The 2023 ULI Asia Pacific Summit in Singapore brought together a panel of prominent investors to discuss how a fast-changing global macro environment is impacting Asia Pacific’s commercial real estate markets.

Moderated by U.S.-based BentallGreenOak’s Richard Price, the panel first noted that current conditions are uncharted territory for an industry conditioned by 40 years of falling interest rates and inflation. According to GIC’s Jeffrey Jaensubhakij: “The question to ask now is: will this change be permanent? Is this the end of the ultra-low interest rate environment, and if so what are the implications for business models of those invested in real estate?”

On the basis that rates are likely to remain elevated for an extended time, Jaensubhakij suggested that traditional strategies that rely on leverage, rising values, and cap rate compression may no longer be viable, forcing investors to adopt alternative approaches.

In particular, there is an ongoing preference for assets in niche but fast-growing sub-sectors focused on “beds” (e.g., co-living, hotels, multifamily residential), as well as on data centres and cold storage. While these spaces continue to offer promising returns, however, they have become a crowded trade and anyway lack the capacity to absorb the large volumes of capital held by institutional investors.

Another approach has been to be more proactive in the way already-owned assets are operated. According to Sophie van Oosterom of Schroders Real Estate, “we’re thinking more around how to make tenants optimise operations within their buildings—how to offer your tenant services, think more flexibly around their income, or the way they do business. Thinking through every building almost as if it’s a hotel. How can you attract a tenant for a day? How can you help your tenants perform better?”

At the same time, there was a general recognition that global markets had decoupled in recent years, with the result that the downturn in commercial real estate now underway in the U.S. and Europe—in particular for office assets—may not apply in the Asia Pacific, or at least not to the same extent.

According to CapitaLand Investment’s Simon Treacy: “I’m sleeping well. Asia is in a better position vis-a-vis the U.S. and Europe at a time where Europe especially is underweight [in the region]. And I think the constant throughout these cycles is that Asia offers growth and diversification from a macro perspective, so that’s where it has value relative to the U.S.”

Nonetheless, Asia Pacific markets are sometimes being tarred with the same brush by global investment committees, no matter how well they perform. In part, this can be explained by a “home bias” during a time of crisis. But China in particular seems to be indigestible for many Western-based funds as a result of ongoing geopolitical tensions.

This mentality belies China’s strong fundamentals, said Treacy, who added that the current deficit of local capital in Chinese markets is unlikely to last, as deep-pocketed domestic institutions again look to deploy: “Renminbi money is building up quickly” he said, “and the China REITs will disrupt that too—we’re going to get to a point where markets will be fully developed from a capital markets perspective and there will be a limited role for foreign money.”

Another consequence of global decoupling is that investors are increasingly looking to diversify critical supply chains, leading to a growing trend for capital earmarked for construction of new manufacturing facilities in China being steered instead to other Asian markets. These include Vietnam, Indonesia, Thailand, and most recently India, which is seeing a surge in interest among investors as large global manufacturers begin to establish operations.