Scenario approach during the Middle East conflict

The ongoing conflict in the Middle East will have an impact on the global economy and on real estate markets. At this stage, the impact is hard to quantify accurately as we don’t know the direction or the likely duration of hostilities. This shrouds inflation and interest rate expectations in doubt, while distorting typical risk measurement tools. 

In response, we are running a week-by-week scenario-approach to assessing the macroeconomic outlook. While our Global Macro Research Team has a range of seven potential scenarios, the three most likely are ‘conflict risks dominate’, ‘TACOil’ and ‘stagflation’. Probabilities of each of these are fluctuating almost daily.  

The forecasts for growth, inflation and interest rates are shown in the tables in Figure 1. The basis for the analysis in this paper and our forecasts is ‘conflict risks dominate’. In this scenario, oil reaches US$120 per barrel and remains elevated at around US$100 dollars until the autumn. Central banks hike modestly during this period. Recession is avoided, but some growth potential is lost permanently from this cycle. These assumptions result in a weaker real estate outlook for the next 12 months, but the potential for a cyclical improvement in returns remains intact. Please refer to our Global Macro Research team for more details on the outlook. 

Figure 1: APAC economic forecasts – ‘conflict risks dominate’

Source: Aberdeen 14 April 2026
Forecasts are a guide only and actual outcomes could be significantly different.

APAC economic outlook (‘conflict risks dominate’)

Activity

APAC economies face less direct energy disruption than Europe, but impacts differ by country. Japan is highly vulnerable to rising oil prices and shipping issues, likely leading to higher costs and inflation through 2026. China is insulated due to large reserves and weak demand; its slowdown mostly stems from domestic factors, with energy security limiting risks. Emerging Asia, as a net fuel importer, may see more pressure, while Australia could benefit from higher commodity prices despite possible rate hikes. Overall, the energy shock will selectively affect APAC growth rather than cause a widespread slowdown.

Inflation

Inflation trends in APAC are varied. Japan faces higher inflation, with CPI rising 3% in 2025 and core inflation near the Bank of Japan's 2% target; this makes energy price increases more influential, and sustained costs could trigger further effects as wage growth responds. China, with almost no inflation and ongoing producer-price deflation, has more flexibility to manage energy costs due to large reserves and weak demand, helping stabilise regional inflation. In Australia, rising export prices may push tradables inflation up, but local disinflation and tight policy should offset external impacts. Overall, elevated inflation risks are mainly limited to energy-importing economies like Japan, not the entire region.

Policy

Monetary policy differences in APAC are growing. Japan is moving towards policy normalisation with a possible rate hike in mid-2026, or sooner if inflation rises, while higher energy prices are likely to accelerate tightening. In contrast, China continues counter-cyclical easing due to low inflation and stable energy supply, giving flexibility to support growth if needed. In summary, APAC’s monetary policies reflect local conditions rather than a unified response to energy issues, unlike Europe’s more collective approach.

APAC real estate market overview

APAC real estate performance had been steadily improving prior to the conflict. Aside from entrenched systemic issues in the broader Chinese property market, much of the rest of the region had been performing well. The region benefited from short-term healthy fundamentals in demand and supply, while longer-term structural drivers, such as growing intra-regional trade volumes and the rise in the number of middle class and affluent households, had been pulling in the right direction. 

The APAC region had become the best performing global region in the latest MSCI Global Property Fund Index in US dollar terms. While currency had an impact on the index, the trend of increasing returns for four consecutive quarters reflects the healthy underlying market conditions. In 2025, APAC delivered asset-level total returns of 6.5%, having increased from -0.9% in 2024¹. This was buoyed by strong performance from Australia (2.1% quarter-on-quarter) and Japan (1.7%) in the fourth quarter of the year. 

The conflict in the Middle East greatly affects global markets, making it crucial to consider specific risks and regional differences. Japan, Australia, and Korea are dealing with higher interest rates because of increased inflation risk, but they have strong real estate fundamentals at this uncertain time. Vacancy rates are near historic lows and new construction is limited. Meanwhile, rents in major areas like offices, residential, and industrial properties are rising in real terms. In contrast, emerging APAC countries rely more on energy imports and face bigger challenges due to ongoing supply chain disruptions.

