[UPDATED] What’s in store for Asia-Pacific real estate in the coming quarters

By Harry Tan,
Nuveen Real Estate
/ EdgeProp Singapore |
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SINGAPORE (EDGEPROP) - Prior to the Covid-19 outbreak, the outlook heading into 2020 showed signs of improvement after the significant headwinds faced in 2019 by the Asia-Pacific growth landscape — particularly from the easing of US-China trade tensions. However, the rapid spread of the pandemic since early January is now highly likely to depress growth in 1Q2020.
The outlook for the tourism sector in Hong Kong, which was already badly hit by months-long protests, will likely remain lacklustre due to the Covid-19 situation (Photo: Bloomberg)
The outlook for the tourism sector in Hong Kong, which was already badly hit by months-long protests, will likely remain lacklustre due to the Covid-19 situation (Photo: Bloomberg)
A significant downside impact on short-term economic growth is highly likely. To begin with, efforts to reduce contagion are resulting in reduced travel and tourism. Beyond tourism, lower confidence and weaker Chinese growth will likely drag on regional growth prospects in the first half with Singapore, Hong Kong and Thailand likely to be worst hit. More broadly, the prolonged shutdown in production in China could potentially also disrupt supply chains and drag on regional industrial production activities.


Due to Covid-19, restrictions on transportation, disruption to factory productions and extension of holidays will weigh on global trade activities. Intra-regional shipment is the first feeling the pinch, and it is expected to ripple through long-haul routes to North America and Europe. It is estimated that cargo volumes at Chinese ports including Hong Kong will decline in 1Q2020, deducting at least 0.7% of global container throughput growth this year, prompting global manufacturers and traders to re-evaluate their demand for logistics space.
That said, e-commerce players are benefitting from the pandemic, as concerns drive consumers to the safety of online shopping. A shortage of fresh food and medical supplies emerging from the crisis has boosted the immediate demand to warehouse these goods, underscoring opportunities for cold storage facilities over the longer term. Cold storage has been a key source of demand in 2019 particularly in China and South Korea, as they led the way in online grocery shopping, reflected by the surge in short-term leases by e-commerce players in the lead-up to the Chinese shopping holiday known as Singles’ Day. Reflecting the strong demand and lack of meaningful new supply, especially of modern facilities, the availability of logistics space has remained tight across most regional markets, particularly in Sydney, Tokyo and Beijing where the vacancy rate is at or near historical lows.
Despite a near-term hit to economic conditions from the coronavirus, the long-term structural story for Asia-Pacific logistics remains intact. The outbreak will only serve to strengthen the occupier demand for well-built, well-located and modern last mile, warehouse or distribution centres near to key infrastructure and transportation hubs over the long term.


The hit to growth momentum from the Covid-19 pandemic is likely to be most severe in the first half of the year, before economic activities rebound (as was seen during SARS) from pent-up demand. In the meantime, there is likely to be increasing fiscal and monetary support in the coming weeks, in order to mitigate near-term downside risks. The downside impact on the real estate market is likely to be concentrated on the retail market. Luxury brands with a large high street footprint, as reflected in the share prices, are most impacted while groceries and convenience stores have done better.
Many major retail landlords have offered concessions, waiving or reducing rents (in some cases, service charges too) temporarily for tenants across their portfolio and more landlords are likely to follow suit. There is little doubt that 1Q2020 retail sales will be impaired with downside risks stretching into 2Q2020. Nevertheless, a release of pent-up demand is likely to be witnessed in the latter half of this year through a recovery in tourism-related activities, entertainment and catering.
The retail sector’s near-term downside pressure is likely to be magnified by online disruption already overshadowing many regional markets. Investors are advised to avoid retail markets suffering under structural headwinds of rapidly changing consumer preferences, online shopping and over-expansion of stores. Stick to the tried and tested discounted luxury outlet mall concept in China, underpinned by urbanisation and the rise of the middle class.
Across China, 95% of shopping centers have re-opened, most of which have adjusted back to normal business hours. There are anecdotal evidences suggesting that in some of the prime schemes, it was difficult to find parking space & seats at cafes, with reported queues outside some fashion boutiques (rebound spending). That said, footfall traffic has generally remained considerably below pre-crisis level, particularly in Tier-1 cities where stricter footfall controls are still in place.


