Commercial real estate markets across Asia-Pacific are expected to remain stable but their strength will be tested by unpredictable monetary policy and financial market volatility this year.
The market dynamics could produce a variety of possible outcomes for Asia-Pacific commercial real estate, both positive and negative. What’s certain, though, is that both investors and tenants will likely harness market headwinds to incorporate more flexibility into their portfolios.
From a regional perspective, capital flows will take place in an environment of compressed yields and higher prices. While corporate expansion remains healthy, economic uncertainty will impact market sentiment and thus affect investment activity. For tenants, it will be worthwhile identifying high-risk functions and incorporating greater agility into their portfolios. On the flipside, investors will have to put more thought into potential acquisition while consider capitalizing on profits in markets reaching peak. As such, it’s timely for investors to turn their attention away from cyclical investments and instead focus on sectors benefiting from structural trends like modern logistics, data centers and multifamily residential.
No dialogue about Asia Pacific can really be complete without taking about its two most formidable growth engines – China and India. To the untrained eye, these countries appear only as proxies for their fast-growing economies. But, there is a stark contrast between the two in their influence on market sentiment, which is expected to be more powerful than real, underlying demand in driving investment activity this year.
India, having surpassed China as the world’s fastest growing major economy, is now also one step ahead in having its own REIT market – this improves the quality of assets offered and attractiveness to foreign investors. In this respect, India is a greater source of optimism than China and we’ll see investors approach the two with different attitudes. Whilst there are parallels to be drawn in policy direction (with both governments hoping to see their country’s ascent to global manufacturing hub via the Made in China and Made in India initiatives), investors’ behavior is different. As investors in India diverge from debt financing toward equities, the reverse is occurring in China.
Foreign direct investment in the two countries is also likely to follow perpendicular paths. With potential tariff-related disruptions hampering investors’ optimism in China, we’re witnessing greener pastures in India where liberalization of FDI (for example, 100% foreign ownership is now permitted for single-brand retailers) is creating an investor-friendly environment. Coupled with a growing consumer base, highly promising for the retail story in commercial real estate.
When we look beyond China and India to other regional markets, the interesting connection between a drive toward omnichannel retail and spike in logistics sector activity is present. The upgrading of industrial and logistics portfolios by tenants will accommodate to the overall embrace of technology to optimize supply chains. At the core of this linkage is a revolutionization of the landlord-tenant relationship, which has evolved from its transactional nature into a partnership in brand delivery.
Another cornerstone of Indian, Chinese and other key markets in Asia Pacific is the increasing strength tech companies and flexible space providers have in driving office demand. Tech companies accounted for almost a quarter of all office demand in 2018 – given the inherently riskier nature of startups and unicorns, this will call for heightened prudence in tenant selection by landlords. Co-working operators, whilst occupying only 1.7% of total prime office stock in the region, have expanded their footprint by 300% in the last three years – pointing to a gradual redefinition of office spaces by tenants as they begin to incorporate flexible spaces into their core portfolios.
The resilience of the Asia Pacific market will be tested this time by a whole new set of circumstances. But, the region is now better placed than in the past. Foreign reserve levels are now 58% higher and 8 times more than they were during the Global Financial Crisis and Asian Financial Crisis respectively. But, as the dusk falls upon the region’s sustained economic growth, there is a breeze of uncertainty about both occupiers and investors will be rethinking their strategies in terms of both portfolio composition and allowing for greater agility.
By Anshuman Magazine, Head of India, South East Asia, Middle East and Africa, CBRE.