Commercial property growth in Asia-Pacific – Has it come to an end following the recent market selloffs?

The topic of the rising trend of commercial property rentals has been closely followed by many investors in Asia as prices have risen in many Asian cities following the onset of the US Federal Reserve (US Fed) monetary easing programme in 2009. The so-called ‘hot money’ has been flowing into higher yielding assets, especially the ‘red-hot’ real estate markets in Asia such as Beijing, Hong Kong Singapore, , Shanghai, Tokyo, among others. However, lately, with the talks among many market watchers regarding the possible US Fed tapering off its monetary stimulus, the commercial real estate market has taken quite a hit lately in the form of empty office spaces in central business districts, and firms opting to move to the less expensive suburban regions outside of the Central Business Districts (CBD) in these cities.

In a Bloomberg Television interview broadcast in Asia on June 13, 2013, the global chief executive officer (CEO), Mr. Colin Dyer, of Jones Lang La Salle (JLL) was interviewed on the programme ‘First Up’, hosted by Susan Li. One of the main discussions during the interview was centred on the state of the commercial property outlook in Hong Kong, and all across Asia. This comes after Hong Kong’s chief executive, Mr. C.Y. Leung reiterating his stance to curb property speculation in the territory through the continued implementation of sales taxes on various classes of property transactions, including the commercial real estate space.

During the interview, Mr. Dyer indicated that he is seeing more businesses, especially those from the financial services sector moving out of the CBD region in Hong Kong, and setting up offices in nearby Core Bay, which has much cheaper office rentals. In fact, in recent weeks, Swire Pacific, one of the major conglomerates headquartered in Hong Kong, was reportedly offering office rentals at bargain prices for its banking tenants outside the CBD region. When asked by host Susan Li on the June 13, 2013 downgrade of the economic outlook of China to 7.7 percent from its previous 8.1 percent by the World Bank and its potential impact on the commercial real estate market in the country, Mr. Dyer replied that he is seeing a slowdown in incremental office rentals, particularly in Beijing and Shanghai, but it is a different story for the retail rentals where there is an apparent pick-up due to the Chinese Government’s gradual shift towards its focus on propping up personal consumption, rather than focusing on the commercial, and industrial sectors. This has led to an increase in the construction of shopping malls, and increase in retail rentals in the key cities including Beijing and Shanghai.

On the commercial real estate outlook in Japan, Mr. Dyer indicated that there has been an increase in demand from commercial office space where it is mostly domestic driven, but has recently seen a pickup in international demand, particularly with multinational companies wanting to set up offices in downtown Tokyo. He attributed to the recent hike in demand due to the increasing consumer confidence in Japan, and the impact of ‘Abenomics’ as it relates to Japanese Prime Minister Shinzo Abe’s ‘Three Arrows’ economic stimulus plans.

As for outlook for commercial property demand in Asia-Pacific, particularly China, Mr. Dyer is generally bullish, and he forecasted a 10 to 15-year secular growth trend in the country for various classes of real estate including retail, industrial, office, etc. He dismissed the current market talk regarding the possible slowdown of China’s growth prospects, and the likely economic path China will undertake under the leadership led by President Xi Jiping. This analysis taken from Mr. Dyer does create many surprises, and gradual optimism towards China’s real estate markets.

So far, all these discussions regarding the growth in the commercial real estate sector in Asia-Pacific seems to be impacted by the current financial market selloff we’ve seen in the past few weeks. One of the cases to be made in point is that several large institutional funds are currently pulling out funds from Asia, and transferring back to places such as the United States, and in some cases, Latin America in search for higher yields, where recently, the 10-year US Treasury Bond yield has risen to approximately 2.5 percent to 3.0 percent, the most seen when compared on a month-on-month (MTM) basis as compared to May 2013. Europe is still mired with its leverage and political issues, which in turn might pose a challenge on issues such as availability of capital funding, particularly in real-estate.

Overall, the commercial real estate outlook in the Asia-Pacific region looks set to see more fluctuations and perhaps distortions as funds are pulling out of their holdings in the region, but with Mr. Dyer’s assessment of a 10 to 15-year secular growth cycle, particularly with China’s property outlook, it does provide some hope among investors regarding a potential upside on a long-term basis. However, as it stands now, as long as the current slippage seen in recent weeks regarding the various stock markets across the Asia-Pacific region stays for the next couple of weeks or even months, it still remains to be seen whether Mr. Dyer’s assessment will come true in a not so distant future.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc