RICS CEO Briefing: Q3 2016

Conditions across the Asia Pacific commercial property markets were mixed in Q3 according to the Royal Institute of Chartered Surveyors (RICS) commercial property survey. The survey indicated that markets were driven by domestic macroeconomic conditions rather than an overarching global trend in the third quarter.
 
Asia Pacific markets benefitted in Q3 from a pickup in foreign investment from Q2. However in some markets, namely Singapore, oversupply remains a major drag.
By Sean Ellison, Senior Economist, APAC, RICS
 
Sentiment remains mixed across Asia Pacific commercial property markets
 
An overview
 
Conditions across the Asia Pacific commercial property markets were mixed in Q3 according to the Royal Institute of Chartered Surveyors (RICS) commercial property survey. The survey indicated that markets were driven by domestic macroeconomic conditions rather than an overarching global trend in the third quarter.
Asia Pacific markets benefitted in Q3 from a pickup in foreign investment from Q2. However in some markets, namely Singapore, oversupply remains a major drag.
 
RICS Commentary
 
Feedback from chartered surveyors throughout the region indicated that though sentiment was slightly positive on balance, subtle differences between regional economies highlighted the impact of domestic macro conditions.
 
Across most markets there was evidence that commercial property remained in demand in a low global interest rate environment and a shortage of core assets. However in some markets this has played its course – elevated domestic flows in Japan into real estate have compressed yields to the point where sentiment is beginning to wane. Greater Chinese markets are feeling a squeeze from weakness in retail space.
 
Looking forward, a low rate environment should continue to be supportive for real estate. However as yields continue to be compressed by the flow of funds into the sector, risks are becoming more skewed to the downside. Additionally, corporate leverage (particularly among developers) remains a concern in mainland China, one which could have regional consequences. The fallout from the US election could also be particularly acute if it results in a slowdown in inter-regional investment activity similar to that of Q1 2016.
 
Markets on the up
 
Japan – momentum slowing
 
Japanese investor and occupier sentiment both continued to fade in Q3, but remained in positive territory. Capital value expectations, particularly among prime real estate, remains particularly rosy over the next twelve months. However optimism has tapered significantly since 2015.
 
This likely signals even more yield compression (Japanese yields are already among the lowest in APAC) in the near-term as domestic asset managers continue to allocate more funds into riskier assets in order to hunt for yield.
 
Australasia – outlook remains rosy
 
Both the investor and occupier sentiment indexes for the Australian and New Zealand property markets were firmly in positive territory in Q3. The sentiment indexes in New Zealand in particular stood out as being among the highest globally. Capital values and rent are expected to rise in both markets over the next twelve months, though the balance of twelve month rent expectations was only modestly positive in Australia.
 
The majority of respondents from New Zealand view commercial property as expensive and see the property cycle at its peak. The responses for Australia were much more nuanced – less than half of respondents see property as expensive and slightly more than a third see the cycle in an upturn.
 
India – still outperforming
 
Sentiment in India remained among the highest levels in APAC in Q3, while nearly 70% of respondents see property as fairly valued. Offices are expected to outperform other sectors in both prime and secondary markets over the next twelve months in terms of capital values and rent. Larger cities, namely Bangalore and Mumbai, were among the most optimistic twelve-month outlooks for global cities.
 
A majority of respondents also saw credit conditions easing following the Reserve Bank of India’s (RBI) surprise rate cut in September. This is despite some reports that commercial banks have bee reluctant to pass along the rate cuts to the market. Forecasts for subdued food price inflation over the coming months is also seen giving the RBI capacity for another rate cut at its December meeting or early in 2017.
 
Indonesia – headline sentiment back in positive territory
 
Both the occupier and investor sentiment indexes were in positive territory for the Indonesian commercial property monitor in Q3. This is the first time that both indexes have been in positive territory since the survey was launched in Q2 of 2015.
 
The rebound in sentiment was led by expectations surrounding retail and industrial space in both prime and secondary markets. However office space continues to be a major drag on both capital and rental expectations over the next twelve months.
 
Sentiment mixed in greater Chinese markets
 
Hong Kong – offices outperform but retail continues to be a drag
 
The headline Hong Kong investor and occupier sentiment indexes remained in negative territory in Q3, though the market is nuanced with retail a drag on the strength of the office sector. However more respondents see the market in an upturn in Q3 vs Q2.
 
Anecdotal evidence that demand from mainland China has been behind the strength in Hong Kong’s prime office space, and this is reflected in respondents’ twelve month capital value and rent expectations. Retail remained very subdued as a crackdown on Chinese corruption and restrictions on overseas purchases continued to take a toll on mainland Chinese tourists.
 
China – sentiment flat
 
Aggregate sentiment in the mainland Chinese commercial property market was flat in Q3, but capital values are expected to increase over the next twelve months. Similar to Hong Kong the market is mixed, but prime is seen outperforming secondary by a significant margin.
 
In Shanghai there was some evidence that demand was not keeping up with supply as rent expectations over the next twelve months was subdued. However easy credit conditions continue to provide support to capital value expectations.
 
Singapore, Malaysia remain subdued
 
Singapore – oversupply remains acute
 
Both occupier and investor sentiment remained very subdued in Q3. More respondents are also seeing property as expensive, and they reported a slight deterioration in credit conditions on the balance. Both prime and secondary are expected to see substantial drops in rent and capital value over the next twelve months across all sectors.
 
The downbeat data contrasts slightly with external figures that point to Singapore as one of the most favorable destinations for regional capital. However, sentiment remains negative as demand still could not keep pace with supply. This suggests that oversupply is the main issue; the balance of leasable space at the highest level since Q3 of 2009.
 
Malaysia – conditions continue to deteriorate
 
Respondents indicated that conditions in the Malaysian commercial property market continued to deteriorate in Q3. Both the investor and occupier sentiment index fell deeper into negative territory, while leasable space continued to increase.
 
Expectations for capital values and rent over the next twelve months remained deeply negative across all sectors. Although fewer respondents see property as expensive, this was matched by a substantial majority reporting some degree of deterioration in credit conditions.
 
For more information, contact
Sean Ellison
Senior Economist, APAC
 
 
For additional information on RICS surveys, please visit here
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