Buyers could have last laugh if Apac commercial real estate standoff drags on

TO SAY that commercial real estate activity in the Asia-Pacific (Apac) has been lacklustre is an understatement.

Recent headlines have centred on eye-bulging increases in transaction volume in Hong Kong and Singapore, but these are outliers. The reality is that deal counts remain in the doldrums and only these two markets globally showed higher deal volumes in the first quarter of 2023, according to MSCI’s latest Apac Capital Trends report.

In fact, if you strip out the effects on Hong Kong from the massive US$830 million distressed sale of Goldin Financial Global Centre in Kowloon, it seems even clearer that not all is rosy.

Could this indicate that a crash akin to the one following the Global Financial Crisis (GFC) in 2008 is on the horizon? A macro backdrop of war in Ukraine, stubborn inflation and rising interest rates certainly do not help calm such worries.

Persuasive arguments could be made for a pending price realignment, if not an outright crash.

For one thing, despite the paucity of transactions in Apac, prices have remained stubbornly high as buyers and sellers continue their standoff.

This is unusual, in that although there is typically a lag before we see the impact of major events on the property market, these effects should have been priced in by now. Naturally, this worries some who fear a bubble is ready to pop.

On some levels, pressure is starting to build. Australia property giant Dexus recently disposed of 44 Market Street in Sydney at a 17 per cent discount to book value, while the sale of the city’s tallest building – Salesforce Tower – was put on hold after bids came in lower than expected.

Not all that bad

However, zoom out and you will find that the region is holding up well. In fact, its resilience sits in stark contrast to the US and the UK, where valuations have moved as much as 20 per cent to 30 per cent downward.

Take Hong Kong. For all the battering it has taken in recent years – on the heels of demonstrations, stringent lockdowns and the closed mainland borders – prices in its bellwether office sector have fallen only 7 per cent over the past two years. This is even as its five-year average for deal count overall fell 47 per cent, making it the second worst performer in the world after South Korea’s 56 per cent fall.

In fact, in some major markets like Singapore, Japan and South Korea, capital values have gone up.

We need to draw the right lessons between the GFC and now. Back then, the struggle was in finding buyers, with a glut of assets coming onto the market as liquidity dried up quite literally overnight.

This time, there is ample capital and liquidity. Consider how Blackstone easily raised more than US$30 billion for its latest real estate fund. However, sellers are not budging. Because, unlike 2008, they have substantial holding power on robust fundamentals, strong relationships with banks, and greater experience and expertise.

With the record prices in 2020 and 2021 perhaps still in their minds, landlords, developers and owners can and often have held on in hopes of making the best deal for themselves.

However, buyers are baulking at the paper-thin spreads amid the higher interest rate environment. After all, financial types pride themselves on being objective in seeking returns. Why would they want to – for instance – buy an office building in Singapore at an indicative 3 per cent yield when a San Francisco premise offers potentially 7 per cent, and with risk-free rates at perhaps 4-5 per cent?

The key takeaway from the GFC should be that, for a period after 2008, investors simply just took their money where the yield was – and that meant out of the region.

South Korea was a prime example. From being almost entirely domestically focused pre-crisis, investors there shifted their attention post-GFC to overseas markets like the US, Europe and elsewhere in Asia.

With an established international presence now, South Korean investors hold crown jewel assets like Plumtree Court in London – home to Goldman Sachs’ head office in the UK, and owned by the National Pension Service of Korea – and One Madison Avenue in New York, one of the city’s tallest skyscrapers and co-owned by NPS and Hines.

We may be on the cusp of that kind of capital realignment away from Apac once more. If prices in the region continue to not move meaningfully, the next act may not unfold in a way that sellers will like.

Yes, there are many dynamics at play and no one has a crystal ball, but sellers should start accepting that repricing downwards is not a weakness in itself. Rather, it is a concession for a sustainable commercial real estate market across the region.

After all, if an investor had bought into Apac before the pandemic, even in the hard-hit retail and hotel sectors, the likelihood is that they would still be sitting on tidy profits.

Taking that profit – without squeezing every bit of return possible – could well be the catalyst for buyers to refocus on, or at least, re-consider, Apac assets.

As more transactions close and thus generate more data, more investors could take interest in the region, hopefully creating a positive loop of activity.

Sometimes, there really can be no gain without pain. This may well be one of those times.

The author is global head of real assets research at MSCI