At the start of the year we released our “9 to Watch in ‘19” infographic – a list of nine key factors, or drivers, that could affect the commercial real estate market in Asia Pacific in 2019. As we approach the halfway part of the year, it is an opportune time to revisit how some of these nine factors are tracking.
The economic outlook for 2019 has clouded a little over the first half of the year. According to Oxford Economics, GDP growth for the 2019 calendar year is expected to be weaker than 2018. However, as highlighted at the start of the year, there is a wide range of growth trajectories with Japan now forecast at 0.5% in 2019, up to India at 6.8%. Overall, growth for the region is expected to average approximately 4.5% – a slowdown on the 4.9% in 2018, but still health overall and especially in comparison to the Eurozone and US. As ever, though, US-China trade tensions remain the largest downside risk for the region.
A range of national elections are scheduled to be held across the region in 2019, with three decided in May alone: Australia, India and Indonesia. All three elections returned the ruling party to government. With the Governing parties returned it should ensure continuity of policy to some extent, though big reforms are likely to remain elusive. In each election there was little to directly impact commercial real estate, though all countries have identified significant infrastructure development programs, which should provide net benefit. Additionally, there were a range of smaller policies such as low- and middle-income tax cuts in Australia, and supporting MSMEs and FDI in India which should also benefit some real estate sectors.
Office supply dynamics
While over 700 million sq ft of office space is under construction across the region, dynamics at the city and sub-market level are highly variable. There is no doubt, though, that the supply tap is starting to be turned on and it is affecting local conditions. For example, in Seoul where new supply entered in 2018, we have seen rents decline by nearly 5% from their peak (in local currency). In Tokyo, despite new supply entering this year, rental growth continues unabated so far. Similarly, Singapore registered 13% rental growth y-o-y in Q1 2019 with Melbourne and Sydney at 10.5% and 8% respectively. All three markets are yet to see any major new supply, though Melbourne has significant new supply starting to enter the market from H2 2019.
Relative value and the investment market
The commercial real estate investment market is at an interesting juncture. As highlighted at the start of the year, there is still significant capital circling the region. Notwithstanding this, investment in Asia Pacific in Q1 2019 was fairly lacklustre. There was no single reason for this, but a stellar Q4 2018, public holidays, trade tensions and lack of stock on the market are all likely to have played a part. One change we have seen over the year is an easing bias for many central banks and a retightening of bond yields. This has helped re-widen the bond yield – property yield spread and increase the relative value prospect of real estate, which together with robust rental growth across many Asia Pacific markets should support investment volumes over the year.
Full infographic can be found here.