By Esther Ang

Managing Director of Credit and Asset Management, APAC

The second half of 2024 is poised to experience significant global volatility, impacting real estate markets across the Asia Pacific region. This volatility will be driven by a range of factors, including macroeconomic changes such as shifts in monetary policy, market dynamics like asset repricing and refinancing, political developments including election outcome, and geopolitical tensions such as the conflicts in Ukraine and Middle East. As some known risks diminish, the prevailing uncertainty could, in certain cases, heighten investment appetite for both equity and debt deployment. Nevertheless, the resulting outcomes have the potential to either bolster or impede market activity, pricing, and sentiment. In this article, we identify four major regional and global events that will shape the outlook for APAC real estate markets in the second half of the year.

1. Interest Rate Hikes by the Reserve Bank of Australia

Australia’s battle against inflation has re-intensified this year, driven by a series of hotter than expected Consumer Price Index (CPI) increases, robust retail sales and strong job data.  These factors have prompted the Reserve Bank of Australia (RBA) to signal for a potential interest rate hike. In the first five months of 2024, the monthly CPI accelerated from 3.4% to 4.0% over the 12 months to January and May, respectively. In June, Australia added upwards of 50,000 jobs – more than double the 20,000 jobs forecast – while the unemployment rate rose slightly to 4.1%, according to the Australian Bureau of Statistics (ABS).

Currently, Australia’s key rate stands at a twelve-year high of 4.35%. Expectations are mixed. Financial market pricing implies a 65% chance of a rate hike to 4.6% this year, reports Bloomberg. However, a separate survey of economists from 28 June to 1 July showed that the majority expect the RBA to keep the key rate unchanged throughout 2024.

The potential for another hike presents a double-edged sword for the Australian economy and real estate markets. If the RBA resumes monetary tightening while major advanced economies begin to loosen, it could attract an influx of capital into Australian bond markets, strengthening the Australian dollar. For international investors, a stronger Australian dollar increases the relative cost of investing and erodes returns when converted back to home currency. In real estate, rising borrowing costs could further soften international capital flows and reduce debt liquidity, as investors and lenders may shelve plans or redirect investment elsewhere. Additionally, higher borrowing costs may rekindle concerns about debt serviceability among some real estate borrowers, particularly on legacy assets that are not keeping pace with evolving sector-specific occupier requirements, as well as sustainability and technology trends. Tightened financial conditions could weigh on real estate valuations, decrease occupier demand, increase debt costs, and reduce liquidity. Borrowers will need to monitor the availability of credit across property sectors, the composition of active lenders, the impact on loan-to-value (LTV) ratios, and spreads over cash rates.

Australia’s unique position as a mature credit market compared to other APAC nations makes it a focal point for global investors. The duration of the RBA’s potential monetary policy divergence is crucial. The longer and wider the differential persists with international real estate markets, the less attractive Australia will appear to investors on a relative value basis. Conversely, if other advanced economies similarly see an uptick in inflation in the second half of the year, Australia may emerge as a harbinger of a resumed global inflation battle. Investors will watch closely how bond markets and capital allocators respond to a potential RBA hike with this less anticipated scenario in mind. The response to any RBA hikes will be closely monitored, potentially setting a precedent for other markets.

2. Impact of U.S. Presidential Election

In the U.S., President Joe Biden’s withdrawal from the presidential election in November has delivered a twist in the race for the White House that many had anticipated. With just under a month until the Democratic National Convention (DNC) in Chicago from 19-22 August, it remains to be seen if Vice President Kamala Harris, endorsed by Biden, the Clintons, and Barack Obama, will win the nomination outright or face challengers.

Biden’s withdrawal introduces new uncertainty over the future direction of the U.S., extending to international support for the APAC region. Several interconnected geopolitical and economic consequences will cascade from who wins the White House in November. Renewed economic and geopolitical tensions could cause significant shifts in everything from international trade relations to global capital flows, underscoring the interconnected nature of markets and the importance of geopolitical stability. For example, a second Trump administration raises the prospect of resumed U.S.-China trade wars, tariffs, and questions over the U.S. commitment to safeguarding Taiwan’s independence from China.

