Higher borrowing costs are putting APAC Living investors’ ambitions to the test. Since our investor survey closed in Q2, further interest rate increases in Australia, Japan and South Korea have made acquisition and development pricing more challenging. Rental income continues to offer support, keeping income prospects central to acquisition decisions.
The survey captured a market already adjusting to the inflationary consequences of tariffs and the Middle East conflict. Almost three quarters identified higher-for-longer interest rates as a concern. Even then, 85% expected to increase their Living investment over five years, with respondents’ intended deployment estimated at US$33.2 billion. The question now is how much of that ambition can be translated into transactions at today’s cost of capital.
A tougher financing environment
Australia’s September increase took the cash rate to 4.60%, its fourth rise this year and the first since the survey closed. Japan raised its policy rate to 1.25% that month, while South Korea’s increases in July and August took its base rate to 3.00%.
For buyers, higher financing costs reduce the income left after interest payments and can lower the price they are prepared to offer. Rising bond yields also lift the return available on lower-risk assets, putting pressure on property yields to rise to remain competitive. Sellers with well-occupied assets and growing rents may see little reason to accept lower valuations, leaving transactions difficult to agree. That matters in a market where 44% of survey respondents already identified the gap between buyer and seller expectations as their biggest investment challenge.
Australia was the leading geographic target in our survey, but its limited stock of institutional rental housing means investors have fewer opportunities to buy established portfolios than in Japan. Development is therefore central to building exposure. Higher financing costs add to already difficult construction economics, making it harder to deliver new housing at rents tenants can afford while meeting investors’ return requirements. Half of respondents had already shifted towards stabilised, income-producing assets when surveyed in Q2. Further increases in financing costs are likely to reinforce that preference, tightening competition for the limited portfolios available.
Capital continues to find a way in
Completed and pending Living transactions across six key APAC Living markets total US$13.5 billion in 2026 to date, 11% above the volume recorded in the first three quarters of 2025. Japan and Australia account for most of the activity, while investment in Hong Kong and South Korea has grown strongly. These figures span the survey period, showing capital continuing to enter the market as rates rose, without proving a subsequent improvement in sentiment. The survey’s longer-term allocation ambitions provide a reason to expect sustained interest, even if buyers take longer to commit and become more selective.
Income prospects remain strong
Rental growth offers support as borrowing becomes more expensive. Across Australia, Seoul and Japan’s major cities, demand for rental accommodation continues to outstrip supply, supporting occupancy and rents. Growing household numbers and demand for smaller homes support this structurally. These conditions leave income growth well placed to contribute more to investment returns, although tenant affordability will influence how quickly rents can rise.
Australia’s rental market illustrates the support for income. National rents rose 5.5% in the year to September on Cotality’s measure and SQM Research recorded a national vacancy rate of 1.4%, still low despite some easing.
Housing shortages continue to underpin rental demand. Higher development costs can prolong those shortages by delaying supply, supporting occupancy in existing buildings. For owners, however, rent increases must also cover rising operating expenses before they translate into stronger net income.
The difficulty for investors is accessing that income, outside Japan relatively few institutional portfolios are available to buy. Many investors will still need to fund development or conversions, often alongside local partners.
This leaves a demanding balance. The desire for established rental income is strong, but creating more of it requires capital to accept construction and leasing risk at a higher financing cost. Well-located projects with credible budgets and experienced operators should remain attractive. Progress will depend on agreeing prices and structures that leave enough return for those taking the delivery risk.
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