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Colliers’ Q3 2023 APAC Cap Rates Report reflects that markets across the Asia Pacific region face interest rate pressures. While the global investor sentiment remains strong towards Indian real estate, the market continues to pose challenges in generating favorable returns relative to the cost of capital.

In Bengaluru, Q3 office transaction volumes remained similar to the previous quarter, with a few transactions driven by individual investors as institutional players were less active. Deal sizes were smaller but more resilient, resulting in a marginal downward change in the cap rate in the office segment.

In Mumbai, the retail sector is anticipated to gain traction in the near future, driven by demand from the luxury segment and the release of additional supplies of quality organized retail assets. Mumbai industrial demand remained strong in Q3, and the compression in the cap rate was attributed to lower availability of Grade A stock, coupled with a positive outlook from large institutional investors towards the sector. The investors were willing to trade off lower current yields for anticipated future growth in the sector.

“Given that the RBI has not changed the rate stance over the last 8 months with inflation range bound, the trend of fully leased CRE as investment for inflation hedge has cooled, expanding investor interest into under-development and alternative assets. Further, yield compression has slowed considerably indicating peaking in ROI cycle where optimum valuations have been reached. Industrial assets continue to see encouraging investments despite yield compression slowing significantly and will be range bound till macro-economic factors step in to make any change”, says Ajay Sharma, Managing Director, Valuation Services.

Key findings across other APAC countries included:

* Australia: Across almost all the Australian cities covered, cap rates in all sectors exhibited an upward movement quarter-on-quarterIndustrial assets in Australia with long lease expirations and low fixed-term rent experienced downward pressure on values during the last quarter.

* China: In China, investment activity remains subdued with only individual investors and insurance institutes actively seeking out discounted assets and adopting a cautious approach to investment. This has resulted in subdued market sentiment in the property sector for Beijing and Shanghai compared to Q2. To vitalize the market environment, the central bank of China has been lowering the Loan Prime Rate (LPR) to alleviate the burden on loans, with the objective of unlocking resources for consumption and promoting nationwide GDP growth. In Beijing and Shanghai, the industrial sector experienced a wave of new supply as the take-up of existing stock slowed down. The government’s release of more industrial and logistics land resulted in an augmented supply in the market.

* Hong Kong: Hong Kong interest rates have continued to gradually increase over the past year. Asset values are under increasing downward pressure, which is beginning to be reflected in pricing. Vacancies remain high and rental prices experienced downward pressure across all sectors.

* Japan: Some investors may consider Japan a risk averse market for real estate investment since the start of the interest rate hike, primarily due to its relatively accommodative monetary policy. The sales volume of foreign investments in real estate has yet to witness a significant increase, although sentiment and interest remain strong. The Tokyo office sector performed well in Q3, with occupancy rates remaining at a healthy level, especially when considering the challenges faced by some other cities in terms of take-up. This is driven by the return to office culture – government statistics indicate that the hybrid working ratio in Tokyo was 44% in mid-2023, down from a peak of over 64% in 2021.

* Korea: Seoul office assets remain in high demand, with rental levels holding firm for landlords. However, there is increasing downward pressure on values due to a lack of liquidity in the market.

* New Zealand: In Auckland, there has been upward movement for more than a year in the office sector. Transactional activity remained subdued over the last quarter as investors continued to take a cautious approach to the market. The Reserve Bank of New Zealand has maintained a steady Official Cash Rate in its last three monetary policy meetings, indicating that rates are at or near their peak in the current cycle. With interest rates stabilising it is anticipated that greater clarity over asset pricing will emerge. This, in combination with the election having been completed, is likely to result in an uplift in sales activity during the final quarter of 2023 ad into 2024.

* Singapore: Cap rates across sectors remain subdued, with a lack of sales evidence to support movement. Increasing lending costs are putting pressure on many investors and owners. However, there are other investors with deep pockets who are taking advantage of this opportunity to acquire assets for long-term investment.

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