Economic Pulse Asia Pacific CushmanWakefield

8/7/2019 Economic Pulse Asia Pacific CushmanWakefield

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ASIA ECONOMIC PULSE | FEBRUARY 2010

Wit most of te Asian economies, particularly Cina, firmly on te pat to recovery from te slowdown

sparked by te global financial crisis, it is not ard to strike an optimistic note wen discussing prospects for

Asia-Pacific in 2010. Consensus opinion (grap 1) calls for economies in te Asia-Pacific region to grow by a

very ealty 5% in 2010. In comparison, oter major regions around te world are forecasted to grow at

around alf of tat or muc less. Tis forecasted outperformance becomes more pronounced wen we

exclude Japan. Asia, excluding Japan, underpinned by te two large and rapidly developing economies of India

and Cina, is expected to grow at a close to 8% rate in 2010. Not surprisingly, as we wade troug te flood

of prognosticating for te coming year, a common teme emerges: Gain exposure to Asia or assets classes

tat will enjoy Asias surging demand.

We are in broad agreement wit te general consensus tat Asia-Pacific economies will grow strongly in

2010 spurred by renewed confidence tat te worst part of te global recession is beind us. At te same

time, if tere is one lesson tat we all learnt from te crisis, it is tat te worlds economies are inter-

connected. Beyond te financial linkages, wic enabled distress in te US real estate and banking sectors to

ripple around te world, Asia Pacifics economies remain eavily dependent on consumer activity in US and

Western Europe, a fact tat becomes readily apparent wen we look deeper into te recovery presently

taking place. A couple of tings stand out from te composition of te GDP rebound: first, tat trade growtCb A

Fbay 2010

WhAT WILL ThE NEW DECADE BRING?The Consensus is ThAT good Times Are AheAd For

AsiA-PACiFiC in 2010

A REPORT ON ThE ASIA PACIFIC ECONOMY AND

ITS IMPACT ON COMMERCIAL REAL ESTATE


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A C U S h M A N & W A K E F I E L D R E S E A R C h R E P O R T

W h A T W I L L T h E N E W D E C A D E B R I N G ?ECONOMIC

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over te second alf of 2009 was a key contributor to te economic recovery and; second, tat government

spending in Asia-Pacific via stimulus efforts played a significant role in blunting te effect of te downturn.

Trade revival an important factor in the recovery

As te carts on trade growt sow (grap 2), tere was substantial sequential improvement starting from

te second quarter of 2009. Wile a good portion of tis, particularly related to commodities or basic

materials, can be attributed to intra-regional trade, a significant part of final demand is actually outside of

te region in te US and in EU. From tis perspective, Asia-Pacific economies are not decoupled from te

slower growing developed economies. Furtermore, trade is volatile and can increase fluctuations in GDP

growt. Singapore, wic as a

total trade value tree times of its

economy, illustrates te point. In

part due to a seasonal drop off in

biomedical production, it suffered

a quarter-on-quarter reversal in its

fourt quarter GDP figures. hence,

our caveat for continued economic

growt in Asia is tat it will depend

to an extent on te recovery of USand EU economies. Tat said, a slow

but steady recovery in te developed

economies is our expectation for

2010.

Source: Consensus Economics

Grap 1 | GDP ACROSS ThE REGION

Source:: IMA Asia

Grap 2a | AUSTRAL IA: TRADE GROWTh, US$ SA (%YOY)


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Source:: IMA Asia

Grap 2b | INDIA: TRADE GROWTh, US$ (%YOY)

Source:: IMA Asia

Grap 2c | SINGAPORE: TRADE GROWTh, US$ (%YOY)

Source:: IMA Asia

Grap 2d | KOREA: TRADE GROWTh, US$ (%YOY)

Source:: IMA Asia

Grap 2e | hONG KONG: TRADE GROWTh, US$ (%YOY)

-30

-20

-10

0

10

20

Sep-07

Nov-07

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Sep-09


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Fiscal Policy has and will be a plus for many Asia

economies

Wile trade dependence is a factor keeping Asia economies coupled

wit te developed ones, fiscal policy is were we believe many Asia

economies can stand apart from developed economies. One brigt

spark is tat government intervention elped spur demand, retain

jobs, keep confidence ig (grap 3), and essentially blunt te effects

of te global slump for many Asian economies. Tese measures

worked partially to blunt te effects of te global slump for many

of te economies in Asia. In our view, te positive aspect of te

effectiveness of government stimulus measures in Asia is tat many

governments in Asia-Pacific are carrying large amount of current

account surpluses and reserves. In essence, tey still ave plenty of

ammunition to pus aead wit furter stimulus measures sould

te recovery from te slump slow. hence we view te flexibility

of Asia-Pacific governments to enact furter stimulus measures as

a strong positive tat sould mitigate te effects of a double dip

sould it occur.

