Unnoticed trends
Nicholas Spiro says while Asia’s property markets have no shortage of good stories, some of the most consequential are also among the most overlooked
Everyone loves a good story. In Asia’s real estate industry, there are plenty of themes and trends that attest to the appeal and resilience of the region’s residential and commercial sectors. Whether it is the huge potential for an institutionalised rental housing market in China or the record level of leasing activity in India’s retail property market last year, Asian real estate has a lot going for it.
Yet it has by no means been immune to the pandemic-induced shifts in the way people work, live and shop, not to mention the fallout from the dramatic rise in inflation and interest rates. Last year, commercial property investment transaction volumes in the Asia-Pacific region fell to their lowest level since 2012. The office sector suffered the most, with volumes down 45 per cent year on year, according to data from MSCI.
In the luxury residential sector, growth in capital values in the major cities in Asia slowed sharply in the second half of last year, with some cities such as Hong Kong suffering outright contractions, according to Savills. Meanwhile, prime rental values fell in Singapore and Tokyo in the final quarter of 2023, according to Knight Frank data.
However, it is the underappreciated, often overlooked trends that are more revealing. One of the most important is the remarkable strength of Seoul’s office market. At a time when the office sector is reeling from the shift to hybrid working, especially in the US, the Seoul market is going from strength to strength.
Even within Asia, where working from home is less prevalent, Seoul is the stand-out performer. According to CBRE, South Korea’s capital has the highest return-to-office ratio in the world. Around 50 per cent of respondents to an office occupier survey said 70 to 100 per cent of their staff were working in the office five days a week.
The fundamentals of Seoul’s office market are the envy of its peers. The vacancy rate is just 1.5 per cent, underpinned by tight supply and double-digit rental growth for grade A buildings for the past two years. Domestic investors – who account for the bulk of the institutional investor base in South Korea – favour offices over other sectors, an extraordinarily rare preference.
The strong performance of the market is a boon for owners selling high-quality buildings. On April 1, Blackstone announced it had sold Arc Place, an extensively refurbished best-in-class building in Seoul’s Gangnam business district, where the vacancy rate is barely above zero. The sale price was 27 per cent more in US dollar terms than the acquisition price, according to Asian property news provider Mingtiandi.
Brad Gladu, the international capital lead for Korea at JLL, which advised Blackstone, said the deal “highlight[ed] the uniqueness of Seoul’s office market as well as the cultural nuances that define different office markets”.
Another overlooked trend is the outperformance of many Asian luxury residential markets that are more affordable. Cost-of-living pressures and taxes on foreign buyers – for example, extra stamp duties for non-residents buying homes in Singapore doubled last year to a staggering 60 per cent – are benefiting cities with lower capital and rental values, as well as lower levies on purchasing, holding and selling homes.
The most prominent example is Tokyo. According to Knight Frank, US$1 million buys 64 square metres of prime residential property in Japan’s capital, compared with 32 square metres in Singapore and 42-43 square metres in Shanghai and Sydney.
Yet, for expats who are more flexible about where they are based, or those looking to purchase second homes, there are other options among Asia’s top cities.
Kuala Lumpur, Bangkok and Mumbai – which have the lowest prime capital values among Asia’s leading cities – are attracting increasing interest from foreign buyers. In fact, some of the most affordable cities have emerged as the strongest performers.
In the final quarter of 2023, Manila experienced the fastest growth in luxury residential prices in annualised terms among 45 global cities tracked by Knight Frank, underpinned by a “surge in requirements from expats”. Victoria Garrett, director of global residential at Savills, said “a lot more expats [in Asia] are focused on relative affordability and quality of life”.
A third trend that does not get enough attention is the spike in Japanese real estate investment overseas. While Japan itself is a magnet for global investors, partly because of its appeal as a stable and mature market, the effects of ultra-loose monetary policy in Japan have forced domestic investors to seek out higher-yielding opportunities abroad.
Nowhere is this more apparent than in Australia. According to MSCI, Japanese buyers deployed more capital in Australia last year than in the past 20 years combined. Their main focus, moreover, was rental housing; the country’s nascent build-to-rent sector holds significant appeal.
Australia ticks the right boxes for Japanese buyers. Aside from being a transparent and liquid market, it is experiencing an immigration-fuelled surge in its population, in stark contrast to Japan’s acute demographic crunch. Japanese investors have also benefited from less competition from their US and European rivals.
Michael Back, co-head of the Asia real estate practice at Herbert Smith Freehills in Brisbane, said Japanese investors in Australia were having “their time in the sun” and that the nation’s “population growth [was] a very important factor”.
Seoul’s exceptionally strong office market, the relative value of prime residential property and Japanese investors’ big push into Australian rental housing are not the only trends in Asian real estate that are underappreciated, but they deserve greater attention.