Listed real estate performance has underperformed broader equities owing to the importance of leverage and the perception that real estate could be more vulnerable to higher inflation than other asset classes. Prior to the conflict, developed Asia real estate investment trust (REIT) returns had reached 31% over the year to mid-March 2026². However, just two weeks later the index returns had halved to 16%. At this level, the region had still outperformed Europe and the US. 

More recently, listed real estate markets have improved but APAC markets have seen less upside. Fears of stagflation have been more profound in the region due to energy dependency on Qatar and flows through the Strait of Hormuz. That said, developed Asia REITs are still up 21% over the 12 months to 13 April, strongly supported by Hong Kong (+42%) and Japan (+38%)³.    

Capital flows in Asia improved as investors returned following earlier US trade policy challenges, with total investment rising 2.5% in 2025. Offices led with a 38% share, compared to <25% in other regions; residential investment was lower at 9% versus >25% elsewhere. Industrial, data centres, and residential sectors surpassed long-term averages, especially in Australia and Japan. Surveys indicate global cross-border capital activity is increasing, and investor interest in Asia may grow beyond the current 35% share.  

Looking ahead, sentiment towards the region had improved prior to the conflict with CBRE’s 2026 intentions survey showing 57% of investors were planning to invest more this year⁵. By sector, offices topped the list for the first time in six years, with logistics and living in second and third place. Data centres have notably climbed the ranking. By location, the 2026 ANREV Investor Intentions survey points to Sydney, Tokyo, Melbourne, Osaka and Seoul remaining top investor target this year. Stylistically, value add remained the preferred option for investors with 57% of the share of intentions, while core was stable at 31%⁴. Trade and energy uncertainty will impact style, but not substantially as investor required returns are likely to rise in a higher rate and higher inflation environment. 

Sector outlook

Offices

The best prospects remain in Tokyo, Sydney, Melbourne and Seoul, while Perth could see improved demand if commodity prices continue to rise. Rents in these markets are rising at between 3-6% per annum⁶, offsetting pressures on relative pricing against bond yields. 

Supply remains highly constrained across most developed markets, particularly in Tokyo where occupier fundamentals are exceptionally strong and vacancy rates are at record lows for prime stock (1.1%)⁷. Chinese major cities and Hong Kong are weaker, where vacancy rates of between 10% and 15% are driving rental values lower.  

Capital continues to favour offices in Asia, with the sector accounting for nearly 40% of transactions in 2025⁸. However, in some markets like Singapore, there are question marks over whether or not there is enough capital actively seeking large scale office deals, relative to the pipeline coming to the market this year. 

In Korea, market conditions remain positive, yet investors are generally focusing on smaller offices in Seoul, with some more cautious over the supply outlook from 2027 onwards. In recent years, strong rental growth in Seoul has led to occupiers becoming more cost-sensitive today, which could become an issue in a market where landlords need to become more competitive. 

Industrial & logistics

Significant trade disruption due to US tariffs, has led to the sector’s mixed performance. Oversupply and weak demand in inland Chinese logistics markets (as exemplified by the anti-involution policy currently deployed by the government) has led to very weak performance. However, urban industrials in Seoul and across Australian cities have been far more positive with strong rental growth driving performance.

The future of the sector continues to look positive in urban settings, as the growth of e-commerce continues and supply pipelines are running low. In Tokyo, developers are constrained by a lack of construction workers and a preference for taking on data centre projects over logistics, with similar challenges in other countries. 

Longer term, positive demographic and population dynamics and growing intra-regional trade should support a more consistent backdrop for logistics demand, with greater resilience against uncertain global trade policy. 

Retail

Retail has been adversely affected by travel restrictions and tourist flows responding to exchange rates. Japan recorded a historic 43 million foreign arrivals in 2025 and a 16.4% year-on-year rise in travel spending⁹. Weakness in Chinese tourism was more than offset by higher-spending visitors from Western markets, Australia and Taiwan, supported by the weak yen. 

