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EC O N OM IC
A REPORT ON ThE ASIA PACIFIC ECONOMY AND ITS IMPACT ON COMMERCIAL REAL ESTATE
WhAT WILL ThE NEW DECADE BRING?
The Consensus is ThAT good Times Are AheAd For AsiA-PACiFiC in 2010
With most of the Asian economies, particularly China, firmly on the path to recovery from the slowdown sparked by the global financial crisis, it is not hard to strike an optimistic note when discussing prospects for Asia-Pacific in 2010. Consensus opinion (graph 1) calls for economies in the Asia-Pacific region to grow by a very healthy 5% in 2010. In comparison, other major regions around the world are forecasted to grow at around half of that or much less. This forecasted outperformance becomes more pronounced when we exclude Japan. Asia, excluding Japan, underpinned by the two large and rapidly developing economies of India and China, is expected to grow at a close to 8% rate in 2010. Not surprisingly, as we wade through the flood of prognosticating for the coming year, a common theme emerges: Gain exposure to Asia or assets classes that will enjoy Asia’s surging demand. We are in broad agreement with the general consensus that Asia-Pacific economies will grow strongly in 2010 spurred by renewed confidence that the worst part of the global recession is behind us. At the same time, if there is one lesson that we all learnt from the crisis, it is that the world’s economies are interconnected. Beyond the financial linkages, which enabled distress in the US real estate and banking sectors to ripple around the world, Asia Pacific’s economies remain heavily dependent on consumer activity in US and
Choonbeng Ang February 2010
Western Europe, a fact that becomes readily apparent when we look deeper into the recovery presently taking place. A couple of things stand out from the composition of the GDP rebound: first, that trade growth
AS I A E C O N O M I C PU L S E | F E BRUA RY 2 0 1 0
that government spending in Asia-Pacific via stimulus efforts played a significant role in blunting the effect of the downturn. While a good portion of this. US$ SA (%YOY) total trade value three times of its economy. That said. a slow but steady recovery in the developed economies is our expectation for 2010. illustrates the point. From this perspective. In part due to a seasonal drop off in biomedical production. Source:: IMA Asia AS I A E C O N O M I C PU L S E | F E BRUA RY 2 0 1 0 2 . Singapore. second. which has a Graph 2a | AUSTRALIA: TRADE GROWTh. our caveat for continued economic growth in Asia is that it will depend to an extent on the recovery of US and EU economies. hence. particularly related to commodities or basic materials. can be attributed to intra-regional trade. Furthermore.PULSE EC O N OM IC W h AT W I L L T h E N E W D E C A D E B R I N G ? A C U S h M A N & WA K E F I E L D R E S E A R C h R E P O RT Graph 1 | GDP ACROSS ThE REGION Source: Consensus Economics over the second half of 2009 was a key contributor to the economic recovery and. trade is volatile and can increase fluctuations in GDP growth. Asia-Pacific economies are not decoupled from the slower growing developed economies. there was substantial sequential improvement starting from the second quarter of 2009. Trade revival an important factor in the recovery As the charts on trade growth show (graph 2). it suffered a quarter-on-quarter reversal in its fourth quarter GDP figures. a significant part of final demand is actually outside of the region in the US and in EU.
US$ (%YOY) Graph 2e | hONG KONG: TRADE GROWTh.PULSE EC O N OM IC W h AT W I L L T h E N E W D E C A D E B R I N G ? A C U S h M A N & WA K E F I E L D R E S E A R C h R E P O RT Graph 2b | INDIA: TRADE GROWTh. US$ (%YOY) Graph 2c | SINGAPORE: TRADE GROWTh. US$ (%YOY) 20 10 0 -10 -20 -30 Nov-07 Nov-08 Jan-08 Jan-09 Jul-08 Sep-07 Sep-08 Mar-08 Jul-09 May-08 Source:: IMA Asia Source:: IMA Asia AS I A E C O N O M I C PU L S E | F E BRUA RY 2 0 1 0 May-09 Sep-09 3 Mar-09 . US$ (%YOY) Source:: IMA Asia Source:: IMA Asia Graph 2d | KOREA: TRADE GROWTh.