Monetary policy is likely to remain fairly loose

Besides fiscal policy, monetary policy is anoter instrument governments and central banks ave at teir

disposal to influence sort-term economic performance. Monetary policy action, troug interest rates and

foreign excange, is commonly used to tune te performance of export-oriented Asia-Pacific economies.

Wile te eadlines typically igligt te Cinas undervalued Renminbi, economies like Japan, Singapore

and Korea do intervene in te foreign excange market to keep teir currencies in a range friendly to teir

exporters. Wit trade remaining so significant to Asia-Pacific economies, it is not ard to believe tat tey

Source:: IMA Asia

Grap 2f | ChINA: TRADE GROWTh, US$ (%YOY)

Source:: IMA Asia

Grap 2g | JAPAN: TRADE GROWTh, US$ (%YOY)

Source: IMA Asia

Grap 3 | GROWTh IN GOVERNMENT SPENDING


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will retain teir stance of trying to keep teir currencies competitively pegged. Te validity of suc a stance

must ave been reinforced wen exporters from Korea saw teir competitive advantage improved vis--visJapanese exporters due to te sarp depreciation in te Korean Won during te initial stages of te global

financial crisis. Wit te economies focus on managing teir foreign excange rates, monetary conditions are

likely to be looser tan tey need to be. Fortunately, wit consumer price inflation expectations expected to

remain benign for 2010 except for India and Vietnam, most Asia-Pacific economies are expected to maintain

monetary policies tat are supportive of te recovery.

A sligt note of worry is tat, outside of Cina, supportive monetary conditions ave not yet led to a

significant expansion of credit taken up by companies. For sustained growt, we need to see businesses start

to spend and expand, demonstrated by an expansion in credit. Witout suc expansion, te rate of growt

in Asia-Pacific may be constrained and may not it te strong numbers currently forecasted by te market.

however, we are buoyed by te continued signs of slow, steady recovery in US and EU markets.

Still we are confident businesses in Asia-Pacific will expand and extend their

footprint

Some of te reluctance to take on credit can be attributed to te palpable caution amongst most businesses

wit many anticipating employment opportunities and ence end user demand in te developed economies to

recover slowly. Still we see Asia-Pacific being in a muc better sape from a business investment standpoint.

We are still at te start of long term trend tat will see many companies sift teir focus towards Asia-

Pacific. Wit te common agreement tat te iger revenue growing opportunities are available in fast

developing regions, Asia-Pacific will attract a sare of te investment pie larger tan its market size currently

deserves. Besides te increase in interest of international MNCs in Asia-Pacific, we can also expect significant

investment contribution from te locally grown business campions. A look at Forbes 2000 Global Largest

Public companies list sows tat from 2005 to 2009, te number of mainland Cinese and Indian firms onte list grew almost 3 times from 51 to 138. Wit teir fortunes on te rise, we would expect many of tese

local campions to lead te wave of positive business expansion in Asia-Pacific.

Retail spending performance was credible in 2009 and will do better in 2010

Wit our expectation of an overall increase in business activities and, ence, increased employment

opportunities, we see a rebound in retail spending in 2010. After suffering a sarp

dip in te first quarter of 2009, retail spending eld up relatively well over te last

tree quarters of 2009. We attributed tat resilience to te relatively muted job

losses in Asia-Pacific in 2009. Wit te return of economic growt in 2010 and

increased job security, we terefore expect retail spending to grow as encouraged

consumers start to open up teir wallets and spend less cautiously.

We will see strong end user demand for commercial real

estate in 2010

Te discussion above provides our background economic outlook for Asia-

Pacific in 2010. For te most part, our outlook is strongly positive. hence we are

anticipating te resumption of strong demand for commercial space to occur. We

are particularly bullis about te prospects in te cities below (Table 1) were a

combination of improving sentiment and businesses going back onto te expansionSource: C&W Research

Table 1 | PROSPECTS FOR CITIES

Bottoming Recovery

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pat will bring ceer to te commercial landlords in tose cities. Even in cities were a large amount of

incoming supply is taking place, we are anticipating tat wit te sarp drop in rentals tat appened in 2009,most of te cities would be entering into a bottoming pase in terms of rents in 2010.

