Global real estate investors acknowledge they will encounter a fresh set of challenges in 2023, identifying pricing and interest rate uncertainties as the main factors influencing capital deployment into Asia Pacific commercial real estate.

According to global real estate consulting firm JLL’s (NYSE: JLL) Asia Pacific Investor Sentiment Barometer 2023, 78% of investors named pricing uncertainty as the biggest challenge to capital deployment ambitions in 2023, while 70% believe that uneven and unpredictable interest rate policy globally will impact investment decisions. The sentiment marks a shift from early 2022, where 82% of investors polled by JLL named competition for assets their biggest capital deployment challenge. This is compared to 9% in 2023.

Uncertainty on pricing and interest rates will likely result in an ongoing decline in total capital deployed in 2023, but longer-term optimism remains high with investors polled saying central bank policy is prompting a pause rather than a retreat from investment activity. According to JLL analysis, 58% of respondents believe that benchmark rates will first need to adjust down 50-100 bps before investment activity picks up. As a result, approximately 60% of investors polled expect volumes to decline further in 2023 from the low bae of $129 billion deployed into Asia Pacific real estate in 2022, aligning with JLL’s forecast of a modest 5-10% decrease published in its Asia Pacific Outlook 2023. 

"Investors are poised to adjust capital plans in 2023 as deployment challenges evolve to mirror the unpredictable global macroeconomic and central bank policy environment," says Roddy Allan, Chief Research Officer, Asia Pacific, JLL. "However, this period of expected caution is not indicative of the favourable longer-term faith investors have in the region, but it will force an adjustment in how, when and where they accelerate the deployment funds later in year.” 

In response, investors are rethinking their strategies and risk tolerance levels in 2023. Value-add strategies are in greater focus for 64% of respondents, up from 53% in last year’s survey, including deployment of capital to upgrade and comply with sustainability targets in core markets, and to repurpose hotel assets as multifamily projects considering supportive positive market demographics including residential shortages.

When executing strategies, investors pinpointed direct investments and debt as the two most-favoured methods to deploy capital in 2023, with 48% and 39% of respondents increasing their focus on such deals respectively. Respondents cited interest in direct investments, due to limited joint venture and platform opportunities, and the higher potential returns on debt resulting from rising rates pushing these capital strategies regionally.   

Logistics - underpinned by robust occupier demand and rental growth - was identified by investors as the asset class anticipated to see the largest net increase in capital and loan exposure this year, with 64% of investors planning to increase their exposure to the sector in 2023. Investors and lenders are also increasingly looking at alternative asset classes regionally as central to value-add strategies, with 46% of respondents expecting assets under management (AUM) in multifamily to grow. Hotels will also prove attractive as travel restrictions lift and tourism returns, with 32% of respondents expecting hospitality AUM to increase in 2023.

In an uncertain operating environment, investors will favour stable geographies such as Japan and Singapore, with 68% and 60% of respondents expecting to increase their exposure to those in 2023. Specifically, Tokyo is poised to be a major recipient of capital in 2023, with the multifamily, logistics & industrial, and office asset classes ranking as the top three investment markets across the region in 2023. 

“Investors we speak with will continue to favour the region’s more mature economies and will gravitate towards markets where they have previously deployed capital. As we head deeper into 2023, we expect interactions with investors around pricing, the impact of higher interest rates and inflation across the region, to frame conversations,” says Stuart Crow, CEO, Capital Markets, Asia Pacific, JLL.

Methodology

JLL surveyed leaders from global and regional investors on their investment intentions, strategies and general outlook in 2023. Half of the survey respondents identified themselves as real estate and/or private equity investment managers, representing some of the world’s largest real estate investors and asset managers, while others were investors with diversified portfolios. North America and Europe are their main capital sources.