Duty-free sales fell 17.1% amid a sharp drop in mainland Chinese visitors¹⁰. However, diversified source markets and rising per-capita spend sustained overall tourism growth. In parallel, Tokyo saw a surge in experiential flagship openings, with luxury and lifestyle brands using large-format, culture-led stores in Ginza and Omotesando to drive engagement and dwell time. Positive trends in consumption have helped to drive high street retail rents up 10% to record highs in Ginza and Shibuya.  

In a similar trend to that seen in Japan with the Yen, a weaker RMB has been a net positive for retail sales growth in Hong Kong. Retail sales by value reached its highest level for six years in February 2026, which is indicative of a market that is starting to recover after a decade of weaker performance. 

Australia’s central business district retail market is tightening, with vacancy rates falling to 10.4% in 2025 – the lowest since the pandemic – as office utilisation increases and international students and tourism return. 

Sydney and Melbourne prime sites are attracting global flagship brands, while experiential and culture-led retail boosts footfall. The market is bifurcated: prime assets outperform, but secondary retail struggles with value-driven consumers. 

Singapore’s retail sector remains strong, buoyed by returning tourists and limited supply. Prime Orchard Road and suburban rents rose in 2025 and carry further momentum, supported by low vacancies and demand from international brands using Singapore as a regional hub. Luxury retailers are focusing on flagship, experience-driven stores in Marina Bay Sands and Orchard, targeting affluent locals and tourists with experiential formats.

Living

Across the region, residential markets are proving locally differentiated but broadly resilient, with “living” sectors benefiting from demographic tailwinds, urbanisation and limited new supply. Institutions are increasingly favouring stabilised rental housing, student accommodation and senior living. Markets exposed to policy uncertainty continue to face pricing pressure. 

Overall, while still only 9% of total investment, residential is emerging as a key sector within APAC real estate portfolios and investors continue to favour new allocations. Eary indications show residential investment in APAC was up 25% year-on-year in March 2026, with Japan, China and Australia accounting for over 90% of transactions in the region¹¹. 

Japan’s residential market remains robust, driven by persistent undersupply, urbanisation, and supportive policies. High construction costs and labour shortages restrict new supply, while rental demand grows in Tokyo and Osaka due to migration, single-person households, and strong investor interest. Rents are increasing by 4% to 5% annually, matching household income growth¹². Monetary policy changes have had little effect on demand or rent growth, and pricing remains stable despite rising interest rates, supported by income gains.

Other residential markets in the region are more nuanced and generally less mature than Japan. In Singapore, home ownership is the primary tenure for over 90% of households and the market is gradually peaking. In Australia, the multi-family private rented sector is still in its infancy, with limited new supply pushing rents on at unsustainable rates for the long term. 

Outlook for performance and risk

Geopolitical risks remain elevated, and uncertainty persists. We are moving week-by-week through our scenario-approach to assessing market conditions and are adjusting our views as more information flows in. 

We think 2026 will be a tougher year than we had expected prior to the conflict, with rising inflation and interest rate expectations weighing on performance. We think yields will be flat this year at best, before the cyclical recovery continues in 2027, supported by a catch up in both leasing and investor allocations. In essence, the conflict in the Middle East serves to delay the cycle rather than halt it entirely. A prolonged stagflation scenario would be more damaging, which carries a 20% probability.

APAC real estate returns were 6.5% as of December 2025, but are projected to drop to 2.3% over the next year, 3% below earlier expectations¹³. Three- and five-year annualised APAC returns are estimated at 5.1% and 6.1%, with the market recovering most of the lost performance this year. Geographic differences will be significant. While all markets will face challenges, Australia, Korea and Japan are expected to outperform. On-the-ground fundamentals in these markets remains strong, and the supply pipeline are likely to tighten further as supply chain disruption persists. 

Given heightened uncertainty, we believe reducing risk and ensuring strategies are linked to resilience and real-world demand drivers should lead to stronger risk-adjusted returns. This means reducing leverage where possible, de-risking development exposure and ensuring voids are kept to a minimum through active management and de-risking upcoming lease events. Once clarity on the outlook is restored, we will review risk exposures.