Buoyant capital markets, strengthening economies and steadily rising demand for real estate in an investment portfolio are likely to continue creating “Goldilocks” conditions for real estate investors globally in 2018.
However, lingering geopolitical tensions and economic risks could potentially disrupt these “just right” macroeconomic conditions.
The rising middle class in Asia, the younger demographics of Southeast Asia, and most importantly, the political stability and positive economic momentum of the two largest economies in the region, China and Japan, are expected to continue to anchor the Asia Pacific macro outlook in 2018. Combined with gradual increases in interest rates/inflation and the continued relative calm of capital markets across all asset classes, a wide range of build-to-core and value-add opportunities1 across the region are likely to be created.
However, real estate investors should remain mindful of and be prepared for the “three bears” scenarios the region could face: geopolitical threats, financial system threats and the side-effects of a “hyper-stimulus” scenario. Within Asia Pacific, China’s debt problem, Japan’s challenge in stimulating inflation, Australia’s over-leveraged households and imbalanced economic structure, low housing affordability in major countries across the region, and the threat from North Korea, all have the potential to disrupt the region’s economic outlook.
LaSalle believes that real estate investors who look beyond a deal-by-deal approach and shift towards a wider portfolio view will be best placed to seize the opportunities the region has to offer, such as taking advantage of low-cost debt in Japan, rising demand for logistics space throughout the region, shortages of affordable housing in major cities, and rising tourism levels.
Asia Pacific is expected to continue its solid growth trajectory relative to the rest of the world in 2018. We remain cautiously optimistic on Asia Pacific economies and real estate fundamentals over the next two to three years. However, regional and global geopolitical risks could interfere with the region’s growth, trade and investor confidence. There could be short-term volatility if these risks are combined with pockets of supply/demand imbalance. Interest rates in major Asia Pacific countries are expected to remain largely accommodative in 2018, although rates will eventually head towards “normalization”. While the probability of significant yield expansion in most Asia Pacific markets over the near term remains low, there could be pockets of weaknesses or re-pricing. If occurs, it is likely to offer attractive investment opportunities.
LaSalle believes that real estate investors who look beyond a deal-by-deal approach and shift towards a wider portfolio view will be best placed to seize the opportunities the region has to offer, such as taking advantage of low-cost debt in Japan, rising demand for logistics space throughout the region, shortages of affordable housing in major cities, and rising tourism levels.
Offices in Sydney and Melbourne, multifamily and non-discretionary retail in Japan, and modern warehouses in key hubs in Asia Pacific remain attractive to core investors. Furthermore, the real estate markets and sectors in the region that are projected to offer growth potential or higher returns in 2018 include the following:
Globally, investments in stabilized, leased real estate are the most direct way to get the asset class characteristics that make real estate a valuable multi-asset portfolio diversifier. At the same time, investors should seek a balance of core and value-add strategies while also setting aside capital for opportunistic and debt strategies.