Hines: Developed Asian real estate prices have fallen 10%

But aggregate repricing in the region has been more limited than that of North America and Europe, according to a new report.

The price adjustment in developed Asian real estate markets is offering an attractive entry point for investors looking to achieve a higher risk-adjusted return by diversifying into the region, according to Hines’ latest research report.

Developed Asian real estate prices have fallen about 10 percent overall from their peak as of Q2 2022. However, the corrections are not consistent across the region due to variations in economic policies and conditions in the individual markets.

For example, the price corrections in Australia and New Zealand are more significant than in the North Asian markets as the former have seen more substantial moves in rates. Standing between 4-4.5 percent, the 10-year bond yields in Australia and New Zealand are currently above their 15-year average and the policy rates are expected to remain around the same level.

Tim Jowett, managing director and head of Asia research at Hines, told PERE that there might be more pricing adjustments driven by the expectation of higher-for-longer interest rates and limited liquidity in Australia. Last week, the Royal Bank of Australia kept interest rates on hold as inflation was higher than expected.

In terms of sectors, office assets in Asia have repriced due to both the downward pressure in rental growth as well as the upward movements in interest rates. For example, office rents in Japan has dropped for 15 consecutive quarters since Q1 2020 for a total decline of 19.7 percent. This has created attractive opportunities to acquire and upgrade underperforming office assets in core locations of Asia’s leading cities, according to Jowett.

Aggregate real estate price corrections for Asia have been more limited than those observed in the North America and Europe, “even as individual Asia markets have shown similar quantum of correction to the US and Europe,” Jowett and Joshua Scoville, head of global research, wrote in the report. The average real estate prices in the US and Europe have dropped by 18 percent and 28 percent respectively.

Because of the price corrections in the region, Jowett believes it is a good time to enter the Asia real estate market since an allocation to the region increases returns and reduces volatility in a hypothetical US dollar-denominated global portfolio.

A hypothetical developed Asia real estate portfolio had the lowest downside volatility compared to portfolios focused on other regions, according to Hines’ analysis of MSCI data. While a developed Asia real estate portfolio saw downside volatility of 1.3 percent as of December 2022, the US portfolio recorded the highest downside volatility of 4.4 percent.

The lower volatility in the Asia portfolio could be attributed to the varying cycles in the region’s property markets. “For example, Hong Kong has been a market that has been repricing for some time while Japan has not seen so much repricing. So it is really that combination of market returns that is helping to smooth out investors’ return,” Jowett explained.

As a result, investors should diversify their investments with an Asia-Pacific allocation that includes multiple markets in the region, for the benefit of achieving a better risk-adjusted return in the long term, said Jowett.