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Unprecedented calm ahead in the usually stormy seas of Asian markets?

​​​​​​​​​​​​21 Jan 2014

Unprecedented calm ahead in the usually stormy seas of Asian markets?

JLL CEO Asia Pacific, Alastair Hughes predicts some welcome stability after a year of record regional growth for commercial real estate markets.


The view from Alastair Hughes’s office of the Singapore Strait is a scenic bellwether for the health of the Asian economy: if there’s little movement in the world’s busiest shipping lane things are bad.

“At the end of 2008 you couldn’t see the sea for ships - there was just a carpet of empty, bobbing containers. Trade had come to a standstill. I’ve never seen such an evocative sign of what the Global Financial Crisis meant in reality.

“Then the Chinese turned on this massive stimulus tap - 4 trillion Yuan in 2009 and 2010 - and the boats started to move again. You could feel it rippling around Asia. Then they turned the tap off in 2011 and you could feel it rippling back again.”

Since taking the helm as JLL’s CEO for Asia Pacific shortly after the Lehman Brothers collapse, Hughes has seen turbulent times with exaggerated versions in Asia of the boom and crash cycles the world has experienced since 2007. JLL figures, out last week, show 2013 was the strongest year on record for investment trading in commercial real estate markets, led by growth in China and Japan. The disconnect between booming investment markets and stagnant rental values was greater than Hughes expected:

“Generally speaking, occupational demand for real estate was subdued with leasing activity down about 10 percent on 2012, which in turn was down 25 percent on 2011. So leasing markets were weaker than anticipated. On the other hand you have the world of real estate investment, which was stronger than projected. Real estate is more stable than equity markets but higher yielding than bond markets and transaction volumes were at a record level for all time in Asia Pacific.”

But moving into 2014 the gap between weak leasing and strong investment markets looks likely to narrow as business confidence slowly picks up. Hughes predicts a year of stabilisation.

“The world is going back to fundamentals. Markets gradually should become less contorted by artificially low interest rates and my sense from the business community who occupy property is that the reasons for being cautious, which have held them back over the past couple of years, are fewer and fewer.

"Concerns about the Eurocrisis, the US debt crisis, a hard landing in China – these are easing, so businesses are dusting down their growth plans and thinking about places where they feel they can grow. That will be good for Asia, which will remain the growth engine of the world economy over the coming decade."

The two markets set to dominate front pages this year are Japan and China, where commercial real estate transaction volumes last year were up 69 percent and 71 percent respectively on 2012. Hughes says in China fears over a "hard landing" following tightening of government policy, or political instability following the change within the Communist Party leadership in 2012, were misplaced.

"We were always skeptical about the scaremongering surrounding a hard landing. We have 6,500 people on the ground in China and based on that insight it just didn't feel like an economy about to implode. The fundamentals are too strong."

The scale of growth in Japan, however, was a surprise.

"We were saying to clients in 2011 and 2012 that commercial real estate looked cheap. You could borrow money at one or one and a half percent to buy good quality, well-let real estate yielding 6 percent. So we called the trend right, picking that market as undervalued, but the extent of the rebound in activity was a surprise, partly driven by Prime Minister Abe's radical dose of quantitative easing."

Abenomics faces some critical tests this year and is sure to be one of myriad Asian stories set to dominate headlines in 2014. This isn't a region prone to steadiness and, looking out over the Singapore Strait, Hughes is sure to caveat his calm forecast with a cautious reminder that Asia tends not to stay still very long.

But that buoyancy is what also leads Hughes to describe the region as "brilliant":

"The great thing about Asia Pacific is the diversity of real estate investment options. If you want a replacement for bonds you've got Australia or Japan; if you're looking for speculative quick capital gains, you could buy a piece of land in Jakarta.

"For a reasonable emerging markets risk Shangai is an international-style market and for a part in the Southeast Asian story there's Singapore, one of the world's most successful economies where office rents are still at a significant discount to where they were prior to the GFC.

"For a counter-cyclical move you've got the low Rupee so Bangalore's a good call and if you want to play sheer demographics or the online retail boom then retail in Indonesia and warehouse space in China allow you to take a reasonable emerging markets risk. There's something for everyone here."

Opportunity certainly abounds setting sail into 2014.