through interest rates and foreign exchange. monetary policy is another instrument governments and central banks have at their disposal to influence short-term economic performance. and essentially blunt the effects of the global slump for many Asian economies. keep confidence high (graph 3). it is not hard to believe that they AS I A E C O N O M I C PU L S E | F E BRUA RY 2 0 1 0 4 . fiscal policy is where we believe many Asia economies can stand apart from developed economies. they still have plenty of ammunition to push ahead with further stimulus measures should the recovery from the slump slow. Source: IMA Asia Monetary policy is likely to remain fairly loose Besides fiscal policy. hence we view the flexibility of Asia-Pacific governments to enact further stimulus measures as a strong positive that should mitigate the effects of a double dip should it occur. economies like Japan. retain jobs.PULSE EC O N OM IC W h AT W I L L T h E N E W D E C A D E B R I N G ? A C U S h M A N & WA K E F I E L D R E S E A R C h R E P O RT Graph 2f | ChINA: TRADE GROWTh. With trade remaining so significant to Asia-Pacific economies. the positive aspect of the effectiveness of government stimulus measures in Asia is that many governments in Asia-Pacific are carrying large amount of current account surpluses and reserves. is commonly used to tune the performance of export-oriented Asia-Pacific economies. Monetary policy action. In our view. In essence. These measures worked partially to blunt the effects of the global slump for many of the economies in Asia. US$ (%YOY) Graph 2g | JAPAN: TRADE GROWTh. US$ (%YOY) Source:: IMA Asia Source:: IMA Asia Graph 3 | GROWTh IN GOVERNMENT SPENDING Fiscal Policy has and will be a plus for many Asia economies While trade dependence is a factor keeping Asia economies coupled with the developed ones. While the headlines typically highlight the China’s undervalued Renminbi. Singapore and Korea do intervene in the foreign exchange market to keep their currencies in a range friendly to their exporters. One bright spark is that government intervention helped spur demand.
the number of mainland Chinese and Indian firms on the list grew almost 3 times from 51 to 138.PULSE EC O N OM IC W h AT W I L L T h E N E W D E C A D E B R I N G ? A C U S h M A N & WA K E F I E L D R E S E A R C h R E P O RT will retain their stance of trying to keep their currencies competitively pegged. Still we see Asia-Pacific being in a much better shape from a business investment standpoint. Fortunately. Retail spending performance was credible in 2009 and will do better in 2010 With our expectation of an overall increase in business activities and. retail spending held up relatively well over the last three quarters of 2009. we therefore expect retail spending to grow as encouraged Kuala Lumpur mumbai consumers start to open up their wallets and spend less cautiously. outside of China. we see a rebound in retail spending in 2010. steady recovery in US and EU markets. A slight note of worry is that. monetary conditions are likely to be looser than they need to be. With their fortunes on the rise. we need to see businesses start to spend and expand. however. Besides the increase in interest of international MNCs in Asia-Pacific. We are particularly bullish about the prospects in the cities below (Table 1) where a combination of improving sentiment and businesses going back onto the expansion AS I A E C O N O M I C PU L S E | F E BRUA RY 2 0 1 0 5 . Without such expansion. supportive monetary conditions have not yet led to a significant expansion of credit taken up by companies. For the most part. With the return of economic growth in 2010 and singapore new delhi increased job security. increased employment opportunities. With the common agreement that the higher revenue growing opportunities are available in fast developing regions. most Asia-Pacific economies are expected to maintain monetary policies that are supportive of the recovery. our outlook is strongly positive. A look at Forbes 2000 Global Largest Public companies list shows that from 2005 to 2009. With the economies’ focus on managing their foreign exchange rates. We are still at the start of long term trend that will see many companies shift their focus towards AsiaPacific. Asia-Pacific will attract a share of the investment pie larger than its market size currently deserves. the rate of growth in Asia-Pacific may be constrained and may not hit the strong numbers currently forecasted by the market. We attributed that resilience to the relatively muted job Bottoming Recovery losses in Asia-Pacific in 2009. with consumer price inflation expectations expected to remain benign for 2010 except for India and Vietnam. we would expect many of these local champions to lead the wave of positive business expansion in Asia-Pacific. we can also expect significant investment contribution from the locally grown business champions. Still we are confident businesses in Asia-Pacific will expand and extend their footprint Some of the reluctance to take on credit can be attributed to the palpable caution amongst most businesses with many anticipating employment opportunities and hence end user demand in the developed economies to recover slowly. hence. we are buoyed by the continued signs of slow. After suffering a sharp Table 1 | PROSPECTS FOR CITIES dip in the first quarter of 2009. demonstrated by an expansion in credit. For sustained growth. Bangkok ho Chi minh City Bangalore Beijing shanghai hong Kong south Korea sydney seoul Source: C&W Research We will see strong end user demand for commercial real estate in 2010 The discussion above provides our background economic outlook for AsiaPacific in 2010. hence we are anticipating the resumption of strong demand for commercial space to occur. The validity of such a stance must have been reinforced when exporters from Korea saw their competitive advantage improved vis-à-vis Japanese exporters due to the sharp depreciation in the Korean Won during the initial stages of the global financial crisis.
