Outstanding senior commercial real estate debt in the Asia Pacific region amounts to at least $257 billion, with a projected funding gap of $8.4 billion expected between 2024 and 2026. This gap is considerably narrower than in other major regions.
Due to limited repricing in the region, the debt funding gap in the Asia Pacific is relatively small compared to Europe ($191.4 billion) and the U.S. ($157.3 billion). This situation reduces opportunities for distressed assets and Non-Performing Loans (NPLs). Australia faces the largest funding gap at $4.6 billion, followed by mainland China at $2.9 billion.
The office sector is anticipated to encounter the most significant gap, with further asset repricing expected throughout the rest of 2024. This repricing will particularly impact secondary properties that are currently less favored by tenants. However, distressed office acquisitions will be limited to selective markets.
With 72% of debt origination in Asia Pacific over the past three years being recourse loans, banks’ actions will be crucial. They will determine how much the debt funding gap results in distress sales. If banks aggressively target assets in underperforming investor portfolios, the risk of distress in certain markets and sectors will increase, shaping the market’s future.
“With the cap rate’s expansion set to moderate and rates likely to stay higher for longer in Asia Pacific, we anticipate increased buying opportunities in the second half of 2024, particularly in the office sector. CBRE expects commercial real estate investment volume in Asia Pacific to grow by 5% year-on-year in 2024, led by Japan, while other markets are poised to recover from a lower base,” said Greg Hyland, Head of Capital Markets, Asia Pacific for CBRE.
Property owners seeking to refinance need to be vigilant, closely monitoring Interest Coverage Ratios (ICRs) and interest expenses. Analysis indicates that refinancing costs in Australia and Hong Kong SAR could be up to 1.9 times higher over the next two years. Japan will also experience restructuring in interest expenses following the end of negative interest rates. This is a critical task that cannot be overlooked.
“Equity investors can find attractive opportunities, while alternative lenders may benefit from working with banks to restructure commercial real estate and development exposure in specific markets,” said Dr. Henry Chin, Global Head of Investor Thought Leadership & Head of Research, Asia Pacific for CBRE.
