Macro risks weigh on short-term expectations in Asia Pacific
The Q3 2018 results of the RICS Global Commercial Property Monitor indicate that mounting macroeconomic risks are beginning to weigh on commercial property markets in Asia Pacific.
New Zealanders have the reputation for seeing the glass as half-full. In a recent conversation I had about the outlook for commercial property across Asia Pacific, it was put to me that New Zealanders' penchant for optimism might be biasing forecasts for the Auckland property market upwards. But is this really the case?
The answer appears to be: maybe.
When it comes to commercial property, New Zealanders have generally held a more cautious outlook than many of their peers across the Asia-Pacific region — except for Australians. But, given this limited data set, it doesn't appear that New Zealanders are particularly optimistic, but rather, that Australians have been extraordinarily cautious in formulating their outlook for commercial property in recent years.
Below, chart one tracks the accuracy of forecasts for prime office capital values in Sydney, Shanghai, Hong Kong, Tokyo, Auckland and Singapore from 2015–2018. The forecasts are taken from the quarterly RICS Global Commercial Property Monitor (GCPM); in New Zealand this is collected in collaboration with the Property Council of New Zealand.
These forecasts are tracked against MSCI's 12-month CBD office asset value growth series for these markets, with the difference in the two series in the chart below. Note that there are fewer data points for Shanghai, Hong Kong and Singapore as the MSCI data is collected on an annual rather than quarterly basis.
The first, is that expectations for Shanghai, Hong Kong, Tokyo, Auckland and Singapore are fairly accurate, though there does appear to be a slight positive bias in the forecasts for Tokyo and downward bias in forecasts for Auckland. On average, prime office capital value forecasts for have been 1.1 percentage points higher than actual growth in Tokyo, whereas in Auckland forecasts have been 2.6 percentage points below actual growth. However, given the limited data set these do not appear to be significant.
The more eye-opening thing about chart one is the forecast errors for Sydney. On average, between Q1 2015 and Q3 2017, GCPM contributors' average forecast errors for Sydney prime office capital growth were minus 8.5 percentage points. This means that if respondents forecast 5% growth in capital values, on average capital values actual growth rate would come in at 13.5%. Meanwhile in Auckland and Tokyo, a similar 5% forecast over this period would on average correlate with capital value growth of 7.6% and 3.9%, respectively.
This is more clearly illustrated in chart two, which displays this data as a time series for Auckland, Tokyo and Sydney. Note that the forecast data has been moved forward by four quarters, so that a one-year forecast made in Q1 2015 will be measured against the actual growth recorded in Q1 2016.
Auckland forecasts appear to have a modest downside bias, with the exception of Q3 2016, while an upside bias in Tokyo throughout 2016 appears to have been corrected from 2017 onward. However, in Sydney the bias appears to be both significant and persistent; despite capital value growth consistently coming in above expectations, GCPM contributors have retained a relatively modest outlook.
Although the sample size for this is small, spanning 11 quarters for Sydney and Tokyo and 10 for Auckland, the errors for Sydney still appear to be significant. There may be some argument for measurement error — that in Sydney there are more prime office buildings located outside of the CBD than there are in Auckland or Tokyo, thus introducing bias into the results, though I'm not sure of how robust this argument is.
In part, this might be explained by the extraordinary growth in Sydney CBD office capital values. From Q1 2016 to Q3 2018, CBD office capital values increased on average by 13.5% year-on-year, more than either Auckland (7.5%) or Tokyo (3%). Respondents in Sydney may be hesitant to issue such bullish forecasts. This is particularly true as we enter the later stages of the cycle: a majority of GCPM respondents in Sydney have been saying that the market has been at its peak or entering the early stages of a downturn since Q4 2016.
However, given that the supply and demand dynamics are relatively slow to adjust (with the exception of black-swan type events) you would still expect some adjustment in market expectations if capital value growth consistently came in higher than forecast — chart two shows this has not been the case. Moreover, Sydney respondents have issued only slightly more bullish capital value forecasts over the 2015–2018 period than their counterparts from Auckland and Tokyo, averaging 4.6% versus 4.4% and 3.7%, respectively. Actual capital value growth over this period has been significantly higher in Sydney (averaging 12.3% versus 7.2% and 3%, respectively).
It is not entirely clear what the catalyst is driving the caution in Sydney office forecasts, but it appears that the downward bias will remain for the foreseeable future. For the first three quarters of 2019, GCPM respondents have forecast prime office capital values in Sydney to increase an average of 3.4% year-on-year; in the first three quarters of 2018, growth averaged 13.5%. It would require a drastic downshift in capital value growth in a short period for this forecast to bear fruit, which, despite mounting headwinds for the market, does not appear likely.
The Q4 2018 results of the GCPM survey will be released on 31 January 2019, so we will be able to see then if any of these dynamics have changed. In the meantime, it might be better to refer to New Zealanders as "cautiously optimistic".
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Senior Economist, Asia Pacific
Sean is responsible for the RICS Economics team’s research into the Asia-Pacific property sector, identifying market risks to the sector and analysing economic events and their effects on real estate.