APAC Cap Rates to Keep Climbing as Property Investment Remains Muted: CBRE

Investors hoping to sell properties in Asia Pacific over the next six months may have to offer buyers a steeper rate of return as interest rate cuts prove slow to materialise and risk appetites shrink, according to CBRE.

For grade A office deals, capitalisation rates — which measure the value of a property by dividing its annual income by its sale price — are seen rising in core locations of Greater China, South Korea and Australia while remaining stable in Japan, Singapore and India, CBRE revealed in a survey of the consultancy’s APAC-based professionals.

Hotel and multi-family assets are in demand given the current cyclical and structural tailwinds, while debt strategies are out of favour due to the limited funding gap in Asia Pacific compared with the US market, said Henry Chin, head of APAC research at CBRE.

“Interest rates in Asia Pacific have likely peaked, and financial pressure is easing,” Chin said. “With investors displaying a stronger focus on underlying asset performance, prime assets in core locations are keenly sought after.”

Japan Most Active

CBRE collected 136 responses from across the region, drawing 25 percent of respondents from Hong Kong, 18 percent from Australia, 15 percent from mainland China and 42 percent from other markets.

Those polled reported current cap rates as high as 10.75 percent (data centres in satellite cities of Shanghai) and as low as 2.10 percent (grade A office assets in core locations of Taipei). Cap rate expansion is predicted across most asset classes in the next six months, with Japan data centres the only segment forecast to see cap rate compression.

APAC as a whole witnessed a 14 percent year-on-year decline in commercial real estate investment volume to $24 billion in the first quarter of the year, CBRE said.

Japan took advantage of its low finance costs and solid market fundamentals to replace mainland China as the most active investment market, accounting for 30 percent of overall regional volume during the period. Mainland China saw a 23 percent year-on-year drop in investment volume, with most acquisitions being completed by domestic corporations, according to the consultancy.

“Investors should target buying opportunities in the second half of 2024 and focus on prime assets,” said Greg Hyland, head of APAC capital markets at CBRE. “Motivated sellers will adopt a more flexible stance towards asking prices, helping narrow the gap with buyers. This will support deal closure as purchasers aim to take advantage of pricing discounts before rate cuts arrive.”

Shanghai Under Pressure

In its own report on regional cap rates, Colliers said Asian markets were generally stable in the first quarter as cap rate movements were driven mainly by oversupply and pressure on rents.

The tendency was typified by Shanghai’s grade A office market, which struggled to attract leasing demand, the agency said. A supply peak in 2024 is forecast to further increase pressure on the leasing market, influencing investor confidence and driving up cap rates — which already stood as high as 6.5 percent in the megacity during the first three months of 2024.

“The oversupply situation in certain Asian markets will require time to absorb, and the pace will depend on overall business activities and the economy, putting pressure on rental growth,” said CK Lau, managing director of valuation and advisory services for Asia at Colliers.

In the finance hubs of Hong Kong and Singapore, office cap rates stood as high as 3.9 percent and 3.5 percent respectively in the first quarter, according to the Colliers report.