APAC Investment Hit by Interest Rate Surge in Q3 as Office Deal Volume Plunges 45%

Fears of an economic slowdown and higher interest rates squelched sales of income-earning real estate assets in Asia Pacific during the third quarter of 2022, with trades of office properties plunging 45 percent year-on-year to $14.9 billion, according to MSCI Real Assets.

The retail sector slowed even more rapidly, with deals for malls and high-street shops tumbling 54 percent to $4.2 billion compared with the same period last year, the data provider said in its Capital Trends report released this past week.

Even the milder decline of 24 percent in trading of industrial properties, to $8.7 billion, was propped up by a single transaction: JD.com’s acquisition of China Logistics Properties and its portfolio of 42 properties, valued at close to $3 billion. Without that mega deal, logistics investment would have had its quietest quarter in five years, MSCI said.

“The rapid changes in the macroeconomic environment are now bearing down hard on the commercial real estate market and the slowdown has deepened in the third quarter,” said Benjamin Chow, head of Asia real assets research at MSCI. “Not only is new dealmaking activity dwindling, but deals are also falling through, which is a negative signal for upcoming quarters.”

Terminated Transactions

Overall investment volume in the region totalled $32.6 billion in the third quarter, marking a 38 percent decline from the year-earlier period and widening from a 16 percent year-on-year slump in the second quarter.

Trade of commercial properties, which MSCI defines as including office, industrial and retail assets, fell 42 percent year-on-year in the quarter to $27.8 billion, bringing the 2022-to-date sum to $111.4 billion, which was down 20 percent.

The largest third-quarter office transaction recorded by MSCI was the $879 million sale of the Goldin Financial Global Centre in Hong Kong, although media reports indicate that the deal later fell through amid legal wrangling.

Not including the Goldin deal failure, the quantum of terminated transactions in the quarter, including Mirae’s collapsed $3 billion purchase of IFC Seoul from Brookfield, totalled $6 billion, or almost 20 percent of overall deal volume, MSCI said.

The third quarter’s next-biggest office deal was Hulic’s resale of the Minato Mirai Center Building in Yokohama to M&G Real Estate in a transaction valued at $849 million by MSCI. Japanese builder Hulic had purchased the 21-storey office block from the asset management division of Goldman Sachs for $835 million during the previous quarter.

Other large office trades in the July-September period included Lendlease’s $582 million acquisition of a 49 percent stake in a joint venture with Singtel to redevelop the latter’s Comcentre headquarters in Singapore’s Orchard area, as well as sovereign investor GIC’s purchase of a half-stake in a $568 million Melbourne office development, 555 Collins Street, from Charter Hall.

Hotels Hold Steady

The hotel sector fared better than others in the third quarter, with volume declining just 8 percent year-on-year to $2.4 billion. It was the only segment in which the pipeline remained constant from the same point in 2021, with more than $1 billion worth of properties traded in Japan in the third quarter alone, although many of the purchased properties may not stay in the hospitality sector.

“The decline in the hotel sector was slight, but some of the deal activity in that sector is to reposition hotels as different property types altogether,” said David Green-Morgan, global head of real assets research at MSCI.

An example of such conversions is Angelo Gordon and Weave Living’s $115 million purchase of the Grand City Hotel in Hong Kong Island’s Western district for transformation into a co-living project, one of a string of hotel acquisitions by locally based Weave in recent months.

For the apartment sector, which saw investment fall 13 percent year-on-year to $1.6 billion, Japan continued to be a centre of activity during the third quarter. The biggest buyer was French fund manager AXA IM Real Assets, which picked up two portfolios of multifamily and student housing properties across Greater Tokyo and Osaka totalling $418 million in value.