Disciplined sector and market selection key to capturing Asia Pacific real estate growth
The divergence signals capital shifting toward AI-supported and structurally undersupplied sectors, potentially strengthening prime and alternative assets while secondary offices and discretionary retail face greater pressure.
Asia Pacific alternative-property investment surged 105% y-o-y in 1Q2026, led by data centres, while office transaction volume fell nearly 8%.
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Asia Pacific (Apac) entered the second half of 2026 against a more uncertain macroeconomic backdrop.
Geopolitical tensions in the Middle East remain elevated, with renewed conflict keeping oil prices volatile and sustaining inflationary pressure across economies that rely heavily on Gulf energy imports.
At the same time, uncertainty around interest rates and consumer prices has weighed on sentiment, prompting many corporates to defer investment decisions until the outlook becomes clearer.
Despite these near-term headwinds, Apac’s role as a global electronics and technology manufacturing hub continues to provide structural support, and with it, growth opportunities emerge.
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The region is well-positioned to benefit from the AI capital expenditure boom, with first-quarter trade data across many Asian economies pointing to resilient export demand.
Investment in AI infrastructure and hyperscale data centre development should therefore continue to cushion growth, helping limit the extent of 2026 forecast downgrades across major economies.
Against this backdrop, central banks are well-positioned to navigate the balance between supporting growth and managing inflation, with their cautious approach reflecting a commitment to long-term stability. Should core inflation continue to firm and second-round effects become more visible, policymakers have the tools to respond decisively.
Japan and Australia, where core inflation has proven more resilient than expected, present opportunities for proactive monetary policy action over the next six months that could help strengthen their economic foundations.
Investment markets: Momentum gives way to selectivity
Investment activity opened 1Q2026 with strong momentum, supported by accommodative interest rates that led to healthy deal flow early in the quarter.
While renewed geopolitical tensions and evolving monetary policy expectations introduced some caution among investors towards March, the market remained resilient, with total turnover finishing just 2% below that of 4Q2025.
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Market performance remained diverse.
Hong Kong, Singapore and South Korea maintained momentum, underpinned by favourable financing conditions that attracted investors.
Japan and Australia experienced some moderation as yield spread dynamics evolved, underscoring the growing importance of disciplined sector and market selection.
Office: Flight to quality supports prime assets
In the office sector, global uncertainty has made occupiers more cautious about space acquisition, reducing the number of large leasing transactions.
Even so, demand continues to favour prime-grade offices as companies use higher-quality workplaces to attract and retain talent.
As a result, rental growth remains concentrated in prime assets, while secondary properties face continued pressure as landlords offer more flexible leasing packages.
Tokyo remains a notable exception. The recovery is broadening across both Grade A and Grade B offices amid historically tight availability, giving landlords greater confidence to raise rents. With tenants more willing to accept increases due to limited space options, wider adoption of fixed-term leases is likely to support further rental growth.
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On the investment side, office transaction volume fell nearly 8% y-o-y in 1Q2026.
Investors remain selective, favouring well-located prime assets supported by flight-to-quality demand.
Prime office transactions were recorded in Seoul, Singapore and Sydney, while Hong Kong’s Central district saw improved activity as opportunistic investors targeted discounted pricing.
Retail: Essentials prove resilient as discretionary spending softens
In retail, consumers across Japan and Australia are demonstrating more thoughtful spending habits in response to ongoing economic conditions, with non-discretionary expenditure remaining a reliable and resilient foundation for the sector.
In turn, retailers are taking a measured approach to expansion plans, focusing instead on optimising store networks and improving operational efficiency.
Rental growth, though more selective, remains healthy in key markets such as Tokyo. Low vacancy rates in core retail locations continue to underscore the appeal of prime precincts, reinforcing landlords’ strong market position and the long-term value of well-located retail assets.
Investment strategies should therefore remain closely aligned with market fundamentals.
Discretionary-led shopping malls may face near-term headwinds, while neighbourhood centres anchored by essential retailers should remain more resilient.
Australia remains attractive for this asset type, supported by population growth. Prime Tokyo high-street retail is also likely to stay in focus as luxury brands continue to expand amid strong spending and recovering inbound tourism.
Logistics: Cost pressures test demand, but supply relief emerges
In logistics, well-located prime assets are demonstrating resilience amid energy market volatility, as proximity to end-users continues to lower transport costs and improve operational efficiency.
While freight cost uncertainty has created near-term headwinds, particularly for third-party logistics companies navigating higher fuel prices, these pressures are expected to be transitional rather than structural.
Leasing fundamentals remain supported by a shifting supply landscape.
Elevated construction and material costs are naturally moderating development pipelines, with some Australian projects extending beyond 2027 and Seoul completions trending towards approximately 55% of 2025 levels.
This pullback in new supply is expected to be a meaningful tailwind for vacancy stabilisation over time, laying the groundwork for a more balanced market.
In the interim, occupiers are benefitting from greater market choice, with landlords offering accommodative terms including competitive incentives.
While this dynamic has tempered near-term rental growth, it also reflects a healthy, tenant-friendly environment that supports occupancy continuity and long-term demand.
As supply normalises and cost pressures ease, conditions for a more active leasing market appear increasingly well-positioned to take shape.
Residential and alternatives: Structural demand continues to draw capital
Japan remains the most attractive market for multifamily strategies, supported by rental growth in Tokyo as higher-income households seek central locations and more cost-conscious households move to outer wards.
Australia also continues to show strong fundamentals, with the national rental vacancy rate falling to 1% in 1Q2026.
Alternative sectors continue to attract capital despite the uncertain environment. Investment surged 105% y-o-y in 1Q2026, led by data centres, while purpose-built student accommodation and Australian senior living, including land lease communities, remain key areas of investor interest.
Overall, while uncertainty around oil prices, inflation and monetary policy remains, AI capital expenditure, hyperscale data centre development and tight vacancy in select markets continue to create opportunities.
In this environment, disciplined sector and market selection will remain critical to navigating near-term volatility while capturing areas of structural growth.