Commercial Property Investments in APAC Decline

While Mainland China was the most active market, Hong Kong’s commercial real estate received the smallest amount of capital in the region

Investment in commercial property in the Asia-Pacific region plunged to the lowest level in 13 years in the third quarter of 2023 as elevated interest rates dampened demand, according to the latest report by JLL. The amount fell by more than a fifth from the same period a year ago to US$ 21.3 billion, the lowest figure since the second quarter of 2010.

Hong Kong’s commercial real estate received the smallest amount of capital in the region even as it enjoyed 15%annual growth, the report showed. Mainland China was the most active market, with US $4.7 billion of commercial property investment, up by 47%from a low base in the third quarter of 2022. Many central banks have tightened their key interest rates with “unprecedented” speed and scale to tame runaway inflation, JLL said.

For example, it took just 15 months for the US Federal Reserve to raise borrowing costs by 525 basis points, a dizzying pace compared to the prior four cycles when it increased rates by 280 basis points over a 23-month period. “Due to the rise in rates, fixed-income instruments have once again become yield-attractive assets to institutional investors, causing them to reconsider allocations to fixed-income versus other asset classes,” the property consultancy said in its report.

With property’s share of institutional investors’ portfolios rising to about a third in 2022 from just 8.7%in 2021, JLL said investors had “reported overweight exposure to real estate”. “This suggests a short-term challenge to real estate, as investors look to maintain target asset allocations,” the report said. “However, these challenges are short term and, investment in commercial real estate is a long game.”

Measured by local currency and the US dollar, commercial property in the region yielded the fourth- and sixth-highest annual returns respectively among asset classes, generating between about 6%and 8%. It was outperformed by American, Japanese and Australian equities as well as global private equities. “Private commercial real estate also offers lower volatility and correlation to other assets, while acting as an inflation hedge as it captures rental reversion alongside rising price levels,” JLL said.

In the July to September period, investment in Hong Kong’s commercial property, including offices, logistics, retail premises and hotels, amounted to US$800 million, with most of the transactions being “small lump sums involving strata-title assets for owner occupation”.

Strate-title refers to the purchase of multiple levels or units within a building, as opposed to buying the whole building. One of the key transactions in the third quarter was the sale of the Hotel Ease in Mong Kok for HK$560 million (US$71.7 million) to a local investor, the report said. The property was put on sale by the family of the late retail tycoon Tang Shing-bor, known as the “shop king”, who had initially wanted HK$730 million for it.

Slow economic growth and high interest rates have hobbled property investment in Hong Kong, JLL said. Last month, preliminary figures from the government indicated that the city’s economy had expanded by 4.1%in the third quarter from a year earlier, though the gain was just 0.1%on a quarterly basis. “Institutional investors have been on the sidelines amid tightened financial conditions,” the report said. “The office investment market was especially quiet as investors remained cautious about the weak rental performance and high vacancy situation of the sector.”

Investors believe interest rates are likely to remain elevated until the middle of 2024, hampering investment volumes, said the report. South Korea, Japan, Australia and Singapore received investment of between US$2 billion and US$4.2 billion in the period.