PART 2: The Capital

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PA R T 2 : T H E C A P I TA L

INTEREST RATE PRICING fundamentals. Unsurprisingly this is resulting in diverging bid-ask spreads. There is no easy solution out of this impasse, other than to assess the asset within the current climate. Vendors choosing to put their asset on the market

To date, the region has remained remarkably resilient. Not only is the regional GDP outlook better than other regions in 2022, but the region is also forecasting stronger growth in 2023. In this respect Asia Pacific sits alone as the only region to forecast stronger growth in 2023 than 2022. However, global inflationary pressures are causing central banks to lift interest rates both earlier and more aggressively than originally heralded. With this, commercial real estate pricing is coming under pressure and it is likely only a matter of time before capitalisation rates (cap rates) soften. Those markets where interest rate hikes have been earlier and more aggressive are likely to come under pressure first, but at the same time these markets are therefore likely to “reset” first and set the environment for other markets to follow. Arguably, it is no longer tenable for capitalisation rates to remain as tight as current standards when increasing interest rates are pushing up the short end of the yield curve such that property to bond yield spreads are now below longer-term averages. While inverted yield spreads are not new, at the same time they are also not an enduring trend. The upward pressure on property yields is not universal. Not only are central banks lifting interest rates at variable speeds, but there is also a great deal of heterogeneity in property market

need to recognise purchasers’ likely increased cost of debt and the impacts on return metrics. At the same time, purchasers seeking high quality assets, especially in off-market transactions, also need to recognise the premium of these assets and their likely resilience through the temporary downturn. DOWNWARD PRESSURE ON PRICING IS LIKELY TO INCREASE AS INTEREST RATES RISE. POTENTIAL VENDORS NEED TO UNDERSTAND WHY THEY ARE LOOKING TO TRADE AND MEET THE MARKET ACCORDINGLY. Outside of this wider pricing pressure, current conditions may shift investor strategy in other ways. The stronger underlying growth prospects of the Asia Pacific region may cause some investors to divert more capital into the region, especially given the greater inflationary pressures seen elsewhere. At the same time current conditions and “risk-off”

Macro-economic volatility together with rising interest rates have driven a level of

uncertainty in commercial real estate investment. This has resulted in something of a pause as investors adapt their strategy to the changed environment. For those investors with capital to deploy, the region remains attractive for its long-term growth fundamentals. This, together with an increasing urgency to address Environmental, Social and Governance (ESG) requirements expected by both capital partners and corporate occupiers is also expected to drive deal activity as investors look through current conditions and continue averaging-in to the region. Against this macro-economic backdrop, the focus then shifts to identifying appropriate opportunities across sectors within the region.

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