APAC commercial real estate faces $5.8b funding gap in next 3 years

CBRE expert reveals strategies to bridge the funding gap and highlights why Singapore shines above-rising interest rates in the region.

As capital values weaken and yields compress, the commercial real estate market in the Asia Pacific region faces a daunting funding gap projected to reach $5.8b in the next three years, with the office sector most exposed to refinancing risks.

Dr. Henry Chin, who leads CBRE’s investor thought leadership across all regions and oversees all research activity in Asia Pacific, and Tricia Song, CBRE’s head of research for Singapore and Southeast Asia, sat down with the Singapore Business Review to give their expert analysis on the matter.

Their insights shed light on the reasons behind the funding gap and revealed Singapore's unique advantages amidst rising interest rates.

Understanding the funding gap

Chin explained the essence of the funding gap, which takes root in the need for refinancing. “Properties with refinance pressure in 2023 will face a funding gap, as banks may ask for more equity or lower the loan-to-value ratio,” he said.

He also said that certain places of the region are facing the greatest challenges with this situation. “The funding gap in Asia Pacific is around $5.8b, with Korea, Australia, and Hong Kong being the most exposed countries,” said Chin.

Lending practices are a contributing factor to the situation, so Chin emphasised the importance of changes in bank lending attitudes. He also highlighted the correlation between asset value changes and the funding gap, citing the importance of considering these factors in understanding the magnitude of the issue.

“Changes in loan-to-value ratio and interest rate coverage ratio significantly impact the funding gap,” he said. “Changes in commercial real estate asset values, especially depreciation, can affect the loan-to-value ratio.” These conditions can exacerbate the funding gap.

Singapore’s resilience

For CBRE’s Song, Singapore is uniquely positioned in the face of rising interest rates. “Singapore, whilst not immune to rising interest rates, witnessed an increase in commercial real estate investments in 2022 due to early economic reopening and the government's proactive stance against COVID-19,” she told the Singapore Business Review.

She also attributed this resilience to Singapore’s safe-haven status, political stability, strong currency, and excellent infrastructure — all unique factors that instil confidence in private investors and boost its attractiveness as a resilient market amidst challenging conditions.

Office sector’s vulnerability

Meanwhile, the CBRE report has identified the office sector as the most exposed to the funding gap. “Office assets across most Asia Pacific locations, except for Tokyo and Singapore, experienced a decline in capital values, making them susceptible during refinancing,” Chin said.

The factors that caused this still point to pandemic-related challenges, which subsequently limited travel and movement. Due to the decline in rental growth, so has the upcoming supply influx until 2025 led to declining capital values in Hong Kong’s office sector.

These vulnerabilities faced by the office sector were seen in various markets across the Asia Pacific region.

How to deal with the funding gap

Chin underscored that the funding gap experienced in the Asia Pacific region is significantly smaller than in the US. This is important to note as it highlights a relatively more favourable situation in the region and, perhaps, better chances of resolving it.

“Market players, including Australian and Singapore REITs, have managed to extend their bank plans before interest rate hikes, mitigating refinancing risks,” said Chin, noting such potential strategies to address the funding gap.

He added: “Alternative lenders, such as credit funds and private equity funds, can bridge the funding gap through short-term loans, creating investment opportunities for strategies like senior loans and junior loans.”

All these strategies put together are a dynamic that creates a chance for investors to make money in more attractive loan strategies compared to traditional equity investment strategies.

While ownership of shares or stocks in a company or property can yield returns, they are dependent on the performance of the equity investment.

Moreover, with the funding gap and other challenges in the commercial real estate market, the loan strategies proposed by Chin offer potentially more favourable returns and lower risks for investors.