CRE resilience reigns in APAC - Unpacking the results of the CRE Megatrend Resilience Index

Identifying the most resilient CRE markets around the world

Over the last five years, the commercial real estate industry has faced no shortage of volatility. In the wake of the pandemic and its economic aftershocks, the cost of borrowing became exponentially more expensive, supply chains constricted, and development and transaction activity across once-thriving sectors slowed. It felt as if the industry took a collective inhale while waiting for the dust to settle, and while some markets struggled to calibrate in this new landscape, other markets demonstrated notable resiliency.

In the interest of identifying those markets, the Oxford Economics’ Commercial Real Estate Megatrend Resilience Index set out to quantify and rank the resilience of CRE markets across regions and sectors in relation to four critical forces shaping CRE: demographics, technology, geopolitics, and climate. Understanding the impact of these megatrends can be complicated; after all, some markets may benefit positively from one megatrend (demographics) while facing challenges from another megatrend (climate or geopolitics).

To provide a more holistic view of markets across 25 countries (representing 74% of global GDP and 97% of the global CRE universe), each megatrend was comprised of 6-12 indicators which informed an overall score for each country at the all-property level and across five key sectors: office, retail, industrial, residential, and hotel.

Notably, Australia was revealed as the most resilient country on the list, with credit to its top all-property score for demographics and geopolitics and a top half score for technology. Singapore came in second, scoring consistently across all four megatrends, and Malaysia came in fourth. Despite strong investor appetite due to the low cost of funding, Japan is notably absent from the top 10. This can likely be attributed to an aging population and low birth rate, which has caused a decline in population and subsequent concern that supply might outweigh demand.

We sat down with Rajinder Singh, Senior Advisory Director for APAC, and Niall McSweeney, Head of Development Advisory, Asia Pacific, to delve deeper into the factors bolstering the resilience of these regions.

|||||Figure 1 - APAC Resilience Index

Australia leads the way for demographics, but suffers from a high climate transition risk premium

According to Singh, Australia’s strong performance in this index should come as no surprise. Australia is, after all, considered by many to be the epitome of a stable and diversified economy. “Australia is a land of opportunity, and often highlighted as a haven for individuals seeking a high quality of life,” he explains. “It also occupies a prominent role on the global stage and, from a demographics perspective, Australia benefits from a thriving working-age population that is expected to continue its growth over the long term. Buoyed by large inflows of net overseas migration, Australia remains an attractive destination.”

“Investors are looking for opportunities in Sydney and Melbourne in sectors such as residential and industrial, the latter being highly desirable but starting to soften. We’re seeing a pivot toward data centres and technology-enabled facilities, fuelled by institutional investment and strong market fundamentals,” shares McSweeney.

From a climate perspective, there is still a great deal of progress to be made in Australia. While the region may seem ahead of the curve as it relates to ESG standards when compared to other regions in North America, the June 2024 Sustainable Development Goals Report 2024 revealed that nearly half of Australia’s SDG targets show minimal or moderate progress, and more than a third have stalled or are regressing. With increased investment and a shift to a data-driven ‘impact mindset’, Australia should be able to improve its high climate transition risk premium.

“Although Australia has rated low in climate, it is an area of focus in new developments, with property developers adopting energy-efficient design to reduce carbon footprint and lower operational costs,” McSweeney adds.

Singapore – A prominent business gateway to the world

When we look to Singapore, we observe a consistent, high performance across all four megatrends. A leader in technological innovation, Singapore’s economy has maintained productivity and successfully leveraged AI to offset macroeconomic challenges.

“With its favourable taxation policies, well-developed financial sector, and strategic position within Southeast Asia, Singapore offers foreign investors competitive and unprecedented access to the Asian Market,” adds Singh. “In addition to its stable and progressive political and economic environment, the republic benefits from a strong workforce that offers employment to individuals in multiple industries and sectors. In my view, these qualities are the secret sauce for its consistent and strong showing across all the four megatrends.”

