In this month's newsletter, we look at where capital is heading as markets split. Hotel investment has been moving out of the gateway cities, the best office buildings have pulled furthest ahead where tenants have the most choice, and stress in property lending is showing up outside the banks. We also look at why private capital is buying operating platforms rather than buildings, and why Asia's large institutions will struggle to raise real estate allocations at home.
Hotel investors are leaving the gateway cities
Hotel deals across the region have been moving out of the gateway cities for more than a decade. In Japan, Greater Tokyo accounts for 30% of hotel transactions since 2023, while Osaka, Kyoto and the other major cities have risen to 43%, from 24% in 2010-14. Visitors are going further than investors, though. Foreign guest nights outside the Kanto and Kinki regions, home to Tokyo, Osaka and Kyoto, rose 21% in 2025, three times as fast as in those two regions, lifting their share from 27% in 2023 to 32%. Okinawa grew 42%, and Tohoku, Shikoku and Chubu each grew by around a quarter. Yet regional and resort hotels make up only 27% of deals, down from 41% in 2010-14. Australia has taken the next step. Regional and lifestyle hotels are now 60% of deals, up from around half through the 2010s, as domestic travel moves away from Sydney and Melbourne. These are small assets, averaging around US$11m, and two thirds of buyers are private, so institutions have largely stayed out.
China has seen the largest shift, with the four gateway cities falling from half of all hotel deals in 2010-14 to a quarter, but the driver is different. Developers and owner-operators were the sellers in three quarters of regional hotel deals since 2023, so much of the activity reflects owners raising cash rather than investors following demand. For investors with operating capability, the opportunity sits in Japan's regions, where visitor growth is now fastest and competition for assets is thinnest.
The best office buildings pull ahead in soft markets
The rent premium for the best office space depends on how much choice tenants have. In Sydney and Hong Kong, where vacancy is above 13%, the gap between the best buildings and the rest of the market is the widest in decades. Sydney Premium effective rents are 4.8 times B grade, the widest gap since 2000 and well above the long-run average of 3.3 times. Hong Kong Central rents are 2.1 times the Grade A average, the widest since 2008. With plenty of space on offer, tenants trade up into the best buildings, and secondary landlords cut rents to compete. In Singapore and Tokyo, where vacancy is below 7%, the premium is in line with its long-term average, because in a tight market every tier rises together.
The next shift comes from supply. New completions in Sydney and Hong Kong over 2026-28 are forecast at about 1% of stock a year, less than half the pace of the past five years, and nothing new is under construction in the Sydney CBD for completion after 2027. As the best space fills, occupiers looking for quality will have to move down a tier, and that is where we expect rental growth to pick up.
The stress in property lending is sitting with non-bank lenders. In Australia, the collapse of a major developer exposed A$3.4bn of debt across around 40 non-bank lenders, and within five weeks funds managing more than A$10bn had frozen or restricted redemptions, including some with no direct exposure. The problem is structural: funds offering monthly redemptions are holding development loans that run 12 to 36 months. Bank books look very different. Non-performing commercial property loans at Australian banks are 0.6% of exposures and falling, and bank lending for land and residential development has risen by more than 40% in three years to A$101bn, with land development loans up 25% in the past year alone.
Korea shows how long the clean-up can take. Project finance delinquencies hit a decade high of 4.65% in March, and nearly a third of land-backed loans at smaller lenders are in arrears. KRW15.1tn of loans remain classified as troubled, yet only 7% of sites bought by savings bank restructuring funds have been sold. For investors with capital, discounted loan sales and forced sellers are where the opportunity sits over the next year.
Operating real estate made up 65% of APAC platform deal value over 2024-26, up from 42-45% in each of the two previous three-year periods, and 79% so far this year. Seniors living and aged care reached US$4.3bn, a ten-year high, while traditional real estate platforms fell to US$4.4bn, the second lowest in a decade. Data centres continue to feature, with KKR's US$5.2bn stake in STT GDC following Blackstone's US$15bn AirTrunk deal in 2024. In sectors where the value sits in running the asset, the only way to buy scale is to buy the company.
The buyers are a small and repeating group. Private equity and alternative managers took 65% of platform deal value this year, up from 30-40% a year over 2017-21, with Warburg Pincus, Stonepeak, Brookfield and EQT all active in Australian and Japanese living and healthcare. Listed data centre REITs mostly hold finished, leased assets, so investors wanting exposure to the build-out itself are buying it privately.
The world's 100 largest real estate investors hold 9.6% of their assets in property. North American investors allocate 9.2%, while APAC investors allocate 4.4%, held down by Japan at under 2%. As Asian institutions rebuild real asset allocations, the question is where that capital can go. Australian superannuation funds manage A$4.8tn. At a North American allocation, that would be worth around US$300bn, more than the US$278bn of real estate held by all institutional owners in Australia combined. Korea's National Pension Service alone would need more than half of Korea's institutional stock.
Japan is the exception. Its pension funds would need under 30% of a US$1.1tn institutional market to reach the same level, which makes it the one market in the region with room to absorb a large domestic increase. Elsewhere, higher allocations from Asian investors will mostly flow offshore, or into assets that are not yet institutional, such as operating platforms, conversions and development.