According to a recent famitsu article, Nomura says KH3 is switching to Unreal Engine 4 and that they're working with Epic to fix some rendering issues that they've had as a result of the switch (source).

Not sure what prompted this. What happened to the Luminous Engine? What was the point of developing the engine if all it's used for is FF XV?

However, I did a bit of research, and apparently Rime uses Unreal 4 and that looks amazing. If that's what a fairly small team like Tequila Works can do with the engine, I doubt the KH team will have a problem making the game look great. So I think there's no need to worry on that front. From an aesthetic perspective, Kingdom Hearts has always been fairly strong, with the exception of the flat environments, which I hope they'll change in KH3.

For reference, here's the Rime trailer that was never put up on the site (look at that one puzzle where you're turning the world):

What? Really? Wow, I dunno, but I always figured something like that would be running on some weird custom engine, not Unreal. Not that I plan on playing it, but I'm surprised.

I expect gratuitous amounts of meatcube-themed Heartless enemies.

That's really strange to think about, total cognitive dissonance. But more importantly that tech demo you posted. Holy shit. When is that from and why aren't they making that game? Ridiculous red feather dress notwithstanding.

I believe it's from 2012. Yes, it looks really good. And the bit of story we get is sort of intriguing. Sadly, I think it will only ever be a tech demo.

Yeah the aesthetic looks really interesting in how it blends the old school FF stuff with guns and modern cities. Kinda reminds me of seeing 7 for the first time. Hopefully that is actually in production. Back to KH, yeah, if Rime is any indication the Unreal Engine should be more than capable of doing that type of 3rd person action-y game. And hopefully this serves to speed up production a bit by making it easier/more efficient.