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News & opinion

30 OCT 2019

Conditions deteriorate amid more pessimistic outlook for global growth

Sean Ellison

Sean Ellison

Senior Economist, Asia Pacific



Respondents to the Asia Pacific Commercial Property Monitor indicated that conditions deteriorated significantly during the third quarter of 2019.

After a period of fairly subdued momentum, which coincided with the onset of trade and geopolitical uncertainty, sentiment has turned decisively negative. This comes as concerns over global growth continue to hang over property markets, with the IMF characterizing the global economy as being in a "synchronised slowdown".

Hong Kong, Vietnam the outliers

Although survey data points to a broad-based moderation in commercial property market conditions across Asia Pacific, Hong Kong was a market that saw a particularly sharp deterioration. Facing the dual headwinds of both domestic political tensions and fallout from the US-China trade dispute, the Occupier and Investment Sentiment Indices registered the weakest reading since Q1 of 2009 and Q4 of 2008, respectively.

At the other end of the spectrum is Vietnam, which continues to benefit from the fallout from China-US trade tensions. Respondents report strong demand for industrial properties, especially from foreigners, as supply chains look for regional alternatives to China.

Momentum slowing across APAC

Although Hong Kong is an outlier, it certainly isn't the only commercial property market in Asia where responses indicated negative momentum. Sentiment surrounding the mainland Chinese market continues to deteriorate amid the ongoing trade dispute with the US. South Korea and Singapore have also been impacted by a slowdown in global trade, in part due to where they sit in supply chains. The effects are amplified for South Korea, which is currently in the midst of a trade dispute with Japan while coping with the fallout from China-US tensions.

Read more: Who wins and who loses in the US-China trade war?

New Zealand has seen momentum slow somewhat from previous quarters but it remains postitive. Meanwhile, India joins Australia, Sri Lanka, Singapore and Japan as markets where survey participants see neither an improvement or deterioration in sentiment.

Auckland, New Zealand
New Zealand

Growth in rental, capital values broadly expected

Survey participants in a majority of markets expect rental and capital values to increase over the next twelve months (in net balance terms). Survey participants in Sri Lanka, and Colombo specifically, appeared to be optimistic that the upcoming Presidential election would help to alleviate domestic policy uncertainty.

Amongst the more developed markets, Melbourne and Auckland appear to be still near the peaks for their cycle. Meanwhile, continued demand for property in Tokyo from occupiers and both domestic and foreign investors helped to support the outlook.

Sentiment was not universally positive, however. Unsurprisingly, Hong Kong is expected to see rental and capital values decline over the next twelve months. In several markets including Seoul, Beijing, Singapore, Kuala Lumpur and Perth rents and valuations are expected to see minimal change.

Demand not keeping pace with supply

Indicative of being later in the current property cycle, the pace of increase in demand appears to be lagging that of supply in the majority of markets. This is illustrated in the survey data and was particularly acute for occupier markets. Hong Kong is once again an outlier as demand from occupiers, especially retailers, was said to have contracted sharply in Q3, while the supply of properties available for rent rose modestly and inducements were little changed.

With the exception of Tokyo, supply and demand dynamics appear to be a drag on rental and capital value expectations. Shenzhen, and to a lesser degree Guangzhou, present an interesting example of relatively soft occupier markets but a robust investment market. This is likely a result of interest from both domestic and foreign investors for opportunities stemming from the Greater Bay Area initiative.

In recent quarters, South Asian markets had been amongst the top regional and global performers. Although commercial property in Delhi, Mumbai, Bengaluru and Colombo are still expected to see rental and capital value growth, expectations have been trimmed somewhat. Contributors in India have been reporting more sluggish growth in occupier and investment demand as economic activity undershot market expectations in Q3. Meanwhile, participants in Sri Lanka were cautious about the outlook for property ahead of a national election.

Malaysia Twin Tower

Valuations perceived as being more 'fair'

Despite ongoing pressure on cap rates, valuations are now being looked upon as broadly being more fair. Less than half of respondents in Asia Pacific view valuations in their market as being 'expensive'. East Asia is the only sub-region where more than 50% of respondents continue to see valuations as being above fair value, largely driven by Tokyo, Seoul, Hong Kong and Macau as mainland Chinese markets are seen as being more fairly valued.

Although commercial real estate in Asia Pacific is not seen as being "cheap", several markets in Southeast Asia (Singapore, Malaysia, Philippines, Thailand) and select Australian markets, such as Brisbane, Perth and Adelaide, are seen as being relatively fairly valued.

Low rates still providing a cushion

Globally, central banks continued to lower nominal interest rates during the third quarter, helping to offset some of the concerns surrounding slower growth. In Australia, lower rates appear to have stabilized expectations for the key cities of Sydney and Melbourne and prolong the current cycle.

However, the efficacy of monetary policy is coming into question as most developed economies in Asia Pacific have negative real interest rates. Some central banks have advocated for governments to increase expenditures to offset the cyclical slowdown in global growth, though budget constraints may prevent this.

Against this backdrop, it is unlikely that there will be a sharp pick-up in momentum across commercial property markets in the near-term. Most markets are seen at being at some stage of a downturn. In Australia there is a large gap between the robust expansion being reported in Melbourne and more subdued conditions in Perth.

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Sean Ellison

Sean Ellison

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.

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