Sunday 25 Feb 2024
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This article first appeared in City & Country, The Edge Malaysia Weekly on December 26, 2022 - January 1, 2023

Property markets worldwide saw a slight upswing in 2022 as border controls loosened and international trade, tourism and spending picked up. Some sectors such as industrial outperformed others, while a few countries saw varying results in their residential and office markets. We spoke to consultants about the challenges, such as the interest rate changes, global economic slowdown and demand-supply matters, for the new year.

Marc von Grundherr

Director Benham & Reeves

As has been the case for some time now, the regions outperformed London and the South East in 2022, with Liverpool and Nottingham winning the property price “arms race” with significant double-digit gains. That said, this only takes ­average house prices in these cities to well under £200,000 (RM1 million) and represents great value still.

The Office for Budget Responsibility predicts a 6% fall — but official sources are often wrong as we know, and my view is that the 2023 outlook is not all doom and gloom as some may portray. The ultimate year-on-year performance by the end of 2023 is likely to be flattish as a consequence of a year of two halves — 1H will see a drop for sure, but as mortgage rates decrease and economic news starts to be more positive, I wager that 2H will see sufficient resurgence to outweigh the drop in 1H.

Luxury, especially in the London market, is the sector to watch next year. The capital city, and prime stock in particular, is relatively undervalued compared to elsewhere. With a weaker pound and overseas visitors back to full strength post-pandemic, this is the area that will likely do well.

Factors that may hinder the property market’s growth in the UK are inflation (if not controlled), high interest rates, wider economic uncertainty, a drop in demand (which is sentiment-led) and mortgage lenders tightening underwriting policy.

What may encourage growth, however, is the major lack of supply … with the Secretary of State for Levelling Up, Housing and Communities and Minister for Intergovernmental Relations Michael Gove recently scrapping housebuilding targets, the continued supply versus demand imbalance, mortgage rates starting to decrease, greater economic stability and continued demand in certain locations.

Wei Min Tan

Licensed associate real estate broker Castle Avenue Team at R New York

In the first half of 2022, Manhattan and Los Angeles did well because interest rates were still low, the economy was strong and there was pent-up demand. But both markets slowed in the second half of 2022 because of inflation/interest rates. High inflation led to the Federal Reserve increasing interest rates, which led to a doubling of mortgage rates compared to a year ago. This turned buyers needing financing into renters.

For 2023, it will be a period of high mortgage rates not seen in 20 years. People need to adjust to the new reality of more than 7% mortgage rates and this will take time. I expect 2023 to be much softer than 2022. The advantage goes to all-cash buyers who can come in to buy at a discount. Manhattan prices should decrease 5% to 10% compared to 2Q2022.

Residential real estate is attractive because there is insufficient net new housing to meet population growth. During Covid-19 and due to work-from-home policies, office demand declined. Retail is down because people are buying directly through Amazon (online). But people will always need a place to live.

People live in Manhattan despite the high cost of living because they like the diversity, cosmopolitan vibe and culture. These factors are not replaceable if one moves to a low-cost city.

The main factor that might hinder or encourage the property market’s growth is the interest rate. High rates make it more expensive for buyers to buy. Higher interest rates are driven by inflation so it also makes rents higher.

Anshul Jain

Head of APAC Tenant Representation and Managing director & head — India and Southeast Asia Cushman & Wakefield

India’s property market witnessed a strong rebound across all asset classes in 2022 with the commercial office sector leading the recovery. Bengaluru and Delhi-NCR, which together hold around 45% of the country’s office inventory of 670 million sq ft (msf) (as at 3Q2022), have fared much better in the current year in terms of office demand. Both cities cumulatively have accounted for around 42% of the pan-India leasing volume of 55 msf year-to-date 2022 (3Q). Improving occupier confidence and a surge in demand for fresh office space have translated into a healthy supply addition of around 15 msf in these two cities, which is 35% of the pan-India supply.