we think investors in core real estate assets will start to aggressively explore opportunities to deploy their funds. with both investor demand and prices increasing. total transaction volume in 2010 is likely to increase by at least 15-20% over the 2009 figure of 210 billion USD. the slowdown in Asia-Pacific was a lot shorter and shallower than expected and cities continued to grow. government would be keen to pro-actively head off any unsustainable increases. As it turned out. Increased investment demand and prices will lead to increased transaction volumes 2010 is also shaping up to be a strong year for real estate investment. studies have shown that there is no conclusive evidence that such a drastic structural reversal would occur. That fear was predicated on the expectation of a possible extended deep recession. Yields will likely stay flat or decrease as increased buyer demand and improved seller sentiment push prices upwards at around the same rate or higher than underlying rent fundamentals. With a wide variety of possible policy actions that governments could implement. and that economic growth will not be a straight and smooth path upwards. Given historical experience that prime assets are usually the first to recover off a slump. we are confident that they would be able to successfully head off any significant asset-price bubbles from building up in their economies. particularly if it is accompanied by significant amounts of debt. however. Even in cities where a large amount of incoming supply is taking place. particularly in the residential sector. we do think that there are a few enduring themes that would drive real estate in Asia-Pacific in the next decade. With the world sensitized to the adverse effects of asset-price inflation. With demand from real estate end users returning. most of the cities would be entering into a bottoming phase in terms of rents in 2010. being a preferred investment class in the region. particularly as they come against a backdrop of a strongly performing economy. We believe this would create the conditions for asset-price inflation. we are anticipating that with the sharp drop in rentals that happened in 2009. we have no doubt that the region will see challenges and difficulties. Nonetheless. we believe this class will again reassert itself as the first investment choice amongst investors. we do not believe that a bubble in real estate prices will develop in most parts of Asia-Pacific in 2010. The decade outlook The year 2010 also marks the beginning of a new decade. Urbanization continues: Residential demand has a long way to go There were fears at the start of the crisis that massive amounts of unemployment would reverse the urbanization trend of major developing cities in Asia as the massive loss of jobs creates a huge wave of migrant workers returning back to their rural hometowns. Even under such adverse conditions. While this is widely touted as the Asian century. we expect that the residential demand in Asia-Pacific has a long way AS I A E C O N O M I C PU L S E | F E BRUA RY 2 0 1 0 6 . This demand will be underpinned by the supportive monetary policy that most Asia-Pacific economies will adopt for the most of 2010. Real estate. Despite the likely gyrations. With this in mind. Risks are therefore on the upside for asset-price inflation. is likely to see renewed interest from investors as they seek to shift more money away from lower yielding cash-like instruments.PULSE EC O N OM IC W h AT W I L L T h E N E W D E C A D E B R I N G ? A C U S h M A N & WA K E F I E L D R E S E A R C h R E P O RT path will bring cheer to the commercial landlords in those cities.
