APAC economic outlook

Markets are increasingly pricing in rate cuts and demanding term premia across developed markets. The US Federal Reserve (Fed) delivered a 25 basis-point (bp) rate cut in December. But it signalled a slower pace of easing ahead, as it eyes renewed inflation risks from Trump’s policy agenda. Against this backdrop, and with the labour market looking solid, we now expect the central bank to stay on hold until its June meeting. We expect just two 25bp cuts in 2025. 

Trade War 2.0 will have the largest impact on the Chinese economy. For now, we have assumed higher tariffs to translate into a 20bp cut in our 2025-26 gross domestic product (GDP) growth forecasts. We expect the Chinese authorities to ramp up policy easing in 2025, but additional stimulus and currency depreciation can only offset some of the immediate economic hit. More aggressive stimulus could provide a bigger offset, but a long-run drag will be hard to avoid. 

Japan’s GDP growth slowed to 0.3% in the third quarter of 2024, but we judge the economy to be reasonably robust under the surface. Consumption has been strengthening, while business sentiment has improved, with capital expenditure plans steadily rising. Meanwhile, wage growth has accelerated, and the Japanese yen is once again facing pressure from rising US yields. Consequently, we expect the Bank of Japan to normalise rates gradually.     

Most observers expect the Reserve Bank of Australia (RBA) to commence rate cuts in the first half of 2025, although underlying inflation remains above target. Australia’s mean Consumer Price Index slowed to 3.2% year-on-year (YoY) in November (from 3.5% in October), but it remains above the RBA’s target range of 2-3%. Meanwhile, the unemployment rate remains relatively low at around 4%, even as the labour market eases gradually. 

Following the two back-to-back 25bp rate cuts in the fourth quarter of 2024, most observers expect policy easing to continue in Korea. This should support the domestic economy, despite renewed pressure on the South Korean won.

Source: abrdn Global Macro Research; December 2024 
Forecasts are a guide only and actual outcomes could be significantly different.

APAC real estate market overview

A slower-than-expected pace of interest-rate cuts suggests investors’ required returns and property yields could stay elevated for longer. This would translate into a more cautious outlook for capital returns over the longer term. This is especially relevant for property market/sectors in APAC, since repricing (ex-China) has generally lagged other regions and most property yield gaps are still tight relative to historical levels. 

Meanwhile, occupier fundamentals of selected markets/sectors have strengthened, which could underpin faster rental growth and mitigate the negative impact from a higher-for-longer rate environment.  

Our base case for a ‘K’-shaped recovery in the APAC property market remains intact, despite the prospect of a slower and shallower rate-cutting cycle. Growing bifurcation in occupier market fundamentals means bottom-up market and stock selection will remain key to investment performance. A higher-for-longer rate environment also remains constructive for private credit and secondary strategies. Within APAC, Japan and Korea are the top two markets where we have the highest conviction.  

The living sector ranks highly in our investment preferences globally. The investment case remains robust for Tokyo multifamily, backed by solid occupier fundamentals. Several tailwinds should support further rental upside. Net migration, coupled with better wage growth and more dual-income households, will underpin leasing demand and affordability. But thinner development margins, because of higher land and construction costs, have discouraged new projects. This has constrained future housing supply. Limited supply is also keeping condo prices high, which is encouraging households to rent (rather than buy).

Office occupier fundamentals in Tokyo and Seoul are also supporting rental growth. Prime-grade office vacancy rates in both cities are among the lowest globally, while the surge in construction costs will drag on new supply. In Tokyo, pre-leasing has been healthy for new projects scheduled for delivery in 2025. And leasing demand for newer buildings is expected to remain robust, as companies look to retain talent in a tight labour market. In Seoul, the start of the Bank of Korea’s rate-cutting cycle has contributed to a faster-than-expected stabilisation in office property yields.

APAC real estate market trends

Offices

Following two straight quarters of slower quarter-on-quarter (QoQ) rental declines, the average sequential fall in APAC office rents picked up again in the third quarter of 2024 to 1.1%1 (from -0.6% in the second quarter). This was driven by the Greater Chinese markets and Melbourne. Meanwhile, vacancy rates remained broadly unchanged at an average 12.9% during the quarter.

The average grade-A office vacancy rate in Tokyo’s central five wards continued to shrink in the third quarter to 3.1% (from 3.6%), marking the lowest level in 2.5 years. Higher construction costs will force delays and re-designs to development projects. This could translate into a longer runway for existing properties to find tenants and reduce vacancy rates further. More Japanese workers are also returning to the office, with some large Japanese firms abolishing telecommuting allowances for employees. 

Sydney was another market with a tighter vacancy rate for prime-grade offices in its central business district (CBD) during the third quarter (14.7%, from 15.6%). Sydney’s CBD recorded its highest level of office attendance since 2019 in September, with an average 78.6%2. A Savills report has also found the amount of premium office space available in Sydney, now or within the next 12 months, has shrunk by 17.8% over the year to August. This is a result of tenants’ flight to quality.   

