A shifting environment tests market resilience
Iran conflict delivers energy-price shock
While the trade tariff threats that dominated market sentiment in 2025 have faded, significant new risks have emerged in recent months as a result of the Trump administration’s decision to join Israel in attacks against Iran. A temporary and somewhat fragile ceasefire agreement was reached in early April, but the disruption to global energy supplies caused by the effective shutdown of the Strait of Hormuz – one of the world’s most important shipping lanes for fuel and fertilizers – has the potential to significantly inhibit growth across national economies in the months ahead.
A coalition of international partners is now trying to put pressure on Iran and the US to re-open the Strait. But oil prices remain considerably higher than they were at the start of the year, and countries in the Asia-Pacific region – which are particularly reliant on energy imports from the Middle East – are already reporting widespread shortages of oil and gas.1
As of the end of April, it was thought that China had yet to tap into its national oil reserves, despite the country being heavily reliant on crude from the Middle East and Iran in particular. However, Chinese officials are reported to have imposed price controls on energy. In Japan, which relies on the Middle East for more than 90% of its oil, the government has implemented petrol and diesel subsidies and increased the role played by the country’s coal-fired power plants in the national energy mix. Meanwhile, the Australian government has taken a number of steps to mitigate fuel shortages and higher prices, including cutting the rate of fuel excise duty and providing interest-free loans for affected businesses.
A positive but uncertain growth outlook
In its Asia and Pacific outlook report,2 published in April, the International Monetary Fund (IMF) said that the oil-price shock was testing the resilience of the region’s economies. The organization noted that higher oil and gas prices threatened to drive up inflation, widen trade gaps and limit policymakers’ room to respond, especially in countries that are heavily dependent on fuel imports.
Nevertheless, the IMF’s latest forecasts suggest that annual GDP growth across Asia will be the strongest in the world in 2026. China’s economy is now expected to expand by 4.4% this year, a figure that has been revised slightly higher since the October 2025 report to reflect the lower effective US tariff rates on Chinese-produced goods, as well as government stimulus measures designed to offset the impact of the current energy-price shock. However, China’s GDP growth is expected to slow to 4.0% in 2027 as a result of structural headwinds, including a slowdown in the housing sector, a shrinking labor force and weaker productivity growth.
In Japan, GDP growth is expected to fall from 2025’s level of 1.2% to 0.7% for 2026 – again, a slight upward revision from last October. This reflects the stimulus package announced by Sanae Takaichi’s new government in November, as well as more recent efforts to limit the impact of higher energy costs. Meanwhile, Australia’s GDP is predicted to grow by 2.0% in 2026, the same pace as in 2025, although this is a marginal downgrade on the 2.1% forecast last October – partly on account of the ongoing energy-price shock. Japan and Australia are currently our favored markets for real estate investment.
However, it should be noted that the forecasts outlined above are based on what the IMF concedes is a somewhat benign view of the conflict in Iran, which assumes that disruption to global energy supplies will be relatively short-lived. The organization has warned that, were oil prices to remain persistently high this year – above USD 100 per barrel – the ramifications would be far more damaging, and a global recession could be a possibility in 2027.
Central banks set to take action
As we noted in November, while a string of interest-rate cuts by the US Federal Reserve in the second half of 2025 had given central banks across the APAC region further license to loosen monetary policy, rates in a number of countries appeared close to or at their neutral levels at the start of this year. The potential inflationary impact of the current energy-price shock, however, is likely to force many central banks to raise rates, particularly in economies such as the Philippines and Malaysia, where reliance on imported fuel is especially high.
Prior to the start of the Iran conflict, Japan and Australia were outliers in terms of APAC monetary policy, with central banks in both countries already having taken steps to increase borrowing costs in response to elevated levels of inflation. The Bank of Japan (BoJ) raised interest rates at the start and end of 2025, taking the official rate to 0.75% – the highest level since 1995. While the BoJ left rates unchanged in the first four months of 2026, three of its nine board members voted in favor of a further increase at their April meeting, the highest number of dissenting voices for more than a decade.
Meanwhile, the Reserve Bank of Australia (RBA) hiked rates in February and March 2026 as inflation continued to rise more rapidly than forecast. By the end of April, financial markets were pricing in another RBA rate increase at its May meeting due to expectations that higher energy costs would drive further price increases across the Australian economy. That said, we retain much of the positive sentiment towards APAC real estate that we set out in our November 2025 report.
