KUALA LUMPUR, 12 MAY 2025: Malaysia is steadily gaining traction as an attractive diversification market for global investors seeking opportunities beyond traditional hubs, with Japan, South Korea, and Australia continuing to lead capital flows into the Asia-Pacific region.

Knight Frank Malaysia group managing director Keith Ooi said there are early indicators of renewed cross-border investor interest, particularly among those re-evaluating the long-term potential of Southeast Asia.

"Malaysia offers improving fundamentals, an evolving real estate investment trust (REIT) market, and increasingly transparent regulations. While investor caution remains, the region's overall momentum offers reasons for optimism," he said.

Knight Frank's latest Asia-Pacific Capital Markets Insights report revealed that cross-border investment in the region's commercial real estate sector surged to US$9.5 billion in the first quarter of 2025 (Q1 2025), more than doubling year on year.

Although Malaysia was not among the top cross-border capital destinations this quarter, Ooi noted a steady increase in investor enquiries—especially targeting Kuala Lumpur, Penang's industrial corridors, and Johor's logistics and residential markets.

He said Malaysia's strengths lie in its strong logistics and manufacturing foundation, affordability, and strategic regional location. However, challenges such as currency volatility, evolving regulatory environments, and sector-specific oversupply—particularly in retail and residential—still warrant careful navigation.

Knight Frank expects investment momentum to pick up in the second half of 2025, contingent upon economic stability and clearer government policy direction.

With US$5.6 billion in deals already captured at the onset of Q2 2025, the market shows promising signs of growth, the firm said.

Shifting investment landscape across Asia-Pacific

Asia-Pacific's total transaction volume remained resilient at US$33.4 billion in Q1 2025, registering a marginal 0.8 per cent dip compared to the same period last year. However, it marked a 17.1 per cent decline from the strong deal flow seen in Q4 2024.

The reduced investment volume in Q1 2025 comes as a contrast to the elevated investment activity witnessed in Q4 2024, where interest rate cuts had prompted investors, who had been cautiously

awaiting opportunities, to actively deploy their capital. This surge in investment activity created a high baseline that was difficult to match, leading to the comparatively weaker performance observed in Q1 2025.

Despite this, investment momentum persisted, driven by several substantial transactions materialising during the quarter

Cross-border capital remains active, accounting for 28.4 per cent of all real estate transactions—the highest proportion since Q3 2023.

Knight Frank anticipates stronger activity in the second half of 2025, contingent on stable economic conditions and clearer government policy signals.

James Buckley, executive director of Capital Markets – Investments at Knight Frank Malaysia, observed that international investors, previously focused on core markets, are cautiously shifting their gaze towards Malaysia.

"We are seeing exploratory interest that could translate into transactions if key policy and macroeconomic indicators stabilise," he said.

Buckley believes that these early signs of interest could translate into deal activity, provided Malaysia maintains macroeconomic stability and delivers clearer policy guidance.

Regional strength bolstered by resilient office and industrial sectors

Craig Shute, the chief executive officer of Asia-Pacific, Knight Frank, said that despite a volatile global backdrop, the region's real estate market showed encouraging performance in early 2025.

"Stabilising asset prices and the clear signal that interest rates have peaked encourage investors to support renewed capital deployment. As investors gravitate toward office, industrial, and retail assets that offer resilient income and long-term growth potential, improved financing conditions and clearer valuation floors are helping to restore confidence across key markets," he said.

Shute noted that improved financing conditions and clearer asset valuations are helping to restore investor confidence across key markets such as Japan, Australia, and South Korea.

By early Q2 2025, the region had already logged US$5.6 billion in deals, pointing to a positive growth trajectory.

However, Shute also flagged caution, citing uncertainty surrounding tariffs.

"While we anticipate this positive momentum to gather pace, the on-again, off-again tariffs are muddying the outlook for further recovery in the investment landscape. Should tariffs lead to a sustained increase in inflation, the Fed would likely raise interest rates, exerting upward pressure on long-term interest rates and cap rates, potentially dampening capital markets activity globally.

"If implemented in full force, the industrial and retail sectors are likely to bear the brunt, with decreasing consumer spending and shifting goods movement directly influencing demand," Shute said.

Tariffs could disrupt industrial and retail recovery

Christine Li, head of research, Asia-Pacific, Knight Frank, said, should tariffs take full effect, sectors like industrial and retail may bear the brunt.

Reduced consumer spending and shifting trade flows would directly impact demand in these segments, she said.

Despite these headwinds, Li highlighted the continued strength of the office sector across the region, which demonstrates notable stability, protected by a unique combination of structural advantages and positive market cycles.

Cities in Japan and Australia are seeing high occupancy rates and stable rental growth, underpinned by structural advantages and favourable local cycles, she said.

"While we anticipate this positive momentum to gather pace, the on-again, off-again tariffs are muddying the outlook for further recovery in the investment landscape."

Knight Frank concluded that, while global uncertainties persist, investor confidence across Asia-Pacific real estate markets remains firm—bolstered by selective opportunities, policy shifts, and a growing appetite for diversification into emerging markets like Malaysia.