Asia Pacific government efforts in containing the spread of Covid-19 have limited its impact on local real estate markets but investor concerns are growing that a market correction across almost all property areas across the region is increasingly inevitable next year, according to a new survey released on Tuesday (November 24). 

Government support, bank forbearance policies and healthy corporate balance sheets are unlikely to last and investors are anticipate asset prices will fall in 2021, though the correction may not prove as severe in the Asia Pacific as elsewhere in the world, said the 2021 Emerging Trends in Real Estate Asia Pacific report, jointly published by the Urban Land Institute (ULI) and PwC . 

Mark Gabbay, LaSalle IM

Speaking in a webinar to launch the report, Mark Gabbay, Asia Pacific chief executive and chief investment officer at LaSalle Investment Management, said "the correction in asset price differs from which country or which asset class you are going for".

He believes a price correction to property markets is on the way in the following 12 to 18 months, although it is likely to be slow. The report did not offer specifics on exactly how large potential valuation drops could be.

While the outlook may be a little downbeat, KK So, real estate tax leader for Asia Pacific at PwC, was upbeat about the versatility of regoinal property investors in the report.

“2020 has certainly been a challenging year for Asia Pacific real estate, witnessing a steep decline in transaction volumes,” said So. “However, investors in the region remain nimble and are already grasping opportunities emerging from the crisis. While remaining focused on mainstream asset classes, they are also looking at other sources of reliable income streams in a down-trending market.”

The report was based on a survey of 391 real estate professionals, as well as 134 interviews with investors, developers, property company representatives, lenders, brokers and consultants across the region.

RISING STRESS

The report highlighted that China’s government’s liquidity squeeze is creating financing challenges for smaller developers.

Colin Galloway, consultant at ULI, told AsianInvestor in a written response that the Chinese government has always managed the pricing of both commercial and residential assets by controlling the availability of finance needed to buy and develop properties.

Colin Galloway, ULI

“Most recently, the 'Three Red Lines' policy has further tightened access to finance across the board, especially to smaller developers, who are therefore being squeezed for cash. While the market itself is relatively healthy, therefore, land and properties are now becoming available as developers liquidate assets to meet debt repayments," he said.

The 'Three Red Lines' refers to metrics regarding debt that property developers will have to meet if they want to borrow more, as outlined by the regulators in September. 

In some ways, China’s real estate market has been a victim of the country’s success in combating Covid-19. China’s economy has enjoyed a remarkable economic rebound in the third quarter when compared with the rest of the world, to the point that Beijing withdrew policy easing measures after rising leverage and a nationwide homebuying rush pushed up average residential prices 4.6% year-on-year in September.

Galloway added on the residential side, pricing action is even more robust, with local governments having to take steps to cool markets in major cities in China. That could well reduce property valuations. 

The report noted that property market stress could also emerge in Australia. Grade A office rents in the country held steady in the third quarter this year despite worsening conditions on the pandemic front and government stimulus measures played a part in keeping the property market afloat. But these may not be long lasting.

A surveyed Sydney-based investor showed concerns, noting “Aussie pension funds are conservative, so they are not necessarily out there doing deals, and the capital markets at the moment are just pretty muted,” in the report.

TOKYO ATTRACTION

The report also noted that Japan, and especially Tokyo, is expected to remain a magnet for international investors, despite potential fluctuations next year. 

The deep decline in transaction volumes seen across most Asia Pacific markets in the first three quarters this year was less evident in Japan. Its sales recorded a relatively modest 22% decline, propped up by foreign purchasing and a handful of large deals.

A surveyed Japan-based fund manager noted that people are going back to work in the country, in a similar manner to China, and as a result the economy remains fairly positive and fluid.

In addition to Tokyo, Singapore and Sydney continue to rank among the top markets for investment and development prospects in the region. The report noted that both cities promise a sense of safe harbour in an increasingly hostile global environment.

FAVOURING OFFICE AND LOGISTICS

For specific assets classes, 73% of the surveyed investors hold an active view on commercial office property and 69% of are positive on industrial and distribution sectors in the region in 2021. Given that the impact of Covid-19 has been quite minimal in many Asian cities there has been little sign of slowing demand.

Logistics will probably be the only sub-sector to come out of the pandemic stronger than when it went it. Asia Pacific logistics transaction volumes in the first three quarters rose by 15% year-on-year, compared with a 38% decline in the office sector and a 53% drop in retail property.