Big US Rate Cut Seen Leading Asia Pacific Real Estate Investment Revival

Commercial real estate investment is expected to rebound across Asia Pacific after the US central bank on Wednesday “went big” in its first interest rate cut since 2020.

The US Federal Reserve lowered its target range for the federal funds rate by half a percentage point to 4.75 percent to 5.00 percent, while signaling a further reduction of 50 basis points this year and 100 basis points of cuts next year, with parallel moves by central banks from Mumbai to Sydney set to rekindle property investment and boost capital raising among fund managers, according to analysts.

“With real estate markets approaching the end of their repricing cycle, higher yields and now lower medium-term base rates are becoming more supportive of improving conditions and higher levels of deal flow,” Nick Wilson, associate director of real estate economics at Oxford Economics told Mingtiandi. “Investors are likely to start allocating capital back toward the real estate sector, which should support stronger capital raising volumes next year.”

The region has already seen an increase in transaction volume this quarter amid investor expectations of monetary easing, with Asia Pacific’s commercial real estate deal pipeline having reached its highest level in four quarters by the end of August, according to data provider MSCI.

“The magnitude of the rate cut, at 50 basis points, was at the higher end of market expectations, as evidenced by the fact that the share prices of listed real estate companies (in particular REITs) rallied in response to the news,” Benjamin Chow,  head of real estate research for Asia at MSCI told Mingtiandi. “More importantly, the Federal Reserve’s signal that more easing could be on the cards should reinforce the trend of growing investment momentum.”

Tale of Two Cities

In Singapore, anticipation of monetary easing has driven transaction volume to $10.4 billion in the first half of the year, representing a 56.6 percent year-on-year increase from the corresponding period in 2023, according to Cushman & Wakefield. Singapore-listed property trusts have also seen a boost in unit prices, with the benchmark iEdge S-REIT Index having risen by 13 percent since early July.

CBRE noted that although yields could remain tight for selected prime assets in the Lion City, particularly in high performing sectors such as retail, industrial and hospitality, they are unlikely to compress significantly even as the Monetary Authority of Singapore begins to move away from its current tightening bias to a more neutral position.

Over in Hong Kong, where the Hong Kong Monetary Authority mirrored the Fed move with a reduction of its base rate by 50 basis points to 5.25 percent, CBRE expects property investment to remain muted this year, particularly in the office sector, as weak leasing demand and oversupply continue to weigh on capital values.

Colliers offered a more upbeat view, with the consultancy’s head of research Kathy Lee anticipating a return of international capital to the Asian financial centre as investors hunt for undervalued, high-quality assets.

“We forecast that the total investment volume in Hong Kong’s real estate market for the entire year of 2024 will exceed HK$30 billion,” Lee said in a release on Thursday. “In 2025, if the economic situation is more optimistic, the investment volume is expected to further rebound to HK$37 billion. The implementation of the interest rate cut policy may motivate investors to actively seek market opportunities, particularly those undervalued and high-quality assets located in core areas, and it may also attract the return of international capital.”

Japan Tightening

With Japan standing out as a notable exception in the region as the country’s central bank signals a gradual upward rate trajectory after hiking the short-term policy rate target to 0.25 percent in July, analysts expect some cap rate decompression for traditional sectors such as office and logistics on the back of a marginal increase in rates.

In mainland China, monetary easing has been unable to offset weak leasing demand and sluggish economic growth. While investors will benefit from lower financing costs, analysts see sentiment and transaction volumes remaining subdued in the short term.

Transaction volume in Australia and Korea is expected to increase as policy rates move in tandem with those of the US, while upbeat sentiment and growth in India will see continued capital deployment by investors in 2025, according to CBRE.

Despite the improving sentiment in most of the region’s markets, analysts do not anticipate an immediate impact on asset prices, with cap rates set to continue softening through the year before stabilising in 2025.

“We anticipate regional investor sentiment to improve with this and anticipated future interest rate cuts,” Ada Choi, head of Asia Pacific research for CBRE said in a statement on Thursday. “However, due to the lag between interest rate changes and real estate yields, we expect further cap rate softening through 2024, especially in mainland China, Japan, Singapore, and Australia, before stabilising in early 2025.”

Restoring Confidence

With the Fed signaling more rate cuts on the cards, cheaper cost of capital, increased liquidity and clarity on monetary policy direction will boost commercial real estate investment, according to JLL.

“When there is confidence, there is conviction,” said Pamela Ambler, head of Asia Pacific investor intelligence at JLL. “There is now confidence in the trajectory of monetary policy, which will lead investors…to put more capital back to work.”

Analysts also cautioned that rate cuts will not be a panacea for all of the challenges facing the region’s property markets. Weak leasing demand and rental growth in Hong Kong and mainland China’s office sectors, geopolitical risks, and high interest legacy loans are unlikely to be resolved in the near term, while the state of the US economy will continue to weigh on future policy direction, according to experts.

“While lower policy rates are generally supportive, they are not the silver bullet to solving all of the challenges across real estate markets,” said Wilson. “Questions also remain around the reasons behind the outsized cut in the US, with growth and employment the key concern.”