Knight Frank’s latest Asia Pacific Capital Markets report examines the region’s economic performance and its impact on the real estate occupier and investment markets in 2013.
Economic Snapshot
A tough rebalancing act for China as talk of tapering QE3 leads to capital outflows in emerging Asia
While the Asia-Pacific economy continues to outpace other regions of the world, growth prospects have weakened over the first half of 2013. Notably with China’s expansion rate dropping to 7.5% y-o-y at the end of Q2 2013 (from an average of over 10% over the last decade), there are concerns that growth could dip lower this year, although a hard landing is unlikely. Elsewhere, forecasts for growth in 2013/14 have been tempered somewhat, given the slowdown in emerging markets and the likely tapering of QE3 in the US. The rise in US bond rates has already led to an outflow of capital and a weakening of domestic currencies, most notably in India, Indonesia and Thailand.
In China, credit conditions continue to be of some concern, with the largely unregulated shadow banking sector representing the largest credit growth in the economy. Further downside risks remain as external conditions remain weak and China’s exports down in the first half of 2013 compared to 2012. Australia, with its economy closely linked into the Chinese external demand for resources is seeing its growth prospects weaken. This has also been reflected in the Australian dollar which dropped by 13% against the US dollar over the first 6 months of the year, with the Reserve Bank of Australia cutting interest rates twice in an attempt to stimulate the economy.
India’s economy, which is running a current account deficit, has continued to suffer from capital flight and a depreciating rupee, leading to increasing inflationary pressure. The economy, which grew at 3.2% in 2012, is forecast to continue to see growth compromised in 2013. Of all the developed economies in the region, Japan is the odd one out, as its unprecedented stimulus measures have boosted growth prospects for 2013 and 2014. Although second quarter growth slowed from the rapid expansion seen at the advent of “Abenomics” in Q1 2013, hopes remain that the country’s economy can be jolted out of its two “lost decades”.
Occupier Markets
Slowdown in prime office occupier markets
In China, the general slowdown of the economy has trickled down to the office market, where prime rents in Beijing, Guangzhou and Shanghai declined over the first half of 2013. The recent change in government has not lifted the gloomy mood in Australia, with the Chinese slowdown indirectly impacting office demand, demonstrated by all major city CBDs seeing negative absorption and declining effective rents.
In Japan, the prime office rental market actually edged down slightly in Q2 2013 following two quarters of strong rental growth. The ongoing impact of “Abenomics” and the continuing move towards prime, earthquake tolerant office accommodation however is likely to ensure solid prime rental growth over the next 12 months. Similarly in India, while the struggling economy is growing at a faster rate than in 2012, and the office markets have shown solid net absorption and rents have moved sideways.
In terms of markets that remain on the upward trajectory of the rental cycle; Bangkok continued to see increases in prime office rents, while Jakarta continued to be the stand out market, with rents increasing by 25.5% over the first six months of 2013.
Not surprisingly, the two giants of the region, China and India stand out with the largest future supply. While Shanghai has proven to be the largest market in terms of net absorption over the last decade, the significant supply pipeline raises questions as to the ability of developers to meet local demand without creating an oversupplied situation in specific localities.
Investment Markets
Investment volumes hold steady with Japan leading the way
Investment volumes recorded in the first half of 2013 stood at US$ 57.9 billion, down marginally 1.8% from the same period of last year, but up 9.6% from the second half of 2012. Japan has remained the most active market followed by Australia, Hong Kong, China, and South Korea.
In Japan, volumes are up 12.1% when compared to the same period last year. The positive sentiment brought about by the monetary and fiscal stimulus measures and the weakening Yen has encouraged offshore interest, with foreign investors such as AXA Real Estate, GE Capital, Goldman Sachs active purchasers over the last six months. As more capital has entered the market, prime office yields have compressed to 4.0%.
Australia saw activity increase significantly over the half, reaching US$13.2 billion, with Sydney continuing to be the most active market.
Some liquidity has returned to Vietnam, despite a continuing crisis in the banking sector, with the largest deal on record going through with the sale of Eden Center (Vincom Center A) to a local purchaser for US$ 470 million.
In terms of average deal size (for transactions over US$ 10m), Singapore stood out with average lot size of US$111 million, although this number does not take into account the numerous sub US$ 10 million deals, such as strata office, industrial and retail.
The rising prominence of the Asian institutional investor
Changing regulations and the rise of welfare states in developing Asia are helping shape cross border property investment activity. Most notably, following the China Insurance Regulatory Commission (CIRC) regulatory clarification of October 2012, Chinese Insurers have started going offshore, with the notable purchase of Lloyds Building in London, by Ping An Insurance Group for £260 million. South Korea’s insurance companies have also continued to be active in offshore investment with National Pension Service (NPS) buying a 50% stake in Erina Fair, regional Sydney and Central Plaza in Shanghai.
Pricing keen in core markets, while increase in bond yields reduce spreads across the region
Although bond yields remain at historic lows, they have moved out across most countries in Asia Pacific. This has reduced the spreads of property yields over the risk free rate. Property however continues to be attractive thanks to its income appeal and hedge against inflation. Prime yields have compressed across nearly all markets over the first six months of 2013, as significant capital is chasing limited stock. Secondary yields where tenancy risk is deemed more significant have remained stable in the majority of markets.