Asia’s commercial property sector is showing strength even in vulnerable economies
- Discrepancies between the economic outlook and investment landscape are particularly evident in Asia’s commercial real estate market
- The decline in investment activity for the region masks divergences in performance and fails to capture strong underlying fundamentals in many markets
Yet, Goldman Sachs’ asset management arm announced last month it had agreed a joint venture partnership with Shanghai-based property developer Sun Jade to invest in new infrastructure assets, in particular modern warehouses, in China’s top-tier cities. The tie-up was its second logistics-focused joint venture with a Chinese developer in as many years.
Yet, the decline in investment activity for the region as a whole masks significant divergences in performance and fails to capture strong underlying fundamentals in many markets, including those one would have expected to be under more pressure by now because of the deterioration in economic conditions.
Tim Graham, head of international capital Asia-Pacific at JLL, said global funds, which are seeking to increase their allocations to real estate, are “realising the investment landscape in Asia is quite diverse and more nuanced” than the headlines suggest.
Yet, Australia’s logistics property market is thriving. Average rental growth for “super prime” assets in capital cities rose 6.7 per cent last quarter, according to CBRE, underpinned by a chronic shortage of space that has driven down the nationwide vacancy rate to close to zero. In Sydney and Perth, rents for top-quality logistics assets grew 25 to 30 per cent year on year.
Trent Iliffe, managing director and co-chief executive of Logos, a pan-Asian logistics developer, said the economic and financial pressures in the region are accentuating the degree to which the supply of logistics properties is lagging behind demand, helping insulate prime assets. “All these risks are keeping the market supply-constrained,” Iliffe said.
The sharp rise in the cost of debt does pose a significant threat to the commercial real estate investment market. In South Korea and Australia, rapid increases in rates have eroded the return premium, even pushing it into negative territory for some assets.
Yet, strong fundamentals, in particular rental growth, are helping offset the increase in funding costs. This is likely to lead to a more bifurcated Asian real estate market in which best-in-class properties will outperform secondary, or less resilient, assets.
The economic headlines in Asia will remain bleak for some time. However, this should not obscure the underlying strength of commercial property markets, even in some of the region’s most vulnerable economies.
Nicholas Spiro is a partner at Lauressa Advisory