By Charlene Chin/ EdgeProp Singapore|April 3, 2020 8:06 AM SGT
SINGAPORE (EDGEPROP) – As the Covid-19 outbreak has weakened market sentiments and thrown global economies into turmoil, Neil Brookes, Knight Frank’s head of capital markets in Asia Pacific, believes that Asia is better positioned to lead the post-pandemic recovery than the US or Europe.The numbers in the region currently point to pent-up demand. As at September 2019, Knight Frank estimates there are US$38 billion ($54.49 billion) of capital in Asia Pacific-focused private equity funds raised from the last two years. This is well in excess of the US$5 billion raised in 2007 and 2008, notes Brookes. This, he adds, indicates a large investment pool ready to be deployed in Asia Pacific markets in medium- to long-term real estate investment opportunities.
Credit: Knight Frank
Backing the numbers are two factors – the strong demographics and urbanisation in Asia Pacific, relative to Europe and the US. This is “driving a lot of confidence that real returns can be found here than in private equity groups globally”, Brookes says in a virtual press conference held on March 31.
Based on anecdotal evidence from brokers, Brookes says that over the last two weeks, investors have been focused on managing their existing portfolio and protecting their current income stream. “However, feedback from our major regional clients is that acquisitions are firmly on the agenda, once they have stabilised their own positions.”Citing past data, Brookes also highlighted that real estate transaction activity “recovered very quickly in the region after SARS was contained, with a significant uptick in investment volumes in China, Hong Kong, Singapore and Japan”. He adds: “We expect [recovery volumes] to be more of a trough in this instance, but very much a quick comeback once this virus is contained.”
Core safe-haven markets
“A slightly unusual quirk of the crisis is that China has become that core safe-haven market in Asia Pacific for the next four to six weeks,” Brookes says. In fact, risk aversion had already been growing over the last quarter of 2019 — 95% of transactions in that quarter took place in the six core markets of Singapore, Australia, China, Hong Kong, Japan and Korea, while only 5% of transactions took place in secondary markets.Knight Frank expects the trend to be amplified as investment activity recovers. Once markets reopen, the real estate consultancy projects that private equity groups will go back into China, followed by Singapore, Hong Kong, Japan, Korea, and Australia. He cautions, however, that recovery is likely to be focused on the core markets. So far, “we have seen a massive spike in emerging markets [in the region] moving into risk territory”, he explains.
Credit: Real Capital Analytics
Current market sentiments
Knight Frank also expects short-term slowdown in purchasing activity in the region. Currently, many investors are postponing investment decisions and moving to a wait-and-see approach, observes Brookes. Mainland China and Hong Kong, in particular, have experienced “very sharp declines” in deal flow for Q12020 “but we expect these markets to come back much more quickly than other markets around the world”, he says, adding that “China will be the first market [to bounce] back, without a question”. He notes that Beijing and Shanghai are currently the top choices for investors.Compared to 1Q2019, deal volumes this quarter have fallen 50% in Asia Pacific. These deal volumes have also plummeted 70% compared to 2018. Knight Frank predicts that such drops will be mirrored in the UK and US as well.In the near term, Singapore and Australia will be “relatively quiet” as they are exposed to cross-border investors who cannot perform site visits at the moment, says Brookes.
However, the impact on Japan and Korea markets will be “relatively mild, thanks to solid investment activity from domestic investors in those markets,” he adds. Already, Knight Frank has observed fairly strong demand coming back to the Korean market.
Chinese market overview
As the domestic spread of the disease has slowed rapidly in China over the past weeks, indicators for economic activity have also been ticking up. Industrial data for March — despite still indicating a contraction — has shown an uplift from February when numbers were demonstrating the sharpest drop in output in decades, observes Nicholas Holt, Knight Frank’s head of research in Asia Pacific, who is based in Beijing.Data from China also showed that road congestions are back to 70% of normal levels, property sales are back to almost 80% of normal levels, while manufacturing is close to a 100% recovery, adds Brookes.Although the manufacturing industry is getting back to business, the dropoff in demand from global markets will impede recovery, says Holt, who adds that 40% of Chinese output is reliant on external demand.Meanwhile, submarkets such as e-commerce and logistics continue to do well. In the last two months, people have continued to buy online, contributing to stable numbers in terms of online purchases, says Holt. This in turn has also indirectly lifted the logistics markets.
Credit: Knight Frank
Retail in China has nonetheless been one of the hardest hit. Malls in tier one cities are starting to open although footfall is “much lower” than it was prior to the outbreak, Holt adds. “Anecdotally, we are seeing about 20% to 30% of the footfall”, as compared to before the Covid-19 outbreak, he says.The office market has also been constrained by a lack of viewings and certainty around business continuity plans for the next 12 months. However, Knight Frank has seen an increase in the number of enquiries in tier-one cities like Shanghai, Guangzhou, Shenzhen and Beijing.But compared to some other cities, Beijing still has a number of restrictions in place. For instance, only 50% of employees are allowed to come into offices in the city, says Holt. These restrictions are likely to be kept in place until around mid-April.
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