As the world’s 5th largest global exporter of high-tech goods, Singapore is widely considered a hot spot for advanced manufacturing and innovation. In fact, it’s ranked 5th in the 2023 Global Innovation Index and overtook South Korea as the most innovative country in the Asia Pacific. With this in mind, Singapore places a great emphasis on R&D initiatives, supports startups, and provides integral access to cutting-edge technologies and innovative ecosystems. According to Singh, this is a primary driver of Singapore’s top position in industrial, and second-place position in office.

“While Singapore cannot compete on cost and sheer production volume, it has become a hub for high-value, knowledge-intensive manufacturing industries such as semiconductors, biomedical, consumer electronics, and precision engineering,” he adds. “Leading firms across industrial sectors have set up next-generation manufacturing facilities and offices in Singapore."

The region produces 4 of the world’s top 10 pharmaceutical drugs and is among the world’s top 10 exporters of machinery and equipment. Its world-class ecosystem also comprises top engineering, procurement, and construction firms with facility engineering and large-scale construction expertise, and research institutes that can work directly with companies to develop cutting-edge solutions with global impact.

Oxford Economics also comments that a notable share of funding in Singapore’s fiscal budget is earmarked for boosting productivity through knowledge sharing, training of local workers, and adapting to digital transformation, which is expected to increase productivity growth over the next decade.

Malaysia leverages a formidable workforce

Malaysia also achieved consistent scores across all four megatrends, with a notably strong ranking for demographics. Although growth in Malaysia’s working-age population has slowed when compared to the previous decade, Oxford Economics noted that it is still projected to rise by an average of 1% per year. “Malaysia’s favourable labour productivity makes its economy increasingly attractive to foreign investors,” explains Singh. “The region also boasts a diverse, well-educated, multilingual, and highly-trainable workforce that serves as the fuel for its economic engine and continued growth.”

According to Singh, Malaysia’s demographic strength plays a vital role in the AI and cloud infrastructure boom that Malaysia has seen this year. “Research by global consulting firm Kearney showed AI was poised to contribute US$1 trillion to Southeast Asia's gross domestic product by 2030, with Malaysia predicted to see more than a tenth of that. To this effect, several large, planned investments by global tech giants such as Google (US$2B), Microsoft (US$2.2B), Amazon (US$6B), Nvidia (US4.3Bpartnership investment deal with Malaysia conglomerate YTL) have recently made headlines.”

|||||Figure 2 - APAC’s performance across each sector according to megatrends

Malaysia is also positioned as a top tourism destination, which further fuels the megatrends driving its performance in the hotel sector. In 2023, Malaysia's travel & tourism sector saw a significant resurgence, growing by a massive 97.8%, accounting for 8.6% of the country's total economic output. The World Travel & Tourism Council (WTTC) 2024 Economic Impact Research (EIR) projects a significant year of growth for Malaysia's travel & tourism sector, with its economic contribution, employment, and domestic visitor spending expected to break all records this year.

“The expected growth in Malaysia's hospitality sector will be complemented by the government's recently announced ‘Visit Malaysia 2026’ strategic roadmap, which aims to attract more travelers from around the world over the coming years,” adds Singh. "This focus will not only drive economic progress but also help to enhance Malaysia's standing as a top travel destination.”

Conclusion

As global CRE markets continue to navigate a complex and ever-changing landscape, Asia Pacific’s consistent high-ranking performance in resilience underscores its ability to adapt and thrive amidst rapid shifts in demographics, technology, geopolitics, and climate demands. Australia, Singapore, and Malaysia exemplify a dynamic balance of innovation, strategic investment, and workforce strength that should set the stage for continued growth and CRE success.

“Evaluating trends, specifically how they interconnect and even conflict, can pinpoint markets that are well positioned to seize opportunities or overcome challenges,” adds McSweeney. “The flight to quality trend continues to play out and is key to success across APAC. The obvious area for rapid expansion is backed by the report findings in demographics where the most pent-up demand will be for the residential sector.”