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The Asian Economy Returns to Growth

By on Mar 03, 2010 in Research

Asia MarketView Q4 2009

Asian commercial real estate markets witnessed a steady recovery of demand in the fourth quarter along with further improvement in the regional macro economic environment. This helped rentals stabilise and several markets recorded two consecutive quarters of rental increments, signaling the end of the downward cycle. However, most corporates remained cost-conscious and continued to adopt decentralisation and consolidation strategies to contain real estate costs.

The period saw multinationals and financial institutions in selected Asian cities display a renewed willingness to expand. Overall office rents in Asia fell 1.8% in the fourth quarter, a slower rate of decline as compared to the 3.1% fall recorded in the previous quarter. Prime retail rents in most cities remained stable, with key markets either recording an uptick or slower rate of decline. The industrial property sector stabilised further with industrial rents in most Asian cities ending their decline and recording minor escalation. Prices for luxury homes continued to edge up in Beijing, Shanghai, Guangzhou and Hong Kong at increments ranging from 6% to 10% q-o-q, while prices in other markets remained largely stable.

OFFICE MARKET

The Asian office market continued to approach the bottom of the current cycle during the fourth quarter as rental declines slowed further and absorption rates gradually picked up. The period saw multinationals and financial institutions in selected Asian cities display a renewed willingness to expand. The unemployment rate declined for three consecutive months in Taiwan and Hong Kong, whilst in Japan it fell from July 2009’s record high of 5.7% to 5.1% in December, reflecting the overall improvement in the Asian labour market.

Despite the positive news on the employment front, this did not translate into recovery of demand in the office sector in many Asian office markets as many companies continued to adopt consolidation and decentralisation strategies to reduce real estate related costs. The fourth quarter saw overall office vacancy in Asian cities edge up 30 bps q-o-q to 12.8%, although Beijing, Hong Kong, Taipei, Bangalore and several Southeast Asian cities all recorded a minor decline in vacancy level.

As the market outlook began to look more positive, landlords of prime buildings in leading Asian financial centres started to take a firmer stance on rents. Elsewhere, oversupply problems continued to exert significant downward pressure on rentals in a number of emerging markets. Overall office rents in Asia fell 1.8% in the fourth quarter, but the rate of decline decelerating from the 3.1% recorded in the previous quarter. The current downward cycle has now lasted for about 18 months but certain markets with stronger economic fundamentals have already seen the slide in rentals come to an end.

RETAIL MARKET

There were signs of recovery in Asian retail property markets in the fourth quarter as consumer confidence across the region remained firm on the back of improved economic conditions. Festive promotional activities conducted by retailers proved successful in lifting consumer spending. Demand for prime retail space remained firm and the overall level of retail leasing activity in the region gradually picked up. The fast fashion and food & beverage sectors continued to dominate leasing activity and remained fairly active in searching for new locations to expand.

Prime retail rents in most cities remained stable, with key markets either recording an uptick or slower rate of decline. Prime retail rents for well-located prime retail facilities in Shanghai, Hong Kong and some emerging markets continued to record a slight increase on the previous quarter, thanks largely to tight availability and/or improved demand for desirable space.

Looking ahead, the Asian retail market is expected to strengthen as consumer sentiment remains positive amidst the generally optimistic economic outlook. The Chinese New Year festive season will bring with it a further rise in retail sales activity. However, the threat of oversupply still looms in Singapore, New Delhi, Beijing, Shanghai and Guangzhou, all of which are expecting a large quantum of new retail space to come on stream in the near future.

INDUSTRIAL MARKET

Along with the gradual recovery of the export sector and continued expansion of domestic demand, industrial production across major Asian economies continued to record growth in the fourth quarter. Tokyo and a number of larger Chinese cities, including Beijing, Shanghai and Chengdu started to see increased demand from domestic companies and foreign firms looking to relocate. The improvement in overall market sentiment acted to further stabilise the sector, with industrial rents in most Asian cities ending their decline and recording a minor rise.

In China, strong domestic demand in major cities emerged as the main driver of demand for industrial properties, including both warehouses as well as business parks hosting hightech, pharmaceutical and new energy industries. A new policy introduced by the Hong Kong government to encourage the revitalisation of ageing or under-utilised industrial buildings is acting to stimulate demand, which resulted in a rise of capital values by 5.2% q-o-q. In Tokyo, the vacancy rate for warehouses and logistics units fell as domestic corporations looked to consolidate their subsidiaries and relocate to high quality large scale facilities. Local manufacturing companies in the Philippines begin to expand capacity to cater to the growth in domestic demand, while a number of developers in Vietnam commenced the construction of new industrial parks.

LUXURY RESIDENTIAL MARKET

The Asian luxury residential sales market enjoyed a strong fourth quarter as investor confidence gradually returned, underpinned by the persisting low interest rate environment and the strong rebound in equity markets. Prices for luxury homes edged up in Beijing, Shanghai, Guangzhou and Hong Kong by increments ranging from 6% to 10% q-o-q, while prices in other markets remained largely stable.

Despite the strong rebound in the sales market, leasing demand for luxury homes remained somewhat fragile in some cities, with Beijing, Guangzhou, Kuala Lumpur and Ho Chi Minh City recording a modest decline in rents in the fourth quarter. Leasing markets in Hong Kong, Shanghai and Bangkok gradually began to recover, with rents for luxury homes climbing by increments ranging from 1% in Bangkok to 6% in Hong Kong.

The next couple of months may see end-users and investors adopt a more cautious stance following the introduction of measures tightening lending for property in certain

markets, especially those which have recorded substantial increases in property prices over the past year. It is expected that the potential reversal of other preferential policies and fiscal measures with respect to the residential market could also restrain sales activity in a number of key Asian markets in the first half of 2010.

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