Inside Asia’s commercial real estate: The cities thriving and those facing tough times

Shifting consumer preferences, evolving regulatory environments, and fluctuating economic policies mean commercial real estate investors in Asia must remain cautious yet agile

When the US economy shows signs of slowing, concerns ripple globally, often impacting Asian economies. However, while last year’s fears of a US-led global recession loomed large, the reality proved different. Asia experienced a boost in exports as the US economy regained strength. However, commercial real estate in the region presents a mixed outlook, with some markets flourishing and others grappling with structural challenges.

Asia’s growth potential has always been resilient, but shifting consumer preferences, evolving regulatory environments, and fluctuating economic policies mean commercial real estate investors must remain cautious yet agile. Japan has been a standout in the commercial real estate market, bucking the global trend. In 2023, while commercial property values dropped by 44 percent globally,

Japan’s real estate market grew by an impressive four percent, thanks largely to its lowinterest rate environment. The Bank of Japan’s sustained commitment to low rates has helped attract both domestic and foreign investment, driving demand for high-quality assets in core markets.

Hotels and multifamily units have emerged as the hottest sectors, outpacing warehouses, which faced labour shortages and escalating construction costs. As a result, Tokyo has become a magnet for cross-border capital flows, as investors seek stability in a market offering relatively high yields. Tokyo remains the only Asian city providing both rental growth and a positive spread of real estate yields over borrowing costs, a rare advantage highlighted by Ada Choi, head of Asia Pacific research at CBRE.

China’s commercial real estate market faces headwinds, contrasting sharply with Japan. With Beijing’s vacancy rate reaching nearly 20 percent and Shanghai’s around 15 percent, concerns about an overextended property sector persist. Before the pandemic, the average vacancy rate stood at 10 percent, underscoring the structural shifts in demand. The rapid urbanisation and supply surge in recent years have led to oversupply, particularly in office and retail spaces.

S&P recently warned of significant risks for Chinese banks heavily exposed to commercial real estate, underscoring the potential impact of a slowing economy, high vacancy rates, and reduced mortgage activity on China’s real estate landscape. The Chinese government has implemented several measures to stabilise the market, yet recovery remains uncertain. “A decelerating economy could further dampen office demand, driving retail vacancy rates higher as consumer spending softens,” says Gary Ng, senior economist at Natixis.

Australia’s commercial property market shows early signs of resurgence. In Q2 2024, transaction volumes hit AUD11.8 billion, reflecting a modest five percent year-on-year decline, a significant improvement over previous quarters’ doubledigit decline. Urban centres like Sydney and Melbourne are leading this gradual recovery, with the potential for further stabilisation as investor confidence returns. Notably, sectors such as life sciences and data centres are drawing increased interest, as these assets demonstrate resilience and high growth potential. Benjamin Martin-Henry, head of real assets research for Pacific at Hall and Wilcox, views the trend as a “promising resurgence following two challenging years.” This sentiment reflects the broader appetite for specialised real estate sectors that are increasingly considered as recessionproof or adaptable in a high-inflation environment. Singapore’s retail sector is capitalising on a robust tourism recovery, bolstered by a new visa-free scheme with China. Orchard Road, the city’s premier retail strip, has seen several major openings, including Nike’s largest store in Asia and Hoka’s first standalone store. Retail continues to thrive despite the e-commerce trend, with online sales accounting for only 14 percent of total retail sales as of August 2024.

Singapore’s real estate landscape benefits from its strategic position as a gateway to Southeast Asia, attracting significant foreign investment. Physical retail remains popular, especially experiential segments like food and beverage, which constituted 46 percent of new openings in October 2024, as noted by Xian Wang Yong of Cushman & Wakefield. The city-state’s focus on experiential retail has led to the creation of vibrant spaces designed for social interaction, reinforcing its appeal as a retail investment hub.

The Philippines, which recorded the fastest economic expansion in Southeast Asia last year, reported a Q2 GDP growth rate of 6.3 percent. While the government’s ban on Philippine Offshore Gaming Operators (POGOs) may impact the office market, experts believe the effect will be limited. Colliers projects the office vacancy rate in Metro Manila will rise to 22.2 percent, a manageable increase as traditional firms and IT companies fill the gap left by POGOs. “Today, POGOs account for less than 11 percent of office space demand, a fraction of their pre-pandemic influence,” observes Mikko Barranda of Leechiu Property Consultants. Manila’s growing BPO (business process outsourcing) sector continues to fuel demand for office space, mitigating the impact of regulatory shifts and enhancing the market’s overall resilience.

Thailand’s commercial property sector is booming, driven by expectations that the country will lead in electric vehicle (EV) manufacturing. The launch of the One Bangkok mixed-use complex, with plans for over 900 stores and two luxury hotels, reflects the country’s bullish outlook.

With the Thai government providing incentives for EV production, JLL predicts that Thailand’s EV industry growth could catalyse a USD6.5 billion real estate market by 2030, supporting facilities and infrastructure linked to EV production. This trend underscores the strategic alignment between Thailand’s real estate sector and its industrial ambitions, showcasing a model for integrating manufacturing growth with commercial real estate.

Though Cambodia’s economy is expected to grow by 5.8 percent this year, the real estate sector faces a 39 percent decline in approved development permits, indicating a broader construction slowdown. The primary factors include rising construction costs and stricter regulations aimed at controlling speculative investments. However, the opening of commercial projects like the Maritime Tower in Phnom Penh and the Maline Office Park suggests that demand for quality office space remains. Foreign direct investment, particularly from China, continues to play a crucial role in sustaining Cambodia’s commercial sector. This trend will likely continue as foreign investments in the country’s commercial sector increase, with Phnom Penh emerging as a key destination for Southeast Asian commercial real estate.

As Asia enters 2025, all eyes are on global interest rate trends. In September, the US Federal Reserve cut rates to between 4.75 percent and five percent, prompting regional investors to watch for potential impacts on borrowing costs. Meanwhile, China’s economic growth will significantly influence regional real estate dynamics. Investors are particularly focused on China’s policy shifts, as these could signal broader trends for the rest of the region. Nonetheless, Simon Smith, head of Asia Pacific research at Savills, believes the region can “carve its path,” with diverse investment opportunities regardless of external pressures. Asia’s commercial real estate sector illustrates the region’s varied economic landscape. Investors are watching closely to navigate these opportunities and challenges, adjusting strategies to Asia’s unique mix of growth potential and economic risks. The region’s adaptability and market diversification offer a promising future for those able to read the shifting dynamics effectively, allowing for targeted investments that align with both local and global trends.

The original version of this article appeared in PropertyGuru Property Report Magazine Issue No. 187 on issuu and Magzter. Write to our editors at [email protected].