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30 JAN 2019

Sentiment in South Asia robust though macro risks remain on the horizon

Sean Ellison

Sean Ellison

Senior Economist, Asia Pacific

Singapore

RICS

The results of the Q4 RICS Global Commercial Property Monitor indicate a substantial degree of dispersion across Asia-Pacific markets. Although looming economic risks appear to be weighing on sentiment in some regional markets, expectations for a continued expansion in rents and capital values remain firmly embedded in others.

This is evident in Chart 1 (see full report), which measures the Occupier Sentiment Index (OSI)* and Investment Sentiment Index (ISI)*. There appears to be two clusters of markets emerging, signalling a degree of dispersion in commercial property market performance across the Asia Pacific region.

Protectionist rhetoric appears to have subsided in recent weeks which has allowed for concerns over trade tensions to subside. However, attention has shifted to weakening economic growth, particularly after the IMF’s recent downgrade of global growth forecasts. Nowhere is this more evident than in China where the government released Q4 GDP figures showing a further slowing of growth, matching the slowest quarterly growth rate recorded since 1992. This has translated in a subdued outlook for rents and capital values in Shanghai over the next twelve months, though the outlook for rents in Beijing are slightly more benign.

Macro risks, namely the prospect of slower economic growth, appear to be weighing on some of the more developed markets. This will be exacerbated if equity markets continued to correct, forcing institutions to reduce exposure to real estate to maintain portfolio asset allocation targets. Although prospects for some of the less mature markets remain robust, investment momentum will have to be domestically driven as obstacles remain in place keeping international investors from deploying capital.

Sean Ellison, Senior Economist, Asia Pacific, RICS

Hong Kong, which carries significant economic exposure to mainland China, has also seen market momentum slow as capital values and rents are both now expected to decline over the next year.

It is a different story for Singapore, particularly for office properties where respondents reported robust demand from both occupiers and investors. The rest of Southeast Asia presents more of a mixed picture. Persistent oversupply remains a drag on Kuala Lumpur, as does the ongoing fallout from the 1MDB scandal. The outlook for Bangkok and Manila is currently more upbeat, though sentiment may be affected by the upcoming general elections in Thailand (February), Indonesia (April) and the Philippines (May).

Australasian markets are similarly mixed. In Australia, contributors in Sydney and Melbourne indicated that these markets appear to be entering the later stages of the cycle, though the outlook for the office segment in both markets points towards a continued expansion. Respondents in these two markets were also nearly unanimous in reporting a deterioration in credit conditions. Perth has also seen momentum slip in recent quarters, though sentiment surrounding commercial property in Brisbane is slightly more upbeat. In New Zealand, both Auckland and Christchurch saw an upward revision to capital value and rent growth from Q3, despite a majority of respondents in Auckland reporting that the market has peaked or is entering the early stages of a downturn.

Contributors from South Asia were among the most bullish, not only regionally, but globally. Headline capital values and rents are both expected to see significant growth in Colombo, Mumbai and Bangalore. However, this optimism may be tempered somewhat as valuations are increasingly seen as expensive in Bangalore and Colombo.

A trend that continues to be evident across the region is the underperformance of retail versus office properties. In net balance terms, half of Asia-Pacific cities included in the survey expect retail rents and/or capital to decline over the next twelve months, while this share falls to the 10–20% range when looking at office properties.

2019 could turn out to be another year of solid regional growth and generally supportive of the real estate market in Asia Pacific. However, structural changes in the retail industry are skewing sentiment to the downside, even with the rise of the region's middle class. The sector will remain particularly sensitive to supply surges as well as signs of economic moderation. For office occupier markets, the rise of the co-working segment has emerged to be one of the strongest occupational trends in the region, mopping up backfill spaces in Singapore, sustaining ultra-low vacancies in Tokyo and steering absorption in India to arguably its strongest year in 2018. We expect co-working demand in Asia Pacific to remain strong this year, in addition to technology and financial occupiers. In light of the current uncertainty, investors should remain focused on the longer-term view; debt opportunities will also emerge amid tight lending conditions in the region.

Sigrid Zialcita, Chief Executive Officer, APREA

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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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