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Asia’s commercial property markets defy global jitters

​​​​​​​​​​​​​​​​​​​​​​​​​21 August 2015

Asia’s commercial p​roperty markets defy global jitters

In recent months, Asian markets paused to see how the drama in the eurozone and jitters in China’s financial markets would develop. Were the “aftershocks” of the global financial crisis going to cause another economic tsunami?

​​​​​Asia’s commercial property markets defy global jitters

By Alastair Hughes
Chief Executive Officer, JLL Asia Pacific

For now, both situations have been contained, one by “can-kicking” from Brussels and the other by “calming measures” from Beijing.

In the meantime, the vast majority of commercial real estate markets in the Asia-Pacific region continue to thrive. Capital values have risen an average of 5.5% on the year in the second quarter, while rents have grown an average of 3%, led by Hong Kong and Tokyo. Performance is good, and the outlook remains positive.

Rising rents

There are several reasons for this assessment.

First, occupier demand is healthy. Since the financial crisis, Western multi- nationals have been cautious, particularly in the financial sector, as they look to re- pair their balance sheets and cut costs. These companies are finally beginning to plan with more confidence and want to optimize the real estate they occupy.

In addition, domestic businesses in Asia are looking to expand and upgrade their office premises. JLL is receiving more inquiries than ever before from Asian companies looking for advice on how to maximize the use of their real estate, both to grow their businesses and become more productive.

In most major markets, this renewed demand is meeting a scarcity of available space due to a lack of development -- with a few notable exceptions -- since 2008.

Rents in most Asia-Pacific office markets are gradually rising. Annual growth has been 8% in Hong Kong and about 7% in Tokyo. Retailers also want to take advantage of Asia’s emerging middle class, and with the shift from luxury goods to middle-market retailers, over- all demand is growing, driven by logistics operators distributing to both retailers and online customers.

Investor appetite rising

Second, JLL is seeing healthy investor demand. The enduring appeal of wealth preservation and income from real estate continues to attract investors into property markets across the Asia-Pacific region. Investment into commercial property to-taled $30 billion in the second quarter of 2015, with the majority going to Japan and Australia.

Relatively inexpensive debt and plentiful equity have created a wall of money looking to invest, and this is met with a relative lack of available investible stock, especially in the more sought-after markets, such as Singapore.

The combination of stronger rents and lower prevailing yields is pushing capital values higher. This capital growth, coupled with healthy rental yields that, although low relative to historical norms, are still higher than cash or bond returns, is pulling more equity into the market. The current level of growth is moderate compared with previous cycles, suggesting returns could accelerate. The fact that debt is being used cautiously and that there is no mad rush of speculative development would also point to an optimistic outlook.

There are, of course, risks in the system that would lead to an adjustment to real estate pricing. The market has already priced in an increase in interest rates later this year, but the principal risk is that rates rise more quickly than is currently expected. This would dampen occupier demand and change the relative pricing of alternative asset classes.

Ripple effect

The second risk is that the Chinese economy might slow more than expected. This would have a ripple effect throughout the Asia-Pacific region.

Evidence from real estate demand, however, is that some of the slowdown in China’s industrial sector is being compensated for by growth in the services sector.

But Asia is more than just the greater China region. Japan’s low interest rate environment and India’s renewed corporate confidence are attracting real estate investors, as are the demographics of Southeast Asia and the relative stability of the Australian markets.

Although there are, as always, political and economic concerns around the world, the combination of rising occupier confidence, strong investor appetite and an Asia-Pacific economy growing at around 5% annually should deliver sound returns from real estate for those taking a medium-term view. Of course, each market in the Asia-Pacific region is different in terms of underlying supply and demand, and their performance will vary significantly, but the general trend is positive.

​​​ This article was first published in the Nikkei Asian Review. Click here for th​e full article. ​​