Results from the Q2 Global Commercial Property Monitor show that the positive momentum across most Asia-Pacific markets in Q1 continued into Q2, though at a slightly more subdued pace. Although some markets were seen to be in the later stages of the cycle, expectations for rent and capital growth are indicative of a "soft landing" rather than anything more severe.
Contributors in most markets expect rents and capital values to increase over the next twelve months, albeit at a slower pace than forecast in Q1. However, there were some exceptions to this, notably in Auckland, Mumbai, and India’s National Capital Region (NCR), where respondents were much more optimistic for secondary properties.
Capital growth was also seen to pick up steam in Hong Kong, largely due to the ongoing pickup in momentum in the retail segment of the market. Meanwhile, respondents in Christchurch were markedly less negative in their outlook for both capital values and rents in Q2.
Tenants occupying prime office space in Hong Kong, Shanghai, Sydney, Melbourne, Auckland, Wellington, and India’s three main cities (Mumbai, NCR, Bengaluru) will not see much relief in rents over the next year. Prime office rents in these markets are expected to increase between 5–10% over the next twelve months.
This is despite valuations in several Asia-Pacific markets being perceived as expensive, as shown in chart one. More than 50% of respondents in Tokyo, Hong Kong, Sydney, Melbourne, Auckland, Wellington, Bengaluru and Mumbai see commercial property as above fair value to some degree. This was particularly acute in Tokyo, where 55% of respondents classified property as being "very expensive", the largest share of any market this quarter.
Although demand continues to outstrip supply at a headline level across most markets, foreign demand for commercial property assets was more subdued. Sydney, Melbourne, Brisbane, Kuala Lumpur and Christchurch all reported a decline in foreign interest. Contributors noted that foreign interest was more subdued in Tokyo and Perth in Q2 than it had been in Q1.
There was also some dispersion in credit conditions across Asia Pacific. Respondents in China also reported tighter credit conditions as the government continues to encourage corporate deleveraging. Australia, and to a lesser extent New Zealand, experienced some tightening in credit as offshore borrowing costs continued to rise.
In Australia, there were mixed views as to how the Royal Commission into banking would affect the commercial property market, with 48% of respondents saying it would have a significant impact, and 41% saying it would not. Contributors from China were slightly more concerned about the effects of a potential trade war with the United States, as 68% respondents in mainland China said that they saw US tariffs as having a meaningful impact on Chinese economic conditions.
Against this backdrop, commercial property markets are seen at varying stages in the current property cycle. However, given expectations for a soft landing, even markets such as Sydney and Auckland, which are in the later stages of this current cycle, are seen as likely to experience growth in rents and capital values throughout 2018.
Positive momentum in commercial property sector with headline rents expected to increase 4.4% over the next year
Responses from Hong Kong indicated optimism and positive momentum for the occupier and investor markets. This was underpinned by the continued recovery of the retail segment. Sentiment surrounding offices and industrial segments remained elevated.
In terms of overall sentiment, the Occupier Sentiment Index (OSI) increased to 23 in Q2 from 14 in Q1. The Investor Sentiment Index (ISI) increased modestly from 19 in Q1 to 23 in Q2.
As for rental demand across sectors, demand for retail space increased in the occupier market since Q2 2013, with landlords offering rent-free periods. Survey respondents continued to report an increase in the supply of office and retail properties available to let at a more modest pace in Q2; landlord incentives remained unchanged for these two sectors.
In the investment market, headline investor demand remains robust in office and industrial properties, driven by the increased foreign investment interest in Hong Kong office space for the eighth consecutive quarter. Respondents reported that the demand for retail properties increased for the first time since Q4 2012, driven by domestic investors.
The outlook for rents was bullish, with the headline rents expected to increase 4.4% over the next year. Respondents see capital values increasing over the next three and 12 months across all segments of the market.
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.