Growth of the East

Introduction

The East's economic power has been building for decades. Buoyed initially by Japan's industrialization, the region was boosted further by the modernization of Hong Kong, Singapore, South Korea and Taiwan, alongside the rapid rise of China (Figure 1).

India, Vietnam and other Southeast Asian countries have stepped up to anchor the region's growth and importance, moving away from over-reliance on China and creating new investment opportunities into and out of Asia Pacific (APAC).

Over the coming decades, an increasing number of people will move to cities in APAC, driving the ongoing rise of the middle class, wealth and consumption. The services sector will continue to expand across the region, and a better educated workforce will also drive innovation and upgrading of the industrial value chain. The factors will help drive opportunities across real asset classes in APAC.

The East: Growing and broadening

China's current downturn is emblematic of both cyclical, structural and geopolitical headwinds. Its growth slowed from 9% in the early 2000s to around 5% currently. While this will take time to resolve, other emerging economies are rising to the fore to continue APAC's march in the 21^st century.

India and Southeast Asia are expected to strengthen, accounting for an estimated 42% of regional GDP by 2040, from 33% currently. These countries are backed by a youthful and sizeable population, adding up to more than 2 billion people.

Domestic demand, on top of a reconfiguration of global supply chains due to geopolitical tensions, will continue to draw foreign direct investments into the region, underscored by relatively attractive total factor cost of production.

APAC presents attractive opportunities in real estate…

Across APAC, the youth demographic will help increase the long-term demand for real estate, underscoring unique and multifaceted investment opportunities for institutional investors. Different sectors and locations will become more attractive over time as various long-term structural demographic trends, such as urbanization with greater mobility and growing middle class, unfold.

1. Young demographic profile: Half of the world's Generation Z population is expected to reside in Asia Pacific by 2030. This digitally savvy and youthful population will help to further accelerate e-commerce penetration and propagate demand for logistics assets, particularly last-mile facilities already buoyed by increasing consumer demand for fast delivery before, during and post the pandemic. Rising demand for internet usage from this user base also supports data centers.
   
   That said, APAC is rapidly aging with higher life expectancy than the majority of advanced economies in North America and Europe. This bodes well for senior living. Japan has a high proportion of people aged 75 and above, which is projected to reach 20% of the total population by 2040. This makes it a primary focus for the senior living strategy. The country also provides a highly supportive insurance pension covering 90% of costs, alongside a persistent demand-supply gap across key regional capital cities.
   
2. Rising urban population: With many regional gateway cities experiencing strong population growth post-pandemic, the influx of people moving to cities to work, live and play is raising the demand for multifamily housing. Japan remains an appealing market for this sector due to its positive yield spread, increasing household numbers and relatively restricted supply due to high construction costs and land values. Rising real wage growth will probably continue in the coming years, supporting rental growth. However, opportunities also exist to develop institutional grade multifamily in other nascent markets. In Australia and South Korea, for example, a growing number of renters are seeking centrally managed rental apartments featuring modern facilities that individual landlords are typically unable to provide.
3. Growing middle classes: Chinese consumers are already the top spenders on luxury products globally¹. Increasing consumer spending power means that Asia Pacific is projected to make up over 30% of global consumption by 2030.
   
   The growing number of affluent consumers will entice international retailers to open new stores in the region, particularly in emerging Asian markets, to meet growing retail demand for modern and well-managed malls.
   
   Student housing is also benefiting from rising affluence. While Chinese students have long made up the bulk of Australia's international students, a more diversified mix of student origins have emerged post pandemic - such as from India. This is broadening the appeal of Australian purpose built student accommodation (PBSA), ensuring high occupancy and positive rental growth. Similar phenomenon has also been seen in European markets, especially in the U.K.
4. Rise in nearshoring: Less costly but highly efficient manufacturing hubs in Southeast Asia with access to natural resources will also benefit from supply chain diversification due to rising geopolitical tensions. Industrial value chain upgrading will result in greater demand for modern industrial facilities. However, the availability of investible stocks is limited, highlighting the importance of collaborating with trustworthy local partners to secure development sites from the government.

…and energy infrastructure

Home to half of the world's population, APAC is already the world's largest energy consumer (Figure 2). Future economic and demographic expansion - along with commitments on net zero carbon targets - will create even more investment and business opportunities, particularly in green energy. The Energy Transition Commission estimates that around $3.5 trillion2 of annual capital investment is required until 2050 to drive an effective energy transition.

Alternative energy will become increasingly important in this shift. Solar PV and wind are the primary focus since they are at or close to grid parity with fossil fuels. Nuclear energy is important to achieving a carbon neutral agenda, and Asia is a major region for pursuing this, with around two-thirds³ of the nuclear plants under development worldwide in the region.

Being at the vanguard of global renewable energy expansion does not yet equate to ease of access and purchase of green energy in the region. Some countries may not be self-sufficient in renewables, and/or their power networks are not connected to neighboring countries' grids. This makes it impossible to import green electricity, creating demand for both energy storage, such as battery energy storage systems and clean fuels, such as green hydrogen/ammonia.

China and South Korea are major markets in the battery industry since they have a strong manufacturing base along the full value chain. Battery technology is already starting to play a critical role in short-term storage to stabilize the grid.

For transporting green energy over long distances, green hydrogen/ammonia molecules are a more cost-effective option than transporting electricity. Their higher energy density than battery technology and suitability for long-term storage are distinct features considered a key solution to decarbonizing the industry, long-haul flights and long-range shipping.

Australia is a highly promising market for the development of green hydrogen/ammonia. Its abundant land and renewable resources allow it to produce green hydrogen more affordably than anywhere else in the world. Therefore, it is expected that Australia will become the largest exporter of green hydrogen/ammonia in the world in the next several years.

Unique opportunities for natural capital

Over the past few decades, APAC's rapid economic development has lifted large groups of people out of poverty. Consumers now spend more on food - particularly protein rich food - and consume a wide range and increasing volume of wood products, from lumber for construction and housing, to wood pulp for basic consumer products like tissue and packaging.

Countries in the region, and many around the world, face the challenge of meeting growing demand for food and timber in an environmentally friendly and socially responsible way.

Adding to the challenge, extreme weather, water scarcity, pollution, climate change, unsustainable land management practices, the need to protect shrinking natural areas, and restrictions on land use conversion have further constrained supply. This opens up an opportunity for the private sector to fill the gap.

Imports are an important way to address the demand and supply imbalances of natural resources. China imports more agricultural products than any other country and its dependency on food imports is an example of the challenges and risks posed by food insecurity⁴.

In contrast, Australia and New Zealand stand to gain from exporting agricultural and wood products because of their highly productive timberland and farmland base and close proximity to major importing countries in Asia such as Japan and Indonesia. Favorable logistics allow them to compete on price with other exporters outside the region.

APAC's rise is a long term journey

The East's growth continues to be supported by positive structural tailwinds. Demographics, wealth accumulation, supply chain reorientation and the expansion of the regions' emerging markets bolster its long-term prospects.

This will provide investors with greater opportunities to tap into APAC's growing economic dominance. However, it is not all about real estate opportunity. The acceleration of the transition to a low carbon economy presents attractive opportunities in energy infrastructure. And greater disposable income and the switch to higher value consumption creates compelling investment thesis for natural capital. These trends will enable global institutional investors to build a well-diversified portfolio across different sectors and asset classes.

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