Logistics

The QoQ change in APAC’s logistics and industrial (L&I) properties fell into negative territory in the third quarter for the first time since the fourth quarter of 2020 (-0.3%, from 0.3% in the second quarter), as the average vacancy rate climbed further to 8% (from 7.7%). The Greater Chinese markets were again the main drag, with prime logistics vacancy rates in both Beijing and Shanghai rising to new highs of 17.5% (from 15.8%) and 25.5% (from 23.2%), respectively, during the quarter.

Despite a higher vacancy rate of 17.1%, Greater Seoul’s average logistics net-effective rent rose another 1.3% in the third quarter. The rent increase was broad-based across all regions and, with new supply of logistics space expected to fall sharply in 2025-26, it appears investors’ interest in the sector has continued to improve. This is particularly the case in ‘special-situation’ cases, where investors picked up developments at a significant discount after running into financial difficulties. 

Australian L&I vacancy rates hiked from a low of 1.1% at the start of 2024 to end the year at 2.5%2, led by Sydney (2.1%, from 0.5%) and Melbourne (3.6%, from 1.6%). While this still represents one of the tightest vacancy rates globally, there is some medium-term upside risk in Sydney, as the Western Sydney Aerotropolis is developed.    

Retail

APAC’s prime retail rental growth slowed further in the third quarter to 0.7% QoQ (from 1.2%), even as the average vacancy rate contracted marginally to 4.9% (from 5.2%).

In contrast to the wider regional trend, Singapore’s retail rental growth picked up slightly in the third quarter, registering a sequential increase of 0.5% (from 0.4%). While a lack of new supply has helped the market’s post-Covid recovery, and the forward supply outlook remains constructive, there are potential downside risks to leasing demand in the near and medium term. Elevated operating costs, for instance, have driven an average 274 food and beverage operators out of business every month in 2024 – a near-20% increase from 2023. Also, the Johor Bahru-Singapore rapid-transit system rail link is scheduled to begin operations in January 2027, and concerns over higher competition for retail spending from Johor Bahru are growing.   

Retail rents in Indian tier-one cities also registered faster sequential rental growth in the third quarter (3%, from 2.6%), led by retail space in Delhi’s national capital region (5.1%, from 4.7%). While growing demand from newer retail categories (like gaming centres) amid limited quality retail space is expected to drive further upside in rents, growth is likely to be more divergent. Factors like developer profile and location are becoming more critical.     

Living 

The average multifamily rent across Tokyo’s 23 wards registered a YoY increase of 4% in the third quarter, which marked an acceleration from the 3% in the second quarter – the fastest rate since the first quarter of 20203. Importantly, the rental growth appears to have been broad-based across unit types and locations. According to a recent Savills report, robust net migration has helped to drive rental demand in the Tokyo residential market, with foreign nationals accounting for around 90% of the net inflow between September and November 2024. As companies scale back remote-working policies, demand is expected to be concentrated in centrally located areas near public transport hubs.   

Value-add investment strategies that target properties for conversion into co-living space remain active in Seoul. While the macroprudential measure implemented in September has helped to cool home-buying sentiment in Seoul, occupier demand for housing remains robust and supports the investment case for co-living conversions. According to Kookmin Bank, the average rent of Seoul’s officetels (a type of rental housing units in Korea; smaller than typical apartments) gained 3.4% YoY in the third quarter (from 3.2% in the second quarter) and lifted the average rental yield to 4.66% – the highest since 2020.

Outlook for risk and performance

We have made minimal adjustments to our three-year total return forecasts for APAC’s property market. But we have trimmed our five-year forecasts to reflect the reduced potential for yield compression, given the change in the longer-term interest rate outlook. 

While interest rates are important, they are not everything. The more important question for real estate investors is whether net-operating income (NOI) can grow faster than the rise in the cost of debt. We believe investors can still achieve decent investment outcomes by focusing on: stocks positioned for rental growth; leveraging higher-for-longer rates for better entry levels; and driving operational efficiencies through technology.

Tokyo’s multifamily properties, for instance, are well-positioned to deliver robust NOI growth. There are fundamental tailwinds supporting rents and a rise in fixed-term leases to hasten mark-to-market.

Macroeconomic drivers and geopolitical developments will significantly affect real estate’s near-term performance. The precise contours of the coming policy shifts under Trump remain uncertain. Should the administration deliver policy changes that are more aggressive than currently expected, aggregate supply could be materially damaged. This could drive inflation and interest rates higher than our current base case. 

On a more positive note, higher construction and financing costs may discourage new starts and defer completions. This could translate into lower downside risks to occupier markets in the medium term. This is especially the case for better-quality assets that benefit from the growing bifurcation in performance.