In its Asia Pacific (Apac) Investment Strategies 2025 report released on Oct 14, CBRE says the interest rate cycle in Apac trended lower in 1H2025, a positive for the commercial real estate market. This should alleviate refinancing and interest coverage pressures, while high construction costs are likely to curb supply.
“With interest rates dropping, appetite for real estate investment has strengthened in recent quarters with positive carry returning across most markets and sectors. This is most applicable in Australia, New Zealand, Singapore and Korea, which are all now largely operating in positive carry territory.”
The favourable interest rate environment has enabled issuers to refinance expiring debt on more favourable terms, benefitting issuers whose interest coverage ratios (ICRs) were stressed, CBRE indicates.
Despite the lower interest rates, CBRE points out that developers in certain markets – which are likely to be China and Hong Kong – may tap the private credit market.
CBRE expects the current interest rate easing cycle to last till 2027. The US Federal Reserve was tardy in cutting the Federal Funds Rate (FFR) because inflation in the US remained elevated. Nonetheless, in September, the FFR was cut by 25 basis points (bps) to 4%-4.25%.
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Against this background, CBRE is expecting yield compression in markets such as Australia, Korea, Hong Kong and to a lesser extent Singapore. Singapore did not experience much yield expansion, unlike Australia, Korea and Hong Kong.
Yield expansion could persist in China despite low risk-free rates, CBRE reckons, due to weak occupier demand.
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In most of Apac, supply chain constraints pushed up construction costs – particularly in places such as Australia and Japan, CBRE says. Construction costs are also elevated in Singapore.
Developers and investors are reluctant to commit to new developments because IRR (internal rate of return) may not be positive, CBRE says. “Mainland China remains the exception where construction with low construction costs and plentiful labour.”
