Asia Real Estate: A Key Diversifier

Key Takeaways:

• Asian economies account for a dominant share of the world’s GDP growth and by and large are growing faster than the United States and Europe.
• Asian markets have not undergone the same type of repricing that occurred in the United States and Europe. The exception to that rule, China, may be at an inflection point thanks to fiscal and monetary stimulus.
• Asian markets offer access to economies at different points in the cycle, with unique growth drivers. Investors with scaled capital across asset classes and a regionally integrated platform with strong local relationships and experience are best placed to navigate these differences.
• Japan’s economy is resurgent, thanks to an exit from deflation, increased tourism, and corporate reform driving the divestiture of non-core real estate assets.
• Australia’s housing market should benefit from strong population growth.
• Attractive supply-demand dynamics and capital markets dislocation should be supportive for the office and logistics sectors in South Korea, and multifamily has emerged as a new asset class in need of institutional capital as household sizes decline.
• We see once-in-a-generation entry points for the emerging multifamily sector in China, driven by the same demographic drivers as in South Korea and direct government support. 

Real estate investors who want access to the fastest-growing, most dynamic real estate markets in the world may want to take a closer look at Asia.

The countries in the Asia-Pacific region account for nearly two-thirds of the world’s total GDP growth, and every Asian country we invest in, besides Japan, has a higher growth forecast for 2025 than the United States and the European Union.¹ Asian cities also accounted for five of the 15 most active cities in the world for real estate transactions over the last 12 months, including the world’s second-busiest market, Tokyo. 

Asia’s real estate is a key diversifier for investors who are mostly invested in Europe and the United States. The reset in property values over the past two years has been more muted in most parts of Asia than in the Western Hemisphere. China, where a much more significant repricing has occurred, is a key exception, but even there we see new government policies as a potential inflection point.

The region is also diversified from within. Markets in Australia, Japan, South Korea, and China differ significantly from one another. Looking at interest rates, a key variable for real estate, as an example, Australia and South Korea continue on their path of heightened policy rates. Conversely, China reverted its interest rate hike cycle back in July and Japan remains a global outlier among developed countries with slow rate increases (Exhibit 1). Investors who seek to capitalize on Asia’s diversity must also contend with high barriers to entry, putting those with deep local understanding built through significant time on the ground, strong relationships, and a broad local presence a key advantage, in our view.

EXHIBIT 1: Countries Across Asia are in Different Stages of their Interest Rate Cycles. Projected Policy Rates (%)

With growth and diversity comes dynamism, and real estate markets in Asia offer exposure to sweeping changes in the way people live, work, and do business. For example, trade among Asian countries is beginning to account for a higher percentage of the region’s total trade volumes, which translates into different needs for logistics and industrial properties. Demand for multifamily housing is rising in many countries for a variety of reasons, including urbanization and a trend toward smaller households. Finally, e-commerce is rising in key markets such as Australia and Japan, creating a need for more new logistics facilities.

We’ll dive into some interesting trends in four key regions below:

Japan

As we’ve noted before, Japan’s economy is in the midst of an economic renaissance, including an exit from deflation. Real interest rates are negative, which should push investors into higher-returning asset classes. As they think about which asset classes, inflation may put real assets further up the list. 

Japanese corporations are increasingly looking to unload non-core assets, in a broader bid to improve shareholder returns and profitability (Exhibit 2). Henry McVey, our Global Head of Maro & Asset Allocation and CIO of the KKR Balance Sheet, recently noted that activity to unwind corporate strategic holdings increased 90% over the course of 2023 and is likely to keep rising. For our part, we acquired logistics facilities from a Japanese conglomerate looking to pursue a more “asset-light” business model with the help of our Private Equity team last year.