The residential sector has witnessed significant market momentum in 2022. In terms of launches, Mumbai and Hyderabad have been the leading contributor, accounting for more than half of pan-India launches this year. The retail sector has seen a revival across cities with prominent malls surpassing their pre-Covid-19 levels of footfalls and revenues.

The commercial office sector has not yet experienced adverse impact from global economic headwinds. However, an expected recession in the US and Europe poses near-term uncertainties. A mild recession as predicted by economists could lead to office leasing witnessing a mild slowing of activity for the first two quarters in 2023.

Healthy residential demand is likely to continue to be driven by sustained demand for mid- and high-end projects despite higher input costs and interest rates. Ongoing residential momentum is likely to continue, with certain cities such as Mumbai, Pune, and Hyderabad likely to maintain their lead in launches and sales.

India is under-penetrated in terms of retail space per capita, as China, Vietnam and Indonesia have three to five times more retail space per capita than India. This is likely to pave the way for a higher supply of quality shopping malls. Being the emerging asset classes, the industrial and logistics space, along with data centres, is likely to continue its market momentum.

In the recent past, we have seen a diversification of investments across multiple asset classes, including mixed-use projects and industrial logistics spaces. This trend seems likely to continue in 2023.

Despite near-term risks, the office market’s fundamentals remain sound. Rising demand from global capability centres (GCCs), the large tech talent pool, competitive office rentals, greater focus on building quality — including environmental, social and governance (ESG) — and technology integration will continue to create new opportunities for investors within the Indian office real estate space. The expansion of e-commerce, manufacturing growth and demand from third-party logistics providers will drive growth and investments in industrial and logistics. With the first retail REIT (real estate investment trust) to be launched around end-2022, the organised retail sector is likely to witness investment activity.

The Indian office market’s growth is likely to be driven by the improving confidence of multinational tech, BFSI (banking, financial services and insurance) and manufacturing occupiers, faster return-to-office by corporates, footprint expansion by occupiers and healthy supply addition. Factors such as rising income, growing preference for homeownership, increasing digitisation, higher discretionary spending and growth of experiential retail are likely to drive the residential, retail and industrial/warehousing segments. Risks associated with mild recession and high inflation are at best seen as causing a temporary blip to the ongoing growth momentum across multiple asset classes.

Lam Chern Woon

Head of research and consulting Edmund Tie & Co (SEA)  Pte Ltd

The top three districts for Singapore’s residential market are Districts 10, 15 and 3 (D10, D15, D3), which accounted for 27% of the total primary transaction volumes (as at Nov 24) for this year. Zooming in on these top three districts, primary sale volumes fell by 12% in the first three quarters of this year, on the back of a 38% decline in total units launched.

Following a 10.6% growth in 2021, prices for private residential properties continued to rise by 8.2% in the first three quarters of 2022. This was led by the landed segment, which saw a more rapid growth of 9% in the first three quarters of this year, as compared to 7.8% growth for the non-landed segment.

Although the overall property market will continue to be supported by a tight labour market and strong household balance sheets for next year, the new cooling measures and rising interest rate would moderate homebuying demand. Our projection for primary sales next year is about 7,000 to 8,000 units, a decline from this year’s territory of around 8,000 to 8,500 units.

Overall price growth is expected to stay positive but moderate for next year, on the back of tighter financing conditions, ongoing macroeconomic headwinds and rising interest rates. Compared to the 9% price growth expected for this year, prices are forecast to rise by 1% to 3% in 2023, barring a further deterioration in expected economic conditions or the introduction of new cooling measures.

Meanwhile, the two sectors that will likely prove attractive to investors are retail and modern industrial. The strength of Singapore’s labour market is likely to boost consumption of domestic services, which should prove to be the most beneficial to the retail sector. More landlords are anticipated to carry out enhancements to their retail assets, which will raise their asset appeal to investors. The updated Retail Industry Transformation Map 2025, which focuses on local brands, innovation and talent, is also expected to foster innovation in the retail scene.

