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28 JUL 2019

Sentiment continues to signal soft landing despite heightened uncertainty

Sean Ellison

Sean Ellison

Senior Economist, Asia Pacific

Singapore

RICS

Data from the Asia Pacific Commercial Property Monitor suggests that several regional markets are entering a period of slower growth. The pickup in momentum experienced during Q1 appears to have been short-lived, as sentiment is generally subdued in Q2 amid mounting downside economic risks. However, markets continue to be positioned for a soft landing, as rents and capital values are still expected to increase over the coming year.

Weighed down by trade

Several participants highlighted concerns that commercial property would see blowback from the renewed trade tensions between the U.S. and China. Unsurprisingly, these concerns were particularly acute in China, Hong Kong, Macau, Taiwan and Singapore. Survey participants in Hong Kong also highlighted the recent political unrest as an additional headwind. However, some markets, such as Vietnam (and to a lesser extent Thailand) were seen as benefiting from the ongoing Sino-US tensions as companies look to expand supply chains beyond China and into Southeast Asia.

Dispersion remains elevated

Indicators are signalling a degree of divergence in the performance of commercial property across Asia Pacific markets. Data shows the Occupier and Investment Sentiment Indicies, a snapshot of current market performance (note that these series capture momentum in the market rather than levels of confidence).

Several markets entering the later stages of the cycle, including those in Greater China, South Korea, Australia and Singapore appear to be moving sideways. That is, growth is neither increasing nor decreasing but rather remaining broadly constant. This is consistent with the elevated levels of uncertainty which survey participants highlighted in their commentary.

Demand not keeping up with supply

Conditions in Malaysia appear to have improved somewhat from previous quarters, though the overall outlook is still subdued and headline rents and capital values are expected to contract over the next twelve months. Although the balance of supply and demand remains a headwind for the Malaysian market, regions outside of Kuala Lumpur are expecting for moderate growth in rents on prime real estate over the next twelve months.

Demand increasing at a slower pace relative to supply is not isolated to Malaysia. Respondents from several cities in greater China, as well as Singapore, Perth and Christchurch have highlighted a similar dynamic in their markets. Although Sydney appears to be slightly more balanced, comments noted that a large stock of fresh supply is due to hit the market in 2020, and there are questions regarding the market's ability to absorb it.

Comments from survey participants in Asia Pacific

Hong Kong SAR

"The ongoing US-China trade disputes bring uncertainties to the real estate market. In Hong Kong, the political unrest also hits the market badly."

Tokyo, Japan

"Japan's real estate market has reached its peak with Cap Rate bottoming out. The large amount of real estate loans and the scandals of financial institutions has made it difficult to provide loans to medium- and small-scale investment real estate, and transactions in the non-prime real estate market have decreased."

Sydney, Australia

"The property market is operating differently depending which sector is being discussed, prime office and industrial are strong with high demand and strong sale and leasing prices, but retail is weak due to the flat economy where wage increases are low and peoples' spending power is restricted. We also have falling house prices which is another negative."

Signs of strength remain

In several markets, respondents highlight continued strong performance. Although the Tokyo cycle has been seen as being at its peak for the last several quarters, participants also highlighted upbeat sentiment leading up to the 2020 Tokyo Olympics. Both Tokyo and Ho Chi Minh City have experienced demand growing at a faster pace than supply - though data shows that these are also perceived as the two most expensive in Asia Pacific (relative to fair value).

Several markets in India also saw a rebound in sentiment following the National Democratic Alliance consolidating power after the federal election results were announced in May. Prime office rents in Bengaluru, Chennai and Hyderabad are all expected to increase more than 9% over the next year. Contributors also noted that Indian markets remain far from saturation.

Headline rents and capital values are also expected to see a healthy expansion over the next twelve months in Sri Lanka, in spite of the ongoing recovery from the Easter terrorist attacks. There does however remain a degree of uncertainty heading into national elections later this year.

Australasia mixed

The outlook for Australia is conducive to a market entering the later stages of the cycle. Growth in both Sydney and Melbourne is expected to remain positive (excluding retail), while the outlook for Brisbane and Perth remains a bit more of a mixed bag. Expectations for commercial real estate in New Zealand are particularly upbeat, as Auckland is still seen as being near the peak of its cycle and Christchurch seems to be emerging from its prolonged downturn. A dynamic that is consistent across all Australasian markets is that retail, especially secondary properties, are expected to significantly underperform office and industrial over the next year.

Credit easing cycle commencing

A stand-out feature of the first half of 2019 has been that despite interest rates remaining at historically low levels globally, it appears that the current interest rate cycle has already reached its zenith. Central banks globally have taken a dovish turn, led by the Federal Reserve in the United States.

Lower U.S. interest rates should help to support domestic consumption, thereby providing support to countries which export to the U.S. Furthermore, it would also increase the scope for emerging markets such as Malaysia, Thailand, Indonesia and India, amongst others, to cut interest rates without having as much of a detrimental effect on their currencies.

Central banks in India, Australia, New Zealand, Sri Lanka and the Philippines have already reduced their respective policy rates in Q2, while the Chinese central bank has undertaken macroprudential measures to inject credit into its economy. There are expectations that the Indian and Indonesian central banks will soon reduce interest rates as well.

It is important to note that monetary policy acts with a lag, and there are many factors at play in some markets which prevent interest rates cuts from being fully passed on to the real economy. However, survey respondents in several Asia Pacific markets have noted improved access to credit.

In markets such as Australia, anecdotal evidence suggests that banks appear to recognize that the property market cycle is in its later stages and as a result lending standards have been raised. Some reports have highlighted increased non-bank lending activity in these markets. Although this lending can provide much needed liquidity to otherwise under-served segments of the market, it tends to be associated with looser lending standards and additional risks.

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Sean Ellison

Sean Ellison

Senior Economist, Asia Pacific

Singapore

RICS

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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