SINGAPORE (EDGEPROP) - A new survey by CBRE has found that investors expect real estate investment activity in Asia Pacific (Apac) to pick up in 2H2023, driven by reduced uncertainty regarding interest rates and an increase in capitalisation rates that will help close the gap in price expectations between buyers and sellers.

Capitalisation rates (or cap rates) — which measure a property’s value by dividing its annual income by its sale price — in Apac are projected to rise in 2H2023, continuing an increase registered in 1H2023 for all property types. The increase was recorded across most Apac cities with the exception of Japan and mainland China, where interest rates remain stable.

Over the next six months, CBRE expects cap rates to further rise by an additional 75 to 150 basis points, underpinned by higher borrowing costs and an uncertain economic environment. Cap rate expansion is expected to be most pronounced for core office and retail assets.

Against this backdrop, CBRE notes that most sectors are already seeing a narrower price gap, including Grade-A office, retail, institutional-grade modern logistics, hotel and multifamily properties. In contrast, when it comes to traditional logistic spaces, more buyers are looking for discounts, indicating that prices may be near their peak.

Meanwhile, the coming months should also provide more clarity on interest rates. CBRE notes that most Asian economies have seen rates stabilise in recent months. “The interest rate cycle appears to be approaching its peak, and we expect this will lead to price discovery in markets such as South Korea and Australia,” says Greg Hyland, head of capital markets, Asia Pacific, at CBRE.

In view of the expected cap rate expansion and certainty on interest rates, nearly 60% of respondents in CBRE’s survey believe that Apac investment activity will resume in the second half of the year. Overall, Japan is anticipated to lead the investment recovery in 3Q2023, followed by Mainland China and Hong Kong in 3Q2023, and Singapore, India and New Zealand in 4Q2023.

According to the survey, private investors continue to have the strongest buying appetite, while real estate funds and REITs show the strongest intention to sell due to current refinance pressure and the need to rebalance portfolios. Nearly half of respondents indicated that the cost and availability of financing will be investors’ most important consideration when evaluating potential acquisitions, due to rising interest rates and stricter lending standards.

Henry Chin, CBRE’s global head of investor thought leadership and head of research, Asia Pacific, points out that interest rate hikes have significantly increased the cost of financing for commercial real estate in the region, with higher interest expenses deterring investors from refinancing assets, particularly in Australia, Korea, and Singapore. “We expect Korea logistics, Australia offices and Hong Kong offices to face the biggest funding gap in the coming 18 months, which could lead to more motivated sellers in the second half of 2023,” he adds.