While the upward trend in industrial prices and rents is expected to moderate in 2023, we expect continued investment commitments due to Singapore’s status as an attractive regional hub for high-value manufacturing and R&D innovation. More industrialists embarking on various supply chain strategies will continue to bolster demand for modern warehouse and logistics spaces.

Looking ahead, some factors that encourage Singapore’s property market growth include a healthy labour market and strong household balance sheets, organic demand growth on the back of population expansion, shrinking household size and an increasing desire for individual living spaces. The continual easing of borders, the attraction of Singapore as a safe haven as well as foreign talent schemes, such as the Overseas Networks and Expertise (ONE) Pass to draw top talents, will pave the way for more inflow of foreigners and boost homebuying demand and rental.

However, Singapore’s property market is now closer to an inflection point, amid slowing economic growth, macroeconomic headwinds and rising interest rates. The incessant announcements of layoffs — globally and locally — could dampen market sentiment and is a harbinger of deteriorating economic conditions. Factors that could cause prices to turn south next year include an outright recession impacting employment and income, or further cooling measures.

Mi Yang and Daniel Yao

North China head of research and China head of research JLL China

The People’s Bank of China lowered the loan prime rate to 3.65% in 2Q2022, the largest drop since 2019. The relatively loose monetary policy has boosted market confidence and sent a more positive signal to the market. The obvious increase in sales also reflected that the pace of market stabilisation may accelerate, even rebound in the short term.

In Beijing, one of China’s most vibrant residential property markets, there were more new project launches in the past 12 months, where the supply of luxury apartments in the market was sufficient to meet the market demand. However, the resurgence of Covid-19 cases in May caused a backlog in leasing demand. With the resumption of the leasing market in June, suppressed demand was gradually released and rents remained stable.

Overall, the residential property outlook in Beijing is stable. There were some high-quality parcels released in the second centralised land auction, which effectively ensured the future supply of luxury apartments. We expect the demand for such property to continue to be stable.

The second most active residential property market in the past 12 months was Shanghai, where sales activities had resumed gradually since June despite there being some delay of new launches in mid-2022.

Nonetheless, the primary and secondary prices held stable at RMB126,500 per sq m and RMB107,300 per sq m respectively as at 2Q2022. The prices have been moving up gradually since the lifting of the pandemic prevention measures in mid-2022.

It is worth noting that the rental market has been more active, driven by leasing demand from upgraders who want larger living spaces, higher-quality residential compounds and better property management.

The Shanghai housing market was recovering gradually as it entered 2H2022, thanks to its administration’s effort to relax its residency policy for fresh graduates to attract talents with solid housing demand, which helped primary property prices remain stable and high-end secondary property prices to see mild growth.

Nelson Wong

Executive director JLL Hong Kong

Residential market activity in Hong Kong picked up following the relaxation of social distancing measures in 2022. We have seen a number of new residential project launches that achieved notable take-up rates, such as Silicon Hill (Phase 1) in Tai Po (take-up: 97%) and Baker Circle · Dover in Hung Hom (take-up: 66%).

As the property market enters peak season at year’s end, we have seen an increase in home viewing enquiries despite the travel restrictions still in place, thanks to the strong domestic demand. Nonetheless, the luxury residential market remains sluggish, mainly due to the fifth wave of the Covid-19 outbreak in 2Q2022, which once again has put market transaction activities on hold. Barring major changes in local government policies and overall market sentiment, we expect the segment to continue to underperform and the market capital value to decline by 0.5% in 2022.

Meanwhile, the luxury residential rental market is also under pressure due to population outflow, especially the expatriates, in 2022. Hence, our forecast that the rental market will drop by 1.5% in 2022 remains unchanged.

On the other hand, the total retail sales of Hong Kong have rebounded strongly by 4.7% year on year in 2Q2022, thanks to the government’s disbursement of consumption vouchers, which helped improve the retail property market. Many retailers were also looking to expand their business and started to shop for commercial property in good locations.

Despite the better market vibe in the middle of the year, there were still many market uncertainties such as travel and business-hour restrictions, rental pressure, high interest rate and lower-than-expected investment sentiment, as reflected in the 5% drop in high street commercial property market capital value as at 2Q2022.

