U.S.-China trade conflict, geopolitical tensions and slowing economic growth negatively affects commercial real estate investment acivity in the AsiaPacific region. Commercial real estate (CRE) leasing activity weakened in the third quarter of this year, according to CBRE Asia Pacific Q3 2019 report.
Asia Pacific office leasing demand remained weak due to continued slow global economic growth and the ongoing U.S.-China trade conflict, said CBRE in a report.
Regional Grade A net absorption contracted by 24% q-o-q or 39% y-o-y to a three-year historical low of 10.9 million sq. ft. NFA. Tech firms continued to drive demand but most occupiers turned more cautious and shifted their focus to lease renewals. The large volume of new supply, slow pre-leasing and lack of new sources of demand ensured rents declined by 0.2% q-o-q.
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Consumer confidence in developed Asia Pacific markets fell into pessimistic territory in Q3 2019 due to the deteriorating economic outlook. Retail sales growth slowed further in Q3 2019. Regional leasing activity weakened as most retailers remained cautious towards expansion and adopted a highly selective attitude towards location. Demand was led by small scale expansion by new-to-market F&B brands. New retail supply stood at 11 million sq. ft. while rents fell by 1.7% q-o-q, mostly due to the sharp 10.5% fall in Hong Kong which continues to see large demonstrations in major retail areas.
Industrial sentiment weakened further this quarter alongside the deteriorating economic outlook. Purchasing Manufacturers Indices (PMI) remained in contraction territory in China, Korea and Singapore. U.S.-China trade conflict continued to impact Asian exports, with the World Trade Organisation’s (WTO) latest forecast expecting merchandise trade to grow by just 1.8% in 2019, down from 3.8% in 2018 and 6.8% in 2017.
Warehouse leasing momentum was mixed with weaker demand from companies in the trading sector but solid activity from domestic consumption-related occupiers such as consumer goods and grocery retailers. Regional rental growth slowed to 0.3% q-o-q, the weakest increase in almost two years, as landlords turned more flexible towards lease terms.
”Ongoing sociopolitical unrest in Hong Kong continued to weigh on investment sentiment..”
Commercial real estate transaction volume registered US$34 billion in Q3 2019, an increase of 15% q-o-q. The figure was supported by the completion of several large and related-party transactions. Cross-border investment slipped by 20% q-o-q to US$7.7 billion mainly due to fewer deals completed by Chinese investors. Property funds remained a key source of capital.
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Ongoing sociopolitical unrest in Hong Kong continued to weigh on investment sentiment and prompted banks to adopt a more cautious attitude towards mortgage lending. Local investors turned more prudent, while some foreign investors opted to seek opportunities in other markets. Turnover contributed by foreign investors fell by 85% y-o-y, mainly due to Chinese buyers not purchasing any assets for the first time since Q4 2009. Foreign investors turned less active in China compared with Q2 2019 amid the weak leasing market, preferring assets with steady cash flow.
Investment activity in Japan and Australia remained solid, supported by the attractive yield spread against the low cost of financing. Japan saw steady purchasing by J-REITs and foreign real estate funds, while Australia continued to enjoy strong interest from Asian capital, especially Singaporean groups.
Investors retain strong confidence in Singapore’s office market with several major Grade A office assets changing hands. Foreign interest in India is rising after the first local REIT appreciated by 35% since listing in March.