While the worst of the global financial crisis appears to be over, its devastating impact on real estate demand is still reverberating around much of the world. Property markets in Europe, Middle East and Africa (EMEA) and the Americas are still bearing the brunt of the meltdown, but Asia is rebounding quicker than these regions, according to a study by international property consultants CB Richard Ellis (CBRE).
Though lingering uncertainties about the global economy remain and prospects for commercial real estate markets around the world are mixed, “Asia is expected to recover from the global recession at a faster rate than mature regions and countries”, says CBRE in its global real estate market review for 2Q09.
The study reveals that real estate demand has taken a blow from the impact of the global economy and that lack of financing, rising risk premiums and weakening property fundamentals has brought a sharp decline in real estate transactions. Real estate asset prices globally have dropped by 35%, bringing the numbers down to 50% from its peak in 2007-2008, according to CBRE. The scale and speed of decline depends on the market, property type, assets quality and location.
Statistics by property investment research and consultancy firm Real Capital Analytics show flat q-o-q numbers and record-low transactions volumes for Europe, Middle East and Africa (EMEA) and the Americas. “Asia on the other hand, saw an increase in transaction volumes. This is likely aided by the bottoming out of prices in 2Q and a quicker adapting market,” says CBRE.
In its Global Market View released in August, CBRE said commercial real estate investment activity in Asia ended more positively in 2Q than it began. Japan, India, Singapore and Korea saw improvements in investment transactions and overall market sentiment as well. In China and Hong Kong, residential sales are on the rebound.
One of the factors that propelled a rise by more than 40% q-o-q in investment sales activity was the high level of debt used to finance purchases in the recent years. This has left some investors vulnerable to downward adjustment in property values, causing financially pressed property owners to liquidate their assets, particular those in the office sector.
The Tokyo market has the largest number of distressed or potentially distressed real estate assets in Asia. The report noted that appetite for quality assets from domestic investors still exist with a number of major office transactions at US$50 million and above transacted in 2Q. Foreign institutions have mainly stayed on the sidelines though they are expected to return gradually to the market.
Despite the overall 2Q drop in prime office rental, and the softening trend in Toyko, Hong Kong and other leading leading markets, it is noted that the rate of decline is beginning to slow. Falling occupancy rates were recorded in almost all markets, particularly China’s one-tier cities with the highest vacancy levels.
CBRE reports that, across the region, cost-cutting measures by companies resulted in a rise in relocations with larger companies shifting part of, or all of their back-office operations to lower rent decentralised office locations or suburban office hubs. Those companies with stronger confidence in the economy, took advantage of the softening leasing market to move into Grade A buildings which saw rental rates slashed after a prolonged market contraction.
Prime retail rents in Shanghai, Guangzhou, Hong Kong and Taipei managed to remain stable in 2Q while others continued to slip. With consumers cutting back on spending, demand for retail space took a dip. Some mid-tier retailers took the opportunity to re-negotiate lower rents in the weakened market. Others, such as youth-themed fashion retailers and mass-oriented F&B outlets searched for new locations with lower occupancy cost.
The residential sales market is faring better with a rise in activity level across a number of key Asian markets, in particular the mid-tier and high-end segments.
In the industrial property market, rents and capital values continue to adjust downwards in all export-oriented markets as overseas interest in leasing or purchasing continues to decline.
After 18 months of financial turmoil, the property markets in the Pacific region appears to be stabilising, states the CBRE report.
Total office vacancy rates continue to rise in 2Q with Sydney recording an increase to 7.7% from 5.4% at the beginning of the year, driven by the creation of sublease space. Similar levels were noted in other markets, highest in Brisbane and Perth.
Incentives offered by landlords increased to 27% of the value of a lease as face rents fell a further 2.6%. Rents in every market were either stable or falling in 2Q. The ones most affected were areas where new office buildings have been completed. In 2Q, office yields softened further though the rate of change has slowed with the average weighted prime office rental now quoted at 8.02%, a further 27-basis point (bps) softening.
