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After Covid, Rising Rates And Global Tensions Post Hurdles To Property Sector’s Recovery

Bigger players gain advantage while smaller investors retreat on higher borrowing costs. S’pore and Japan show resilience.

September 1, 2022 – The outlook for the Asian property market hangs in the balance due to inflationary pressure with Japan and Singapore seen likely to weather economic uncertainties better than others.

Investment momentum in the property sector has slowed in the second quarter of the year, as investors grew concerned of the global economic environment and its effects on the real estate industry, various analyses showed.

In its latest Real Assets Asia Pacific Capital Trends Report, MSCI reported that investment to the property sector in the region totalled US$45.1 billion in the second quarter, representing a 24% decline from the level registered in the same period in 2021. 

The decline was led by a sharp drop in trades of individual properties, which totalled only US$33.1 billion for the quarter, compared to an average of more than US$40 billion per quarter for most of 2021. 

MSCI further said that in addition to the decline in volume, the number of deals and active buyers fell. The report said this demonstrated that liquidity in the region has taken a hit.

Small Buyers Opt Out

Benjamin Chow, Head of Asia Real Assets Research at MSCI, said he has noticed an inequality at least for the second quarter of the year, where smaller buyers opted out of property transactions due to rising interest rates worldwide. 

“The rising interest rate environment has taken its toll on deal activity in a number of core markets. Rising borrowing costs have squeezed out smaller buyers, as evidenced by the fact that deals under US$50 million fell the most across all measures of activity,” Chow said.

“On the other hand, big global institutions and cross-border players, who are relatively less affected by these headwinds, remained much more active in the second quarter,” he added. 

In light of this, fund-raising activity performed relatively well in the first half of the year, owing largely to larger players pursuing opportunistic strategies. 

Fund-raising Momentum At Risk

CBRE Research said funds-raising may continue its strong momentum towards the end of the year. However, activities could slow if the global economic environment continues to sour.

“Fund-raising remained on an upward trajectory this quarter as several large funds achieved their final close and raised additional capital for their second rounds,” CBRE Research said. 

“While CBRE expects current strong fund-raising momentum to continue to H2 2022, rising geopolitical tensions and economic uncertainty may prompt some groups to temporarily adopt a wait-and-see attitude towards raising and deploying capital,” it added. 

Leasing trends may also be affected as aside from higher interest rates, occupiers grapple with rising inflationary pressures worldwide. 

In its Q2 report on Asia-Pacific Office Markets, Knight Frank said the “much anticipated positive sentiment” forecasted for Q2 2022 was “watered down” in the face of the highest inflation seen in more than 40 years.

APAC Holding Up Better

“APAC is still in a relatively good position to handle the volatility in the short term despite the multiple headwinds in the macro environment. Leasing momentum is expected to remain more resilient as economies recover from the pandemic. However, should inflation stay elevated and central banks’ tightening continue to outpace growth, the post-pandemic recovery could weaken, and occupiers may take a wait and see attitude towards lease commitments,” Tim Armstrong, Knight Frank Global Head of Occupier Strategy and Solutions, said. 

Going forward, investors are likely going to be “more selective” in where they put in capital for next year. 

“Except for Singapore and Japan, most markets expect to register yield expansion for H2 2022 and into 2023. This will prompt investors to turn more selective towards potential acquisitions,” CBRE said. 

“Japan and Singapore will attract capital with their favorable cost of finance and positive cash on cash yield across all asset classes. Fundamentals in the latter remain solid and all sectors continue to register solid rental growth. Private capital will continue to seek high quality assets in this market,” it added. 

Industrial And Logistics Fall On Economic Headwinds

A big winner during the pandemic, industrial properties fared worst in the second quarter as data from MSCI showed that transaction volumes were down 62% from a year earlier to US$7.2 billion. 

Going forward, CBRE Research said recent tailwinds supporting logistics leasing and rental growth are expected to weaken in the coming quarters. 

“Global supply chain operations have now largely stabilised while slowing economic growth will prompt occupiers to be more cautious towards planning expansionary moves,” CBRE Research said. 

Expect Slow Recovery For Retail

The retail sector was also affected by global economic headwinds. 

MSCI said purchases of shopping centers in the second quarter fell by 30% against a robust Q2 2021. Deal volume for shops also declined and activity in this sector overall dropped 26% year- on-year.

“The regional retail market will recover slowly in H2 2022 as rising inflation and growing economic uncertainty weigh on consumption. Retailers will stay cautious and take longer to commit to major expansions amid rising operating costs,” CBRE research said. 

In terms of markets, CBRE Research said Australia and Singapore should still see mild gains this year but markets in Greater China will continue to struggle due to zero-Covid policies. 

Office Sector May Adapt 

MSCI said the office sector posted increased deal volume in Q2 2022, reaching U$$22.1 billion, a 9% year-on-year improvement. 

Momentum swung towards suburban offices, according to the firm, which constituted almost half of all office investment for the first half of the year.

CBRE said while the return to office trend will continue to gain momentum across the region, recovery will vary per market going forward. 

In particular, CBRE said upbeat markets will include India as recovery will be driven by rising leasing demand and institutional-grade supply.

Tight markets such as Singapore and Seoul will see rental growth accelerate while those in core CBDs in tier-1 cities in mainland China will begin to stabilise.