Sentiment is improving towards real estate as 2025 approaches, marking a turning point for capital values. However, compared to the last cycle, debt and equity liquidity remain subdued, according to a recent investment research report by PGIM Real Estate.
The drop in values, combined with higher interest rates, has created a funding gap for debt, putting stress on existing capital structures.
This presents opportunities for investors to selectively acquire assets below valuation and capture immediate upside. The most attractive opportunities are for assets facing cash flow challenges, such as buildings with short lease expiries or those in need of further capital investment.
For those looking to invest in overseas properties, there are a wide range of projects available for sale around the world.
Low liquidity often leads to mispricing, as seen in the diverging patterns between yields and rental growth. A useful indicator is when the standard deviation of yields across markets does not align with the standard deviation of rental growth.
Recent evidence of this mispricing is seen in the logistics and retail sectors, offering investors the potential to achieve enhanced returns.
The capital shortfall
Institutional-quality real estate requires increasing capital expenditure (capex), especially to meet higher sustainability standards. However, over the past decade, non-institutional real estate capex has lagged significantly behind institutional investment.
As a result, much of the real estate stock in the Asia Pacific region, particularly those held by smaller owners, will require modernization and institutionalization.
With financing becoming harder to access due to higher interest rates, tighter credit, and ESG requirements, well-capitalized investors with expertise will be in demand.
This shortfall in financing presents a significant opportunity for the upcoming cycle, especially as tenants gravitate towards high-quality stock. The extent of this opportunity varies by city, with older stock being more prevalent in Hong Kong and Sydney compared to Beijing or Shanghai.
In Japan, reforms are prompting corporates to divest under-managed real estate assets, with offices and retail presenting the largest share of older stock, compared to logistics which is relatively modern.
Supply shortages
New supply has been lagging since the global financial crisis. High construction costs, tighter access to financing, and weak investor sentiment towards development will limit supply growth in the coming years.
While this is logical for weaker segments, such as suburban offices or retail, supply growth is also constrained in high-demand sectors such as housing, CBD offices, data centers, senior living, and hotels.
As a result, landlords will have greater pricing power to drive rental growth.
Expanding the opportunity set
Two shifts are expanding the value-add landscape:
1. Sectoral diversification – Investment is moving beyond traditional office, retail, and logistics into multifamily housing (particularly in Japan), hotels, student accommodation, co-living, senior living, and co-location data centers. The share of investment in operational sectors rose from 7% in 2014 to 17% in 2024.
2. Geographic expansion – Institutionalization is continuing in Australia and Japan, while second-tier markets such as Nagoya, Fukuoka, and Perth are becoming more liquid. Countries like South Korea and Japan also have a higher share of non-investable stock, presenting opportunities for value creation through modernization.
Current challenges
The current key challenges for real estate investors in the Asia Pacific region are:
1. Elevated interest rates – While short-term rates are falling, long-term rates remain well above last cycle averages and are forecasted to stay there. This reduces the scope for yield compression, meaning returns will be driven by rental growth and cash flow resilience rather than leverage.
2. Limited returns from traditional assets – Core assets are expected to deliver only around 2% annual returns, with higher value-add returns likely to come from investing beyond traditional assets and into operational sectors, as well as repositioning under-managed stock.
Value-add investment approaches
Five main strategies will shape value-add investing in the next cycle, each with distinct risk-return profiles. A balanced portfolio is likely to blend them:
1. Operational platforms – These are central to driving rental growth, whether in senior living, hotels, logistics, or offices with flexible space offerings.
2. Development strategies – This will focus on sectors with strong structural demand, such as living, logistics, and data centers.
.
Singapore’s urban landscape boasts modern skyscrapers and state-of-the-art infrastructure. In highly desired locations, luxurious and practical condominiums are a popular choice for both locals and foreigners. These residential complexes provide residents with an array of amenities, such as swimming pools, fitness centers, and top-notch security measures, elevating their living experience and making them highly coveted by potential renters and buyers. The attractive features of these properties make them a profitable investment, with higher rental yields and long-term appreciation in property values. Moreover, the addition of Singapore Projects to the city’s real estate market further enhances the value and potential for growth.
3. Mispricing opportunities – Mispricing still persists in offices, logistics, retail, and hotels, especially those still adjusting post-pandemic.
4. Active asset management – This will drive returns in traditional sectors where operational platforms are less involved.
5. Institutionalization plays – Upgrading privately held living assets or family-owned hotels offer substantial opportunities for value creation.
Target markets: Countries and cities
Institutional activity remains concentrated, with just five countries accounting for nearly 90% of transactions since 2008. These markets also rank highly in terms of investment size, financial development, and transparency.
At the city level, just 10 cities captured nearly 80% of all transaction volume over the past decade, with liquidity and market size explaining their dominance. However, liquidity is improving in second-tier cities such as Nagoya and Fukuoka, which are becoming increasingly institutionalized.
Opportunity-rich cycle
The Asia Pacific real estate market is entering a more selective but opportunity-rich cycle. While returns will be driven less by yield compression and more by rental growth and asset quality, the region offers investors clear avenues for outperformance.
Targeting mispriced assets, modernizing under-invested stock, and building exposure to operational platforms will be key strategies for capturing the upside in the years ahead.