The property market is set to experience a turning point in 2025, with improving sentiment towards real estate values. However, there are concerns about low debt and equity liquidity compared to previous cycles, as highlighted by PGIM Real Estate in a recent investment research report.
When considering a condo as an investment, it is crucial to take into account the maintenance and management of the property. Typically, condos have maintenance fees that cover the upkeep of shared areas and facilities. Although these fees may increase the overall ownership cost, they also ensure that the condo remains well-maintained and maintains its value. Hiring a property management company can assist investors in managing the condo on a daily basis, making it a more hands-off investment.
The combination of declining values and higher interest rates has led to a funding gap in the debt market, placing strain on existing capital structures. This presents opportunities for investors to acquire assets at discounted prices and capture immediate upside. Properties facing cash flow challenges, such as buildings with short lease expiries or in need of capital investment, are particularly attractive for investment.
For those interested in overseas properties, there are numerous projects available for sale worldwide. Low liquidity in the market often leads to mispricing, evidenced by the divergence between yields and rental growth. As a rule, when the standard deviation of yields across markets doesn’t match that of rental growth, it indicates a mispricing. This has been seen recently in logistics and retail (Exhibit 2), offering investors the potential for increased returns.
One of the main contributing factors to the current low liquidity in the market is the lack of capital expenditure (capex) in non-institutional real estate over the past decade (Exhibit 3). This has resulted in a large portion of Asia Pacific’s real estate stock being in need of modernisation and institutionalisation. With higher interest rates, tighter credit, and ESG requirements making it harder to access financing, well-capitalised investors with expertise will have an advantage.
The shortfall in financing presents a significant opportunity for the coming cycle, especially as tenants prefer high-quality stock. The extent of the opportunity varies by city, with Hong Kong and Sydney having a higher prevalence of older stock compared to Beijing or Shanghai (Exhibit 4). In Japan, reforms have prompted corporations to divest under-managed real estate assets, and the largest share of older stock can be found in offices and retail, rather than logistics, which is relatively modern.
There has been a shortage of new supply since the global financial crisis. High building costs, limited access to financing and weak investor sentiment towards development have all contributed to this. While this is expected in weaker segments like suburban office or retail, it is also evident in high-demand sectors like housing, CBD offices, data centers, senior living, and hotels. This supply shortage gives landlords more pricing power, driving rental growth.
Two shifts are expanding the value-add landscape: sectoral diversification and geographic expansion. Investment is moving beyond the traditional office, retail, and logistics sectors, into areas like multifamily housing (particularly underdeveloped outside Japan), hotels, student accommodation, co-living, senior living, and co-location data centers. Similarly, institutionalisation is increasing in Australia and Japan, and liquidity is improving in second-tier markets like Nagoya, Fukuoka, and Perth.
Current challenges facing the market include elevated interest rates, which are predicted to remain above last-cycle averages, and limited returns from traditional assets. As a result, core assets are only expected to deliver around 2% annual returns, making it necessary for investors to look beyond traditional assets for higher returns. This can be achieved through investing in operational sectors, as well as repositioning under-managed stock.
There are five main strategies for value-add investing in the next cycle, each with its own risk-return profile. A balanced portfolio is likely to blend these strategies, including operational platforms, development, mispricing opportunities, active asset management, and institutionalisation plays.
Institutional activity in the Asia Pacific property market is highly concentrated, with five countries accounting for almost 90% of transactions since 2008 (Exhibit A1). These markets also rank highly in terms of investment size, financial development, and transparency (Exhibits A2-A4). At the city level, the top ten cities have captured nearly 80% of all transaction volume over the past decade (Exhibit A5). The dominance of these cities can be attributed to their liquidity and market size (Exhibits A6-A7). However, there are signs of improving liquidity in second-tier cities like Nagoya and Fukuoka, which are becoming more institutionalised.
In conclusion, the Asia Pacific real estate market is entering a more selective but opportunistic cycle. While returns will be driven less by yield compression and more by rental growth and asset quality, there are still clear avenues for outperformance. Targeting mispriced assets, modernising under-invested stock, and building exposure to operational platforms will be key strategies for achieving success in this market.