With tightening expected across various real estate asset classes and pricing adjustments in major metropolitan areas. Interest rates in Asia Pacific have fallen sharply over the last four years. backdrop provides a conducive environment for real estate investments and support for capital values, but while asset yields have compressed to some extent, current low rates have not been fully priced in. Bond yields in Australia, Singapore and Hong Kong retraced 70 bps year-to-date, borrowing costs in these countries remain 60-125bps lower than 2018 levels. Furthermore, analysis shows that select markets have priced in some rate increases with investors more cautious about the rental outlook in Sydney but more comfortable with rents bottoming out in Hong Kong. Office markets across Asia Pacific, investors seem to have priced in some increase in interest rates in Sydney, Singapore and Hong Kong over the next five years. In 2016-2020, office spreads over cost of funding widened by 190 bps in Sydney, 60 bps in Singapore and 20bps in Hong Kong. JLL expects office cap rates in these cities to remains stable even if interest rates rise moderately. In Tokyo and Seoul, yield spreads are stable as cost of debt did not decline significantly.
Logistics assets to become a core part of Asia Pacific institutional real estate portfolios over the next five years and the yield gap between office and logistics assets to narrow. Logistics spreads have compressed by 60 bps more than other sectors across the region in 2016-2020 as investor allocation to the sector for diversification increased. Multifamily and build-to-rent yields may compress further in Japan and Australia, consistent with global patterns. According to JLL data, yields for this asset class have traded below office yields in other gateway cities as institutional capital seeks exposure to the resilient, low-volatility sector for diversification.