Moving into 2023, the commercial property market in Hong Kong is expected to be largely driven by the performance of the economy, which is mired in a recession at the moment. Demand for office space is soft while the market is undergoing a supply boom. Rents were soft, though they stopped falling visibly in 2022 after the big decline in 2019. The retail sector is almost exclusively reliant on domestic consumption. An upward tilt in demand, hence retail rents, will likely happen when inbound visitors return in droves. This is highly dependent on how Covid-related quarantine and social distancing measures are administered.

Meanwhile, the residential market is facing various headwinds, including rising interest rates, a high level of availability, low confidence and weak sentiment and, above all, a series of punitive measures on residential property transactions that effectively drove away all investment purchases. Similar to the outlook on the commercial property market, the performance of the residential market will be largely driven by the economy.

Ben Burston

Chief economist, research and consulting Knight Frank Australia

The global economic outlook is clouded by the highest inflation rate since the early 1990s 

at least, with cost-of-living pressures, the consequent tightening of financial conditions and the lingering effect of the pandemic all weighing on growth. However, the Australian economy retains more growth momentum than many other major economies heading into 2023, as reflected in the latest forecasts from the OECD (Organisation for Economic Co-operation and Development) and IMF (International Monetary Fund). A key reason for this is Australia’s position as a major commodity exporter, which substantially offsets the looming pressures on growth arising from the anticipated moderation in household spending.

With benchmark interest rates touching 10-year highs right along the maturity spectrum, the cost of debt has risen by well over 200 basis points during 2022 and this presents risks to the outlook in 2023. The rise in funding costs is putting pressure on property values, with yields now rising across multiple sectors.

This represents a large shift in the macrofinancial environment underpinning property investment, and in this climate, the income growth equation has become more urgent. Markets and assets that are perceived to have a stronger rental growth outlook are better placed to navigate the current environment of higher interest rates, as this growth will offset the negative impact of the yield shift.

With this in mind, we expect a renewed focus on achieving income growth to guide investor strategy and asset selection during 2023, and it will impact the market across multiple dimensions. First, in the traditional mainstays of office and industrial, it will accentuate the evolution of new product types, such as multi-level logistics facilities and the next generation of new office towers providing ultimate flexibility and heightened tenant experience.

Second, it will also drive demand for emerging sectors such as life sciences and the wider healthcare space, where demographic and behavioural trends point to the need for more investable stock. Third, it will cast a spotlight on lease structures, and the ability to ratchet up rents relatively quickly in line with higher inflation. This is a key theme underpinning the rise of build-to-rent, which is keenly sought by investors seeking to diversify, even though the rise in construction costs is presenting a large hurdle at the moment.

Finally, it will add to the focus on aligning with more demanding ESG criteria to safeguard long-term asset value through maintaining access to the widest possible pool of tenants and investors over the next decade and beyond.

In spite of the more challenging environment, underlying demand for Australian real estate remains high with investors consistently nominating Australian cities as among their top targets when executing an Asia-Pacific investment strategy. This will help mitigate against downside risks in the near term and underpin a resurgence in demand once financial conditions settle, especially when set against the backdrop of Australian dollar depreciation which will bolster demand from US and Singaporean investors.

Hafiz Ismail

Associate director Savills Japan Co Ltd

The average vacancy rate for a Grade A office in Central Five Ward of Tokyo stood at 4.1% as at 3Q2022, an increase of 1.6 percentage points on a year-on-year basis. Office rent for all major wards is still on a downward trend from the peak in late 2019. Amid some transformation of the working environment due to Covid-19, the office vacancy-rate increase in 2022 is also caused by the completion of some additional new projects such as Yaesu Midtown Building in Chuo Ward.

Meanwhile, in Osaka, the average vacancy rate for office buildings showed an increase of two percentage points to 4.8% as at 2H2022, while the rental level is relatively steady for submarkets such as the Umeda and Honmachi districts. Meanwhile, