As the region heads into the sixth month since the COVID-19 outbreaks, the majority of Asia-Pacific markets have managed to control virus numbers, with lockdowns easing and local situations generally improving. However, over recent weeks, a number of markets including Hong Kong, the Australian state of Victoria and the Philippines have seen a significant increase in numbers leading to secondary lockdowns. While many parts of the real estate sector were in recovery, these recent waves have injected further caution, not only into these localised markets, but the region more widely.
Residential markets, which saw a rebound in activity following the end of lockdowns are showing signs of slowing again, with those markets undergoing secondary lockdowns most notably impacted. While supported by low interest rates and underlying demand, the second half of the year could see more patchy performance across the region, as economic realities start to bite.
In the office markets, major relocation and expansion decisions continue to be put on hold, with many corporates considering a review of their footprints across the region, as both a cost cutting exercise and as a move to more flexible working. While this discussion continues for many corporate occupiers, growing vacancy rates and falling effective rents also provide an interesting opportunity in a more tenant friendly market.
In the capital markets, with few major transactions, many major investors seem to be happy to bide their time, trying to get a better grip on pricing. The full impact of weaker occupier markets is still challenging to price, with vendors current expectations not necessarily being met by buyers looking for further discounts.
As markets continue to recover, Knight Frank will continue to monitor activity, sentiment, deals, anecdotes and market dynamics to provide a level of understanding during this recovery phase.
Herearethekeytakeaways fromKnightFranks end-Julydatacollection:
Office and retail markets remain slow; industrial and residential see most activity.
· Only four of 19 office markets saw an increase in activity in July (page 8), with many corporate occupiers hesitating on expansions and relocations.
· With most markets turning in favour of tenants, office and retail markets are seeing declining asking rents in most markets.
· Industrial markets remain one of the most active sectors, fueled by e-commerce related logistics and a recovery in several
· manufacturing sectors.
· Residential markets remained active although the new waves in Hong Kong, Melbourne and now the Philippines are impacting transaction volumes in those markets significantly and weighing on confidence generally.
Inves tors happy to wait and s ee as trans ac tion volumes remain low
· Investment volumes were down 39% year-on-year to US$67.2bn as at July 2020.
· Investors are still looking very cautiously at occupier markets (see page 8), with challenges noted in terms of pricing the potential tenancy risk.
· We have seen an increase in the number of sale-and-leasebacks in several markets, with occupiers looking to release capital. At the same time, investors can profit from strong covenants on long term lease commitments.
· While the expectation around discounts are building, there is little evidence of significant repricing across most markets.
· There is still a likely flight to quality, with well-leased prime assets likely to see values remain resilient.
Lessons from second waves
· The resurgence of Covid-19 in several markets has demonstrated how challenging it is to fully contain the virus.
· While international travel restrictions are slowly being lifted in several markets for essential travel, given the risks of secondary waves, a full opening is likely to still be some way off.
· There has been an uptick in residential activity from overseas expatriates looking at buying back in their home markets, with an increase in enquiries from Asia-based Australian and UK nationals as a notable trend.
For more information about construction as a sector with a sizeable share in many economies, rising level of digitalization, and shifts in consumer sentiment in real estate, please see the Asia-Pacific region, Housing and Utilities and Building and construction.