The working relationships between the U.S., Australia, and China have profound implications for Australia’s economy, including volatility in currency markets and commodity prices. Australia’s geopolitical strategy involves balancing its strong defence ties with the U.S. while seeking to normalise and improve trade relations with China. Any perceived weakening in U.S. support could reduce Australia’s leverage, making it more challenging to navigate its complex relationship with China and potentially impacting its export markets. This in turn, could weaken real estate market stability and soften overseas capital flows, triggering regional liquidity crunches and stifling transactional activity.

3. Public and Private Markets Valuation Discrepancies

Price dislocation between private and public (REIT) real estate valuations is stark. Public asset valuations reprice sharply and very quickly due to daily trading, while private valuations are much slower to reprice, supported by less frequent valuation requirements. The disparity between similarly priced assets across public and private markets created a raft of opportunities during the height of the pandemic uncertainty.

However, discrepancies between share prices and underlying asset valuations raise questions about the true value of assets and the reliability of current valuation practices. For example, Lendlease, the Australian listed global property developer, saw its share price fall 17% in one day after its annual results on 19 February, due to weaker development revenues and a deteriorating earnings outlook. In extreme market scenarios, Australia’s superannuation funds act as a stabilising force, providing a wave of capital to opportunistically acquire mispriced assets when dislocation becomes exaggerated, and quality assets come to market.

Sustained high interest rates have prevented many private sector funds from bringing assets to market, in part due to the preference to wait for debt liquidity to return, support transactions, and enhance price competition. As borrowing costs loosen throughout major APAC economies – Australia possibly excluded – the environment may tempt private asset owners to bring more stock to market in anticipation of improved pricing relative to the discounts implied by public markets.

The financial year-end in July was also a critical period for REITs, as management boards may look to realise losses in the first two quarters of the new financial year. This “kitchen sinking” strategy can clear the decks of unrealised losses across portfolios and reset boards’ performance expectations from a low base.

4. Recapitalisation Trends

A confluence of market and macro events could accelerate a fresh wave of equity and debt recapitalisations among APAC closed-ended funds over the second half of the year. Equity recapitalisations align investors’ extended investment time horizons and allow existing managers and operating partners to retain ownership and management of prized assets. Single assets and portfolios are transferred into new vehicles upon existing fund expiration, providing opportunities for new equity investors to acquire a stake in infrequently traded assets, sometimes at discounted valuations to intrinsic value. Motivated sellers can also emerge due to the denominator effect, which could resurface in Australia’s monetary policy diverge from global trends. This effect occurs when rapid interest rate hikes cause fixed income and equities to reprice faster than real estate, leading to overextended real estate allocations within multi-asset portfolios and potentially forcing institutions to reduce their real estate holdings.

Debt recapitalisations occur when fund vehicles require refinancing, including routine and distressed situations. In distressed cases, portfolios that have suffered a downward reappraisal may have insufficient collateral value – or be on the borderline – to satisfy debt covenants. Funds that do not proactively seek a refinance risk later being forced into action by equity holders or lenders. This can trigger rights issues and private placements or prompt managers to seek alternative non-bank finance – including mezzanine facilities – which are often more expensive but provide higher loan to value rations (LTVs). In Australia’s highly transparent institutional market, these trends are particularly visible.

Conclusion

The second half of 2024 presents a unique confluence of macroeconomic, political, and market-specific factors that will undoubtedly influence strategic and operational decisions. From potential interest rate hikes by the Reserve Bank of Australia to the ripple effects of the U.S. presidential election, industry experts will need to continue to closely monitor these developments to be able to anticipate and navigate any emerging challenges.

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Esther Ang, Managing Director of Credit and Asset Management in APAC at Trimont, has 14+ years of experience in performing and non-performing loan management, facility agency, security trustee, escrow agent, loan operations and servicing. Ms. Ang is a qualified Chartered Accountant and a subject matter expert in agency, corporate trustee, insolvency and distressed management.

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