EXHIBIT 2: Price-to-Book of TSE-Listed Companies

Finally, tourism is one of the country’s strongest industries. Japan expects 35 million visitors this year and as many as 60 million by 2030. We see opportunities to invest in both limited-service hotels that offer a more affordable option in an expensive market and upscale hotels where we see the need for improved management. For example, we recently acquired a hotel operating platform that includes limited-service hotels, and we plan to expand our holdings in the segment through the platform. We entered into a strategic partnership with Marriott to brand 14 hotels.

South Korea

In South Korea, we see the potential for tighter supply in many sectors, offering opportunities for players with scaled and flexible pools of capital. Demand for high-quality, well-located office space is underscored by a full return-to-office, for example, as well as a structural shift from blue-collar to white collar jobs.

Meanwhile, the market for multifamily residential housing is undergoing structural changes that open up investment opportunities. Since 1980, the size of the average South Korean household has dropped from 4.5 people to 2.3 people, underpinning demand for more apartment units. Preferences are shifting from owning to renting, and the market is becoming more institutionalized. Still, we expect the supply of institutionally managed multifamily units to remain tight since land is scarce, construction costs are high, and little construction financing is available. Recently, we formed an exclusive joint venture with a prominent multifamily operator and have acquired undermanaged hospitality properties and studio apartment buildings for conversion into multifamily buildings. We see a clear opportunity to enter the market as a first mover and provide more institutional supply, particularly to young professionals.

Finally, logistics supply has risen sharply in South Korea since 2020, but demand is there to meet it (Exhibit 3). 2023 was a record year for new supply and absorption. Current pipelines indicate that new supply is set to drop off dramatically starting in 2025, while demand is expected to remain strong. A dislocation in local capital markets has enabled us to select recently built, high-quality assets from undercapitalized developers and construction companies and then seek to leverage our operational expertise to accelerate lease-ups.

EXHIBIT 3: Annual Logistics Warehouse Supply in Greater Seoul

Australia

The Australian population is growing faster than that of almost any other developed economy, as immigration picks back up after the country’s strict pandemic shutdown. The population is expected to grow by 13%, or some 3.5 million people, over the next decade (Exhibit 4),² and all those people will need places to live. However, we are playing the multifamily theme in specialty subsectors, as there is a very limited supply of traditional multifamily and build-to-rent, and what exists is tightly held by well-capitalized domestic institutions. We recently acquired a majority share in a joint venture that provides specialized disability housing as a way to invest behind this theme and contribute positively to the urgent need for more housing.

EXHIBIT 4: Net Increase of Population in Australia

China

While we navigate our China exposure thoughtfully amid geopolitical tensions, the real estate sector has had such a broad ripple effect on the economy that we feel we would be remiss not to mention it. While transaction volumes have been slower this year, we think they will re-accelerate as both rate cuts and new government policies aimed at shoring up the real estate market take effect (Exhibit 5). We see the current moment as a once-in-a-generation opportunity to acquire distressed property at historically low valuations.

Multifamily real estate stands out as attractive. As in South Korea, public preference is shifting dramatically from buying to renting. Couples are waiting longer to get married and have children, and the recent experience in the real estate market have called into question the idea that owning one’s home is a guaranteed pathway to wealth. Meanwhile, real estate developers have been severely constrained due to the crisis, and the existing supply of institutionally managed units is very tight. This shortage, coupled with government initiatives, supportive financing conditions (Exhibit x), and the establishment of a C-REIT market as a source of exit liquidity all lend to our continued conviction in this sector.

EXHIBIT 5: Asia Long-Term Prime Lending Rates in the Past Two Years

Conclusion

We often say that there is no “one Asia.” The region offers access to markets at different points in the economic cycle, each with a unique set of growth drivers. Without exposure to Asian real estate, we think investors are missing access to a dynamic, fast-growing region with some of the busiest and most interesting real estate markets in the world. However, given the nuances of each economy and market, we think that local presence within a regionally integrated platform and longstanding relationships are critical to successful real estate investments in the region.

^1. Source: International Monetary Fund

^2. Source: Australian Government Centre for Population Projections