The retail sector in Australia is proving the most resilient of all as consumer spending improved and rents stabilised in every retail market and property type from the beginning of the year. Though retail vacancy rates remain at a historically low level, they are mostly stable. Although still softening, the rate of change in yields slowed across the region.
The softening of yield in the industrial sector eased noticeably in 2Q while industrial rents fell or were stable over 2Q. A decrease of 2.9% in overall industrial rents were recorded.
In New Zealand, the leasing market has become less active in the last few months, resulting in falling rents. More incentives due to lessee expectations in the current market were identified as the leading cause of the fall.
Unlike the occupiers market, investment market conditions appears to be stabilising as an undersupply of investment stock has emerged relative to investor’s interest for properties with strong fundamentals and secure cash flow.
In EMEA, market yields are beginning to stabilise, particularly the prime end of the market though rents continue to fall. Rental values and occupier markets are expected to be the primary drivers of value change, says CBRE.
Cost reductions is a major concern for occupiers, resulting in a very subdued leasing activity in the main European markets. According to CBRE, significant y-o-y contraction relative to 2008 is expected. Some markets such as Paris and certain parts of Germany are showing relatively less demand contraction than London and Madrid where leasing activity is at half of last year’s levels.
With occupiers taking measures to reduce occupancy cost, landlords are being increasingly pressured to accommodate their demands. Subleasing and completion of new buildings are two major contributors to the rate of rising vacancy. However, in many markets, these completion are starting to ease and the development pipeline is set to contract sharply over the next two years as new construction starts are almost non-existent, states the CBRE report.
According to CBRE EU-15 index, prime office rents fell by 2.9% in 2Q, taking the y-o-y rate of decline to 8.9%. Most significant falls occurred in London, Madrid, Dublin and Oslo while rents in Germany and the Netherlands remained relatively stable.
In the retail sector, despite aggressive discounting by retailers, sales have fallen sharply, although UK, France and Germany are holding well. Vacancy levels in prime high street locations and shopping centres are low, with minimal new space being developed.
The CBRE EU-15 retain rental index shows a marginal decrease of -0.8% y-o-y but the majority of the markets rent are stable. However, rents have fallen more sharply in the secondary markets where demand is weaker.
Weakening demand has also been noted in the industrial sector as manufacturers and others seek to reduce their cost base. The CBRE EU-15 industrial rents index reported a drop of 1.5% in 2Q, taking the y-o-y decline to 5%. The degree of decline since the peak of the market varies with cities like Lisbon, Madrid, Dublin showing a 20% decline while the main German and Dutch markets remain stable.
Larger European countries, particularly France and Italy, saw a marked increase in investment activity q-o-q while Central and Eastern Europe continues to experience low investment activity. Overall, the turnover of the EMEA investment market grew to €13 billion from €11.6 billion in 1Q.
Vacancy rates in the US continue to rise in the office, retail and industrial sectors. The office vacancy rate increased by 80bps during 2Q to 15.5% while downtown vacancy rate increased by 70 bps to 11.7% and the suburban rate rose by 90 bps to 17.6%, according to the CBRE report.
The national office vacancy rate remains below the high of 19.1% recorded in 1991 as the national industrial availability rate increased by 80 bps to 13%. This marked the highest level since 2003 in the industrial sector and is expected to rise further.
In Canada, the national office vacancy increased to 8.3% from 7.5% in 1Q. New supply in Calgary and Toronto and diminishing leasing activity are expected to push the number higher. The industrial availability rate increased 7.4% from 6.7% in 1Q.
Meanwhile, the recovery of the Latin America real estate market is dependent on the length of the global recession. Vacancy rates have increased moderately while rental rates flattened with a few market declining.
Like the global market, investment transactions took a fall but deals are being closed, especially in the major markets, says CBRE.
This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 771, Sep 7-13, 2009.
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