Bond markets are moving

Bond market moves, especially at the long end of the curve, have been grabbing headlines over the past few weeks. Nominal yields in some markets have climbed to levels not seen in a generation. The drivers are structural: central banks have stepped back from quantitative easing, government issuance remains high, deficits are structural, and term premium has steepened yield curves. What matters for real estate is how much of that move is driven by inflation expectations. Breakeven inflation though has been largely stable over the past few years, so most of the rise is a genuine increase in the return investors require above inflation, and that feeds more directly into hurdle rates and terminal cap rates. Since the end of 2024, Japan has seen the largest normalisation, with real yields up 118 basis points against 60 in Australia and 45 in the US. The US and Australia saw their discount rates adjust earlier. Cap rates there expanded through 2022 to 2024, but there are uncertainties around whether these shifts are sufficient given how sticky inflation rates have been. Japan, on the other hand, has only more recently seen these real yields rise, but the outcome for real estate sectors is uneven in the current environment.  Rental growth in office markets in Tokyo is running at double digits, with renewals often 20% to 30% higher, and that trend looks likely to continue, at least in the short term. Income growth at that pace offsets the rise in the discount rate. But incoming investors who have missed the income growth cycle may start to seek higher entry yields, or at least require higher reversion potential, especially if rental growth starts to ease. 

Real Estate Market Trends

Cross-border selling in China 

Cross-border investors holding China assets have begun to accelerate disposals following several years of tight liquidity. The volume of asset sales by cross-border owners over the past year has nearly tripled from end-2024 levels, reaching RMB 125 billion as of mid-2026. There are signs that the market correction may be starting to mature, while lower interest rates are beginning to support renewed transaction activity. Pricing is increasingly attractive on a relative basis, although income security due to oversupply remain key considerations for investors.  

Domestic insurance companies have emerged as important buyers, accounting for seven of the 15 largest asset transactions by value. Sellers, meanwhile, represent a broad cross-section of international capital, including US private equity funds, Hong Kong investment managers, Middle Eastern sovereign wealth funds and North American pension funds. The sector composition of transactions is also evolving. While previous years were dominated by office and industrial assets, 2026 has seen greater portfolio activity across the retail and data centre sectors. Transactions have included both outright 100% ownership stakes as well as syndicated structures involving a mix of domestic and cross-border capital.

APAC fund raising shifts toward alternatives 

Private fundraising across the APAC region continues to shift away from diversified blind pool funds towards sector-specific and specialist strategies. Diversified funds accounted for 46% of total funds between 2008 and 2012, but this has fallen to 13% over the past two years. Including the traditional office and retail sectors, the combined share has fallen from 70% to 32%. Specialist sectors, including infrastructure, living, debt and other niche strategies, now account for nearly half of all funds being launched. As noted in a previous newsletter, there has also been a broader shift in capital raising away from pooled vehicles and towards club and JV structures. 

Short dated refinancing creates opportunities  

Debt refinancing tenors across the region have typically shortened across the APAC region. But among listed REITs, REOCs and developers, Hong Kong stands out in the region for refinancing pressure. Around 30% of debt is due within the next year and 73% within three years, up from 53% in FY2023. Much of the maturing debt is being rolled over onto higher financing costs, while interest coverage ratios for the REITs is the lowest in the region at 2.5x. The pressure extends beyond REITs. Hong Kong-listed developers issued around US$10 billion of bonds annually through FY2021, before issuance largely disappeared between FY2022 and FY2024. This left many developers reliant on shorter-term bank financing at higher rates.  At the same time, softer real estate equity valuations have made raising new equity unattractive. With only narrow access to both debt and equity markets, some owners have had little choice but to sell assets to reduce leverage and refinance pressure. For buyers with available equity or private credit, this creates opportunities to acquire assets from owners facing refinancing pressure. However, this window may be short-lived, with Hong Kong developer bond issuance starting to recover and market fundamentals slowly improving.