many of the economies are on the cusp of seeing a large increase in discretionary spending as the per capita income increases significantly beyond what is needed for subsistence spending. we are likely to see sustained demand for office and industrial buildings. real estate users should still be paying rents much lower than they were in early 2008. we think much of Asia-Pacific is still under shopped. coming after steep drops in rents in 2009. it has not been too difficult to write positively about the prospects for real estate for 2010 and. AS I A E C O N O M I C PU L S E | F E BRUA RY 2 0 1 0 7 . indeed.PULSE EC O N OM IC W h AT W I L L T h E N E W D E C A D E B R I N G ? A C U S h M A N & WA K E F I E L D R E S E A R C h R E P O RT to go. particularly in the mass-market or lower-end segment and rental units as cities grow to accommodate migrant or expatriate workers. While a lot of office and industrial supply is also being built. Retail: Still under shopped Based on a comparison between developed countries and non-developed countries of per-capita retail space. historical studies have shown that in periods of strong demand. A good 2010 and a good decade Everyone likes to start the New Year on a good note. especially in the developing economies. This is good news for real estate asset owners and. be it in end-user demand or investment demand. we are of the opinion that sustained demand will blunt any downward trend in rents over the decade. rents can continue to climb despite substantial influxes in supply. This will spill over positively into real estate assets. Office and industrial: Riding the coattails of economic growth With our expectation of long-term growth in developing economies. All these are strong factors that we believe will help drive the long-term prospects of the retail sector in Asia-Pacific. The growing upper class would hence drive significant demand for high-end luxury residential units. At the same time. The economies in most parts of Asia-Pacific look set to enjoy healthy growth. particularly amongst the younger generation. even for the new decade ahead. We are expecting to find more incidences of such counterintuitive situations happening in the next decade. We also believe that a change in attitudes towards the use of credit and a stronger bent towards consumerism is underway. Fortunately. We also see the high-end segment doing well as the growing and transforming economies create a large pool of the newly rich. There will be demand for new and diverse retail options. hence we still see strong potential for significantly more retail spaces to be built.
accurate. visit Cushman & Wakefield’s Knowledge Center at www. The information on which this report is based has been obtained from sources we believe to be reliable. implementing and managing on behalf of landlords. inc. 1290 Avenue of the Americas new York.com For more market intelligence and research reports. it does not purport to be a complete description of the markets or developments contained in this material.cushmanwakefield. among many other advisory services.000 professionals in 230 offices in 58 countries.com For more information about C&W Research. and site selection and space location assistance. The firm delivers integrated solutions by actively advising. strategic planning and research. but we have not independently verified such information and we do not guarantee that the information is accurate or complete. we aim to assist our clients in making property decisions that meet their objectives and enhance their competitive position. tenants.cushwake. occupiers and investors. high-quality research reports on the leading trends. Cushman & Wakefield also provides customized studies to meet specific information needs of owners. Cushman & Wakefield.cushmanwakefield.PULSE EC O N OM IC W h AT W I L L T h E N E W D E C A D E B R I N G ? A C U S h M A N & WA K E F I E L D R E S E A R C h R E P O RT Cushman & Wakefield is known the world-over as an industry knowledge leader. All rights reserved. To find out more about Cushman & Wakefield’s service offerings. and investors through every stage of the real estate process. inc. Cushman & Wakefield also provides valuation advice. head of research services Cushman & Wakefield 20 raffles Place #13-01 ocean Towers singapore 048620 choonbeng. markets around the world and business issues of the day. contact: Choonbeng Ang director. nY 10104-6178 (800) 376-3133 This report has been prepared solely for information purposes. Cushman & Wakefield is the world’s largest privately owned commercial real estate services firm with more than 15. in addition to producing regular reports such as global rankings and local quarterly updates available on a regular basis.ang@ap. visit: www. portfolio analysis.com Published by global Corporate Communications © 2010 Cushman & Wakefield. AS I A E C O N O M I C PU L S E | F E BRUA RY 2 0 1 0 8 . Through the delivery of timely.
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