However, as noted above, conflict in the Middle East has created a significant degree of uncertainty around the supply and price of energy, and these factors have the potential to negatively impact real economic activity across the region. Energy-intensive sectors such as data centers and manufacturing facilities could be in the firing line, while a slowdown in consumer demand may lead to weakness in retail assets. As a result, we continue to take the view that residential is the most attractive sector. Our preferred markets remain Japan and Australia, where we see resilience and prospects of a continued recovery.
Japan – solid foundations for further progress
Real estate investment volumes in Japan are reported to have exceeded JPY 6 trillion last year, and CBRE forecasts a similar level in 2026.3 Despite recent increases in interest rates and the likelihood of further hikes in the near future, investor appetite is expected to receive support from ongoing rent rises as well as the accommodative stance adopted by Japan’s financial institutions. Impressive corporate performance drove high levels of leasing activity in the office sector in 2025, with office rents rising across all of Japan’s major cities over the course of the year. With vacancy levels remaining at historic lows in most parts of the country, rents are projected to rise further in 2026.
Tokyo continues to lead the way in terms of office investment performance. In the first three months of 2026, rents on grade A and grade A- properties recorded their second-highest rate of quarterly growth in history.4 Despite new supply surging to 103,000 tsubo (a traditional Japanese unit of area measurement) over the quarter, net absorption in Tokyo was even higher, at 114,000 tsubo. Meanwhile, the all-grade vacancy rate in Osaka declined to 2.0% in the first quarter and a series of tenant relocations to newer buildings saw the grade A vacancy rate drop by 0.7 percentage points to 3.0%, while rents rose across all grades.
Our preferred sector in Japan, however, is residential – in particular the multi-family property market. In many urban areas, declining affordability has driven an increase in rental demand; this is likely to be supported by further increases in interest rates. CBRE figures indicate that investment volumes in rental housing reached a record high of JPY 904.3 billion in 2025, with the residential market attracting a combination of domestic and foreign investors.5 We believe the sector is well-placed to continue its recent positive performance in 2026.
Australia – grounds for optimism amid wider uncertainty
In our November 2025 report, we highlighted the fact that, following a period of underperformance, there were signs of progress in Australia’s office sector. This optimism was founded on a string of RBA interest-rate cuts earlier in that year as well as a generally brighter economic outlook.
Figures for the first three months of 2026 suggest our optimism was not misplaced:6 Prime office rents in Australian central business districts (CBDs) climbed by 6.6% year on year (YoY), the fastest pace of annual growth since early 2019. Rising rents have been underpinned by a healthy labor market, improved sentiment in the leasing market, and long-term supply constraints. Brisbane’s CBD led the way in terms of rental growth in the first quarter (+12.8% YoY), followed by Sydney’s CBD (+8.2% YoY in the core market). Rents also rose in Canberra, Melbourne, Perth, and Adelaide. As we move through the second quarter, however, we await data that provides some initial insight into how conflict in the Middle East and disrupted energy supplies are affecting tenants’ business operations, as well as their decision-making in terms of leasing activity.
Australia’s CBDs recorded a slight increase in average vacancy rates, to 14.8% from 14.3% in mid-2025. This was largely due to supply increases over the year. However, CBRE forecasts that the overall supply of new office space over the next five years is expected to slow to the lowest rate this century, partly as a result of elevated price inflation in the construction sector. If energy prices remain high for the foreseeable future, this problem could become even more acute.
Meanwhile, there was a sharp rise in investment activity in the office sector at the start of 2026, with a number of major transactions completed in Sydney. However, the rises in interest rates already seen this year, with the possibility of more to come in the months ahead, could put upward pressure on capitalization rates across the country, particularly in non-core locations.
Australia’s residential real estate market could benefit from its position as a defensive asset if recent macroeconomic uncertainty persists. Rental property offers visible, consistent, and inflation-linked cashflows. Any rotation into the sector by investors in response to recent events could provide significant support for valuations.
Strategic viewpoint
The sectors highlighted in this article are opportunities that we think are relatively well positioned, but are by no means exhaustive. Ultimately, we think that a diversification strategy is still crucial and is likely to show its true benefits in this uncertain macroeconomic and geopolitical environment. Being selective about sectors is important as an overarching filter, but it does not mean ruling out deals that have attractive attributes at the asset-specific level – such as value-add and opportunistic angles in pricing, under-renting, plot-ratio optimization, and area rejuvenation.
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