Increased investment demand and prices will lead to increased transaction

volumes

2010 is also saping up to be a strong year for real estate investment. Wit demand from real estate end

users returning, we tink investors in core real estate assets will start to aggressively explore opportunities

to deploy teir funds. Tis demand will be underpinned by te supportive monetary policy tat most

Asia-Pacific economies will adopt for te most of 2010. Real estate, being a preferred investment class in

te region, is likely to see renewed interest from investors as tey seek to sift more money away from

lower yielding cas-like instruments. We believe tis would create te conditions for asset-price inflation,

particularly as tey come against a backdrop of a strongly performing economy.

Risks are terefore on te upside for asset-price inflation. however, we do not believe tat a bubble in real

estate prices will develop in most parts of Asia-Pacific in 2010. Wit te world sensitized to te adverse

effects of asset-price inflation, particularly if it is accompanied by significant amounts of debt, government

would be keen to pro-actively ead off any unsustainable increases, particularly in te residential sector. Wit

a wide variety of possible policy actions tat governments could implement, we are confident tat tey would

be able to successfully ead off any significant asset-price bubbles from building up in teir economies.

Noneteless, wit bot investor demand and prices increasing, total transaction volume in 2010 is likely to

increase by at least 15-20% over te 2009 figure of 210 billion USD.

Given istorical experience tat prime assets are usually te first to recover off a slump, we believe tis classwill again reassert itself as te first investment coice amongst investors. Yields will likely stay flat or decrease

as increased buyer demand and improved seller sentiment pus prices upwards at around te same rate or

iger tan underlying rent fundamentals.

The decade outlook

Te year 2010 also marks te beginning of a new decade. Wile tis is widely touted as te Asian century,

we ave no doubt tat te region will see callenges and difficulties, and tat economic growt will not be

a straigt and smoot pat upwards. Despite te likely gyrations, we do tink tat tere are a few enduring

temes tat would drive real estate in Asia-Pacific in te next decade.

Urbanization continues: Residential demand has a long way to goTere were fears at te start of te crisis tat massive amounts of unemployment would reverse te

urbanization trend of major developing cities in Asia as te massive loss of jobs creates a uge wave of

migrant workers returning back to teir rural ometowns. Tat fear was predicated on te expectation of a

possible extended deep recession. Even under suc adverse conditions, studies ave sown tat tere is no

conclusive evidence tat suc a drastic structural reversal would occur.

As it turned out, te slowdown in Asia-Pacific was a lot sorter and sallower tan expected and cities

continued to grow. Wit tis in mind, we expect tat te residential demand in Asia-Pacific as a long way


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to go, particularly in te mass-market or lower-end segment and rental units as cities grow to accommodate

migrant or expatriate workers. We also see te ig-end segment doing well as te growing and transformingeconomies create a large pool of te newly ric. Te growing upper class would ence drive significant

demand for ig-end luxury residential units.

Retail: Still under shopped

Based on a comparison between developed countries and non-developed countries of per-capita retail space,

we tink muc of Asia-Pacific is still under sopped. hence we still see strong potential for significantly

more retail spaces to be built. At te same time, many of te economies are on te cusp of seeing a large

increase in discretionary spending as te per capita income increases significantly beyond wat is needed for

subsistence spending. Tere will be demand for new and diverse retail options. We also believe tat a cange

in attitudes towards te use of credit and a stronger bent towards consumerism is underway, particularly

amongst te younger generation. All tese are strong factors tat we believe will elp drive te long-term

prospects of te retail sector in Asia-Pacific.

Office and industrial: Riding the coattails of economic growth

Wit our expectation of long-term growt in developing economies, we are likely to see sustained demand

for office and industrial buildings. Wile a lot of office and industrial supply is also being built, we are of te

opinion tat sustained demand will blunt any downward trend in rents over te decade, especially in te

developing economies. historical studies ave sown tat in periods of strong demand, rents can continue to

climb despite substantial influxes in supply. We are expecting to find more incidences of suc counterintuitive

situations appening in te next decade.

A good 2010 and a good decade

Everyone likes to start te New Year on a good note. Fortunately, it as not been too difficult to writepositively about te prospects for real estate for 2010 and, indeed, even for te new decade aead. Te

economies in most parts of Asia-Pacific look set to enjoy ealty growt. Tis will spill over positively into

real estate assets, be it in end-user demand or investment demand. Tis is good news for real estate asset

owners and, coming after steep drops in rents in 2009, real estate users sould still be paying rents muc

lower tan tey were in early 2008.


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