Investors navigating a wave of revolutionary change in worldwide asset classes face both obstacles and possibilities in a rapidly changing environment of geopolitical tension, high inflation, rising interest rates, and shifting policy changes. The dynamic real estate (RE) markets of the Asia Pacific (APAC) are in particular gaining attention as investment funds move to revise their strategies. Managers want to take advantage of these markets' historically strong track record for growth as well as their potential for portfolio diversification at a time of rising levels of market risk.
Global investors are under more pressure to investigate growth economies as a result of recent market events. These markets offer a variety of advantages, including strong secular tailwinds, solid demand fundamentals, fast urbanisation, and the expanding influence of a burgeoning middle class. Due to its long-term prospects for strong growth, APAC has always kept a dominant position in this environment. In addition, as APAC markets continue to institutionalise and attract more inbound foreign direct investment and product offerings, this should also help to expand the investment pool.
In addition to generating alpha, a strategic focus on growth markets (and in particular, APAC) offers a way to diversify investment portfolios1 by reducing the risks associated with traditional markets and products. This is a crucial feature given the limited options for increasing returns in the current environment.
Global investors should consider exploring APAC RE markets to diversify their portfolios and potentially improve risk-adjusted returns2.
1. APAC: A CATALYST FOR ECONOMIC DIVERSIFICATION ACROSS MARKETS
The possibility of economic diversity is the first aspect that makes APAC an appealing option. The pairwise correlations of yearly GDP growth between the APAC, US, and EUR markets from 1990 through 2022 show this (Figure 1). APAC-US has the lowest pairwise correlation, with APAC-EUR having a slightly greater correlation. The US-EUR correlation for the same time period was noticeably higher, demonstrating the two economies' stronger favourable relationship.
2. APAC RE: OPPORTUNITIES FOR ASSET CLASS DIVERSIFICATION
We then examined the value-add of possible diversification by adding RE as part of a global investment portfolio with other asset classes, including as equities, bonds, and REITs, given that APAC RE already offers large total returns on a stand-alone basis.

We observe clear diversification benefits indicated in the low-to-moderate pairwise correlation range of 0.23 to 0.30 between three regional indices using a global RE portfolio as a baseline (Figure 2). Differences in occupier profiles, lease structures, and land use policies, among other things, are primarily responsible for the correlation variances between the US, APAC, and EUR areas.
3. ENHANCED RISK-ADJUSTED RETURNS VIA ALLOCATION TO APAC RE
The last advantage provided by APAC RE is that with a sensible approach of portfolio design and rebalancing, investors can significantly increase risk-adjusted returns while also lowering overall risk.

An analysis of possible portfolio allocations that provide the highest predicted total returns for a particular degree of risk was conducted. In order to do this, an efficient frontier representing a variety of fictitious portfolios has to be plotted. Investors could use this to assess potential risk/return tradeoffs in comparison to their own holdings.

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