In the first three quarters of this year, global retail real estate transactions fell by more than a third on an annualised basis, according to property consultancy Real Capital Analytics, as investors continued to be put off by the disruption from the rise of online shopping , especially in the US and Britain where fears of a “ retail apocalypse ” have damaged sentiment. Yet, in mainland China, retail transaction volumes actually rose in the first nine months of this year, with investment in Tier 1 cities reaching a record of nearly US$7 billion. This is just one example of the outperformance of the Asia-Pacific region’s property markets in the face of a slowdown in commercial investment and leasing activity globally. In a report published last month, property adviser JLL noted that commercial transactions across the region rose to US$128 billion in the first three quarters of the year, an all-time high and a 10 per cent increase year on year, compared with a 13 per cent fall in deals across Europe, which limited the growth in global investment volumes to just 1 per cent. To be sure, Asia’s occupier markets are not as buoyant as they once were. The fallout from the trade war has contributed to a marked decrease in office leasing volumes amid a surge in supply led by China, with completions of new Grade A buildings last quarter rising to nearly 18 million square feet, the highest quarterly figure on record, according to CBRE, another adviser. This is putting downward pressure on the region’s rents. Moreover, leasing activity in the retail sector has suffered as consumer confidence in Asia has taken a knock, causing rents and capital values to fall last quarter, data from CBRE shows. However, the pressure on occupier markets is amplified by the severe deterioration in the fundamentals of Hong Kong’s property market , where high street rents fell by a whopping 10.5 per cent quarter on quarter last quarter – the sharpest fall since 1998 – due to the mass anti-government protests. Still, while the political crisis in Hong Kong – which as recently as last year was one of the world’s most actively traded commercial property markets – has exacerbated the slowdown, the investment case for Asian real estate remains strong. The most compelling opportunities in the region lie in the logistics sector, Australia’s housing market and decentralised office districts. First, consumer-led growth buoys logistics market. At a time when global manufacturing activity has collapsed due to the fallout from the trade war, with new export orders falling in November for the 15th straight month, growth is heavily reliant on domestic demand in countries with large consumer markets. The combination of huge domestic consumer bases in Asia, led by China, the rapid growth and sophistication of e-commerce, and rental yields that are the highest globally gives the region’s industrial property market an edge over other asset classes. Chinese consumers spend more even as trade war bites With regional logistics rents and capital values still rising on a quarterly basis, and pent-up demand for new warehouse facilities in a region where most of the stock, notably in Japan, is owner-occupied, industrial properties are poised to deliver the strongest returns in Asian real estate over the medium term. JLL rightly describes the sector as “the most in-demand asset class”, and notes that logistics-focused Asian real estate investment trusts have attracted a third of the capital raised this year, even though their share of the Reit market capitalisation is just 12 per cent. Second, looser monetary policy supports house prices. Nowhere are the knock-on effects of the US Federal Reserve’s decision earlier this year to resume its interest rate cuts more apparent than in Australia’s battered housing market, where prices have unexpectedly begun to recover following a steep drop in values since mid-2017, led by sharp gains in Sydney and Melbourne. Rate cuts by Australia’s central bank, an easing of lending curbs and the re-election of an investor-friendly government are bolstering the appeal of a residential market that has long benefited from the Australian property industry’s reputation for transparency, as well as its ample liquidity, acting as a magnet for cross-border investors, notably from China . Moreover, the sudden rebound in Australian house prices coincides with the political crisis in Hong Kong, which is providing a further fillip to home values as “flight capital” from the territory helps drive up prices. Third, cost-cutting drives office decentralisation. Weakening demand in the office sector, particularly in mainland China and Hong Kong where the net absorption of office space has fallen sharply this year, is accentuating the appeal of decentralisation as an occupier strategy. Cheaper rents in secondary districts – the discount between core and noncore locations is as much as 70 per cent in Hong Kong – create cost-reduction opportunities for tenants, and help cushion the decline in leasing activity. Last quarter, take-up in Shanghai’s office market was driven by technology and manufacturing firms in decentralised markets, while in Hong Kong, the only district to enjoy rental growth was Hong Kong East as tenants continued to decentralise, data from JLL shows. Leasing competition from noncore locations is bound to increase as occupiers remain cost conscious, presenting opportunities for office investors to diversify their portfolios by acquiring assets in decentralised districts, especially those backed by governments. Asia’s real estate markets are feeling the effects of the global slowdown, but the sector retains its allure. Nicholas Spiro is a partner at Lauressa Advisory