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Five key themes in Asia-Pac real estate
A BACKDROP of increased uncertainty prevails following the renewal of US/China trade tensions. It is not immediately apparent how the uncertainty and myriad as-yet-unknown factors will impact the APAC real estate markets in the coming months. Here are some things investors looking to navigate the landscape should look out for.
• China's likely sub-6 per cent growth this year
Global growth outlook has significantly deteriorated over the past month or so, mirroring in large part the heightened risk climate from the trade and technology war not just between the United States and China but also US' tariff threats on other major economies. As a result, rising headwinds to global growth and demand will pose further downside risks to some regional economies already hit by softer domestic consumption. While labour market conditions remain relatively robust overall, it is unlikely that regional growth can withstand additional external headwinds on top of a domestic housing market slowdown (Australia, South Korea), soft retail trade (Singapore, Japan) and generally more uncertain business investment climate. The step down in Asia-Pacific growth forecasts is likely to accelerate in the coming months, with China's potential sub-6 per cent growth as the biggest drag.
• All-time low interest rates
Global and regional central banks are likely on a more accommodative monetary policy stance in the coming months in order to support economic activities. China will likely turn on the credit tap in order to buffer short-term cyclical headwinds - mainly liquidity injection through the reserve requirement ratio.
A sub-trend outlook also now points to potentially two rate cuts in Australia this year, reversing expectations of a rate increase (at mid-2020) at the beginning of this year. Looser monetary conditions will support real estate pricing in the near-term. But investors should be conscious that if there is any one point in the current extended 10-year cycle where markets dislocate, this may be the year that we see a more pronounced divergence in performance due to significantly higher risks and a more uncertain outlook.
• Office sector: Focus on cities with resilient fundamentals
Despite a softer macro-backdrop, office market fundamentals remain broadly sturdy, with positive net absorption continuing to drive vacancy broadly lower across most regional markets. But fundamentals are likely to be more uneven (and uncertain) going forward, in light of the rising economic and political uncertainties, which will underscore a greater divergence in market performance in the near to medium term. The balance of risks is to the downside, with rising likelihood of an ongoing deterioration in economic conditions driving a pullback in occupier demand.
With the exception of Singapore, Hong Kong and Shanghai, net increase of CBD office stock across most regional markets in 2019/2020 would be higher than the historical five-year average. Therefore, the occupancy rate is likely to soften over the next two years. Nevertheless from 2021 onwards, supply would be more restrained especially in Tokyo, Seoul and Beijing where few new projects will be launched. Take-up is forecast to be strong in Brisbane, Beijing and Seoul, aided by a stronger outlook on employment in these cities' financial and business services sectors.
While long term structural trends are favourable for the regional office sector, investors should stay focused on markets such as Sydney, Melbourne and Tokyo office where demand fundamentals are resilient enough to overcome short term cyclical headwinds, from a tactical perspective.
• Aggressive e-commerce penetration
While we do not expect consumer market fundamentals to tail off sharply, APAC houses some of the most advanced e-commerce economies in the world. Aggressive e-commerce penetration means retail demand would not necessarily translate into occupier demand of the physical space, in particular the non-food categories.
We favour retail assets that offer customers a “day-out” experience that cannot be easily replicated online - for instance, designer outlet malls and experiential shopping centres with innovative and high quality leisure components. Convenient assets anchored with food retail should also be relatively shielded from the direct impact of online competition and attract frequent visits, and hence present a stronger performance outlook.
• APAC real estate market becomes more institutionalised
Investment activities across the APAC commercial property market started the year in a relatively soft patch after a record-high 2018. Transactions slowed to US$30.8 billion in Q1, 13 per cent below the quarterly average of the last five years. This trend is similar in most regional economies, with Japan and Hong Kong showing the biggest drop in volumes from the same period last year.
While transactions slowed in Q1, capital flows into APAC over the near term should be supported by a more accommodative interest rate environment. As most regional central banks have reversed the tightening bias since end-2018, interest rate expectation has been lowered lately, pointing to more benign financing conditions and consequently, ongoing sturdy capital market strength. Concurrently, the immediate pressure for outward yield shift has subsided as interest rises are kept on hold.
Looking beyond interest rate cycles, the APAC real estate market is rapidly becoming more institutionalised as reflected by the increasingly important role played by cross-border investors.
This trend is most pronounced in China over the last quarter. While this is, to some extent, attributed to the divestment pressure of the Chinese asset holders in response to the government's ongoing deleveraging initiative, it also signals that the country's financial reform has started to bear fruit. As regional markets continue to mature, APAC is set to see further expansion of its investable stock. W
The writer is managing director, real estate Asia-Pacific, Nuveen Real Estate