Falling interest rates have incentivized investors to increase allocations in Asia Pacific real estate over the past four years. This has supported capital values across the region and caused asset yields to compress – a trend that JLL sees will continue. However, not all cities and sectors across the region have fully priced in the current low rates and some have already priced in rate increases.
This challenges investors to look into the specific dynamics and prospects of each market and asset class to identify risks and opportunities, such as the following:
- Cap rates in Sydney and Singapore have already priced in interest rate increases and are unlikely to expand from here, in our view.
- Logistics yields could potentially compress by a further 50-100bps over the next five years, driven by strong growth in capital flows into the sector.
- Retail assets could be contrarian investment opportunities as yields have expanded sufficiently in Singapore, Hong Kong and Sydney.
- There is more caution towards Sydney office rents as its yield spreads widened 50bps further than other Asia Pacific cities. For Hong Kong, there may be expectations that rents have bottomed as yield spreads are not pricing in any future rate increments.
- Multifamily and build-to-rent yields may compress further in Japan and Australia. Globally, yields for this asset class have traded below office yields as institutional capital seeks exposure to the resilient, low-volatility sector for diversification.
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