Asia-Pac's stubbornly-high property prices may correct next year

Singapore

THERE are growing concerns that a market correction may be on the cards next year for Asia-Pacific (Apac) real estate, which has stayed resilient despite the Covid-19 pandemic.

A regional forecast report by non-profit education and research institute Urban Land Institute (ULI) and PwC released on Tuesday noted that the Covid-19 outbreak has had a limited impact on local real estate markets this year.

However, stress in the form of forced sales may surface soon, particularly in China, India and Australia.

So far, investors anticipating a cascade of defaults as recession took hold have largely been disappointed this year. While Apac's property investment volumes fell 38 per cent year on year in the third quarter of 2020, prices and cap rates remained mostly stable, Real Capital Analytics data showed.

Government stimulus and employment-support schemes have temporarily staved off the impact of deep recessions. In Apac, banks and landlords have been supporting their cash-strapped customers, instead of calling loans or terminating leases.

This has sustained "essentially insolvent tenants, shoring up occupancy rates and maintaining landlords' balance sheets at near pre-Covid levels", noted ULI and PwC.

The region's buyers and sellers are also in a standoff over asset pricing.

"Buyers are underwriting lower values and cap rates based on an assumption of lower (or no) growth, together with expectations for declining rents," the report added. On the other hand, owners tend to be strong enough financially to hold out in hopes of turnarounds in the economy and pandemic response.

Still, conviction is growing that artificially high asset prices - and, with them, investors' profits - are due for a fall, as hopes for a V-shaped economic recovery fade fast.

One analyst said businesses have been propped up by government support, delaying the appearance of distress in the market. But distress "will come, for sure, whether it's corporates selling assets, investors whose income streams have dried up and are unable to meet interest-rate coverage ratios, or banks or receivers themselves stepping in as creditors", the analyst added.

Expectations of investor profitability thus declined to levels near the 2009 lows of the global financial crisis, the ULI-PwC study found.

Another reason pricing has stayed "stubbornly high" is that valuers have been reluctant to write down asset values, relying on technical caveats about market uncertainty and hopes for an economic rebound next year.

An Australia-based interviewee believes that next year, there will be more pressure on landlords to be realistic in valuing their assets, when job furlough schemes are removed, unemployment rates rise and other asset classes are repriced.

In China, smaller developers are finding it difficult to obtain bank financing due to a liquidity squeeze, and thus might soon liquidate assets to finance land purchases at attractive valuations, the report noted.

India has seen an implosion of local non-bank finance firms, causing developer finance to be in short supply. With significant industry consolidation and demand for distress capital, foreign institutional and private-equity funds are looking to India as a source of opportunistic investments.

And in Australia, the economic impact of Covid-19 has been among the most acute in the region. Australia's mechanisms to sell off distressed assets are also more front-and-centre than the rest of Apac; such market transparency may open up more buying prospects there, the report stated.

Meanwhile, Singapore, Tokyo and Sydney again ranked as the region's top markets for investment and development prospects. The three markets each promise "a sense of safe harbour in an increasingly hostile global environment", said ULI and PwC in a statement on Tuesday.

Ong Choon Fah, ULI's Singapore chair and Edmund Tie's chief executive, said Singapore's reputation for neutrality has attracted a stream of investors and corporate occupiers that may be opting to avoid uncertainties in Hong Kong.

The Emerging Trends Asia Pacific report by ULI and PwC was based on a survey of 391 real estate professionals, as well as 134 interviews. Respondents included investors, developers, property company representatives, lenders, brokers and consultants.