 billion, the lowest since 2010, according to the MSCI Asia Pacific Capital Trends Q3 2023 report. However, India remained a bright spot in the region.
While the preceding quarter was encouraging, the third quarter was hit by the narrative of a “higher for longer” interest rate environment, which put a dampener on hopes for an early recovery, the report said.
While most countries in the region saw a drop in deal activity, India reported a 44 per cent rise at $1.5 billion — a good portion of it being accounted for by Brookfield’s sale of a 50 per cent stake in its office portfolio in Mumbai to Singapore’s GIC for $683 million.
“India has cemented itself as one of the most promising emerging markets globally, with activity continuing to recover from the trough at the end of last year,” the report said.
Overall weakness in the region was primarily due to the office sector, which continued its downward trajectory. A number of deals that were to close in the quarter did not fructify, especially in Korea.
Economies such as South Korea, Australia, Singapore, and Hong Kong remained subdued in the third quarter.
In China, the property market is struggling, and while the country saw the highest deal volumes at $7.4 billion in the quarter, it was 22 per cent lower on year. The market saw substantial price declines across most segments, with a wave of distress sales. Global investors from outside the region have remained on the sidelines, while investments by listed developers have fallen to a historic low.
Japan, which saw a 27 per cent fall in deal activity in the quarter, was the biggest commercial real estate market in APAC in terms of both deal volume and deal count in the first nine months of 2023. Its growth was restricted by the office sector, where volumes have fallen to a historic low.
The MSCI report said the APAC region has lagged the rest of the world in terms of price discovery. Price adjustment, in response to interest rate hikes, was a prerequisite “for a recovery in investment activity,” though there were other macro concerns, including the conflict in West Asia.
It warned of a long and slow road to recovery.
In India, capital market activity in the commercial real estate sector received a boost with greater participation from domestic players.
“Other than China, India was the only other major market where the number of deals above $10 million rose relative to a year earlier, reaching a new high for the first nine months of a year,” it said.
Investors outside APAC
The MSCI report pointed to a pullback in activity by investors outside APAC over the past 12-15 months.
“US, Canadian and European investors have all dialled back acquisitions across the region significantly. Spending by each of these groups has declined by over 50 per cent in the first nine months of the year, compared to that in the same period over 2021-2022,” it said.
Investors from Singapore have taken their place, investing in countries such as Japan, India, and South Korea, though they have reduced their investments in Australia and China.