Savills released their latest Asia-Pacific Investment Quarterly this week. The report provides an overview on the performance of eighteen key markets across Asia-Pacific and identifies which sectors have performed best and worst against the backdrop of the COVID-19 crisis.
While each region has had differing levels of success at managing the pandemic and its economic fallout, some unifying trends emerge.
- Q1 saw some dramatic downturns as the pandemic and resultant lockdowns took hold
- Retail and hospitality hit particularly hard
- Q2 experienced some improvements in market conditions as initial waves of infection brought under control
- Data centres and online-related logistics outperforming throughout
- Hopes of recovery dependent upon ability of countries to contain second waves of infection
Below we provide a some highlights and lowlights from the report, focusing in on five key markets: Hong Kong, Australia, Japan, China and Vietnam.
With the COVID infection rates easing significantly from mid-April, the commercial sector in Hong Kong appeared to have stabilised somewhat in Q2, following a very difficult start to the year. While Grade A office rents fell for the fourth consecutive quarter, there were glimmers of hope as the rate of decline slowed in Q2. Grade A office rents fell by “only” 3.8% quarter-on-quarter, compared with a fall of 5.2% in Q1. Meanwhile prime street shop and shopping mall rents fell by only 1.7% and 0.8% respectively over Q2, buoyed by signs that foot traffic in shopping malls was starting to improve as local infections fell to negligible levels.
Looking for potential positives in 2H/2020, the report’s authors cite the upcoming IPOs and secondary listing by a number of mainland Chinese firms in Hong Kong, which could lead to a pickup in leasing demand, by both the issuing companies and their ancillary financial and business service firms.
What the report does not mention, however, is that a new wave of infections in Hong Kong this month may put any hopes of recovery on hold. Following a week of triple digit daily infections, the HK Government has brought in its most stringent social distancing measures to date, with restaurants temporarily closed to dine-in customers, public gatherings limited to two people and work-from-home highly encouraged. The market must wait and see whether these measures can bring this latest wave under control.
However, the report highlights one sector that has thrived in 2020. COVID-19 enforced work-from-home and social distancing has accelerated digital transformation, driving demand for data centres and high-end logistics in the city. Digital Realty, a US-based data centre REIT, announced that it will start development of a 226,000 sq ft data centre and Data Zone Company, a subsidiary of China Mobile, has agreed to pay a record price of US$723 million for 50-year lease on a 94,792 sq ft industrial site in Shatin.
Despite the current economic climate, assets in Australia continued to trade in the first half of 2020 with domestic institutional groups leading investor demand. In the 12 months to June 2020, Savills tracked AUD31.8 billion of sales (AUD5m+) across office, retail and industrial asset classes. Office transactions took the lion’s share, contributing AUD18.7 billion. According to March 2020 data from Morgan Stanley Capital International, industrial property was the best performing asset class. Total returns from both income and capital appreciation reached 11.8% for the sector. Office returns weren’t far behind at 11.1%. Melbourne CBD recorded the strongest return of all office locations.
However, now that Victoria is going through a spike in infections and is back in strict lockdown, the next quarter will likely paint a very different picture. Work-from-home directives have meant that office occupancies are at all-time lows, with building occupancy in Melbourne at just 5%. With many businesses anticipating that employees will not return to the workplace full time in the short to medium term, current space requirements are being re-assessed and Savills expects to see an increase in sublease space as a result.
With second and third waves set to be a constant threat until a vaccine becomes widely available, recovery is proving hard to predict.
Despite the wider economy being pushed into a technical recession in 1H/2020, Japan’s core property markets performed relatively well in Q2. Within the Tokyo central five wards, Grade A office rents rose by 0.2% QoQ and 4.8% YoY. As with other countries the communications and logistics sectors in Japan appear to be performing well, while the hospitality and retail sectors have inevitably suffered due to the lack of inbound tourism.
Even in the midst of a “soft” lockdown, a number of large deals in the office, logistics, and multifamily sectors managed to reach closing including the purchase by AXA IM Real Assets of the Royal Parks ER Sasashima West residential complex in Nagoya for JPY 20 billion ($186 million). Click here to view our recent interview with Laurent Jacquemin, Head of Asia-Pacific at AXA IM Real Assets.
That said, the Tankan survey as of mid-June reveals pessimistic market sentiment across the board with 88% and 87% of medium and small sized enterprises respectively seeing business conditions as being either “not so favourable” or “unfavourable” (the full Tankan survey results can be accessed here ).
If Japan sees a second wave of infections in coming weeks, any hopes of further recovery will need to be put on hold.
Savills’ report divides mainland China into five regions centred around Beijing, Tianjin, Shenzhen, Shanghai and Chengdu. All five regions saw a significant downturn in the first half of the year. In Shenzhen retail vacancy rates rose sharply to 7.3% on the back of falling retails sales which dropped by 16.5% YoY for the first five months of 2020, while in Beijing the office market remained stagnant through Q2 with total transaction values down 56.9% QoQ and 42.6% YoY.
However as the initial wave slackened, some green shoots of recovery could be found. Tianjin’s land market saw its new supply and transaction volumes both increase quarter-on-quarter in Q2, with transaction volumes increasing by 123% QoQ.
In other positive news for China’s property investment market the China Securities Regulatory Commission and the National Development and Reform Commission published two documents regarding the trial policy for China infrastructure Real Estate Investment Trusts (REITs). The pilot program is viewed as a milestone for the China REIT market as under the new guidelines, China is expected to see its first publicly sold and traded REITs. While the report raises concerns about some of the rules imposed on the new REITs, the announcement demonstrates China’s determination to continue moving forward with reforms and innovations in the sector.
Despite Vietnam’s relative success in limiting domestic infections, the global downturn has made its impact felt. While Vietnam’s gross domestic product (GDP) increased by 1.81% during the first half of the year, this was in fact its lowest growth rate since 2011. Foreign direct investment fell by 15% YoY to US $15.7 billion. Low primary supply and market uncertainty saw the Ho Chi Minh City residential sector weaken by 52% year on year, its weakest first half performance for five years. However, the average absorption rate in Q2 was up 16% YoY, reflected positive underlying demand despite the impact of COVID-19.
Looking to the second half there are some macro drivers that give cause for optimism. The EU-Vietnam Free Trade Agreement was approved by the National Assembly on 8th June 2020 and could start to come into effect in August, boosting two-way trade and the local logistics industry. Vietnam continues to benefit from US-China tensions as multi-nationals look to relocate. Apple moved 30% of its AirPod production from China in Q2/2020 and Panasonic also announced that it will move appliance production from Thailand to Vietnam to reduce costs. Some significant transactions also took place in Q2/2020, including Temasek Holdings and KKR leading a group of investors taking a 6% stake in property developer Vinhomes for VND15.1 trillion (US$650 million). The central government has set a GDP growth target above 5%. Compared to many markets across Asia-Pac the economic outlook would appear to be relatively bright.
The Yield wishes Vietnam (and all countries) well in its continuing efforts to contained new COVID infections.