Business sentiment took a step back in 2019, which was evident in a slowing leasing environment and less active investment market. On the supply side, a number of completions are likely to push up vacancy slightly across some markets in 2020, but the net addition of space over the next three years is still relatively restrained (only sub-2% in the case of Osaka and Singapore). In terms of demand, office leasing will slow momentarily as businesses pause on expansion plans due to Covid-19.
Flexible space providers continued to drive take-ups in 2019, but there are signs of this levelling off. Further moderation is likely in the immediate future, particularly in wake of WeWork’s IPO failure in October 2019. Should WeWork take a step back and other operators follow suit by adopting a more measured pace of growth, demand by this cohort of tenants may experience some short-term disruption. This would mainly affect gateway cities which are more exposed to the flexible sector.
That said, a flexible workspace has growth potential. We envisage markets with healthy fundamentals (such as strong pricing power of landlords, high entry barriers for new supply, and a well-balanced tenant mix) to thrive in this space. Japan and Australia, where the office tenant profile is more diversified, are better poised to weather near-term shocks from the manufacturing and flexible space sectors. Structurally, the outbreak may accelerate the growth of the flexible workspace setting, as the remote working model becomes more accepted in the region.

Investment market

Investment volumes in the Asia-Pacific region have continued to trend down, representing a 9% decline in 2019 compared with 3Q2018, as commercial investors deployed capital prudently confronted with uneven economic growth and rising geopolitical tensions. Activity is expected to remain muted in the first half, as investors adopt a wait-and-see approach and deal negotiations are being delayed with the cancellation of business trips and meetings across the region.
We believe that long-term borrowing rates will remain compressed for some time. While cheaper financing costs should help temper the appreciation in real estate yields, investors would have to accept lower returns than they enjoyed in previous years. The Asia-Pacific remains the fastest growing region in the world with its depth and breadth continuing to provide increasing opportunities and risk-adjusted returns to global investors looking to diversify beyond their home markets.

Hong Kong, the city to watch

The outlook for the tourism sector in Hong Kong, which was already badly hit by months-long protests, will likely remain lacklustre due to the Covid-19 situation. This is by virtue of tight linkages to the Chinese economy, its status as a trading hub and a further sharp fall in tourism.
The near-term outlook will stay challenging and an extended downturn of the residential property market looks imminent. That said, the commercial property market provides a more interesting investment proposition against the current backdrop.
Office rents in the Central district have recently started to decline, given the recent weak sentiment, and this will persist especially as businesses readjust their expectations of Hong Kong’s long-term outlook and the need to diversify away from the city. The fall in office rents, by around 30% to 40%, will continue in Central and other mature decentralised areas in the near to medium term.
This provides good opportunities for investors looking to diversify their global portfolios and enter the market. Despite the recent situation, Hong Kong will remain one of the most dynamic, vibrant and transparent global real estate markets over the long term.
Transaction volumes declined in 2019, partly as a result of the more uneven growth environment and tight pricing, but also due to the limited investability of quality stock. The trend of declining transaction volumes from 2019 is likely to persist, particularly as the bid-ask spread will likely stay wide.
At the extended point of the cycle, where local market fundamentals are likely to detach from pricing across some markets, investing in resilience, durability and structural megatrends should have a role in long-term portfolios seeking attractive risk-adjusted returns. While regional growth this year is likely to come in below initial expectations, a stronger demand picture is likely to surface in 2021 with growth running significantly above trend. Indeed, the Covid-19 outbreak will only stall — but not derail — the longer-term positive structural trends and deeper set of opportunities across the Asia-Pacific.
Credit growth accelerated in March, up 11.5% from a year ago in China, aligned with the government’s monetary and credit policy support in light of Covid-19.
With an additional fiscal support package totalling HK$137.5 billion announced recently, Hong Kong’s fiscal deficit is estimated to reach 9.5% of GDP this year, the largest ever recorded.
Harry Tan is head of research for real estate, Asia Pacific, at Nuveen Real Estate
Harry Tan is head of research for real estate, Asia Pacific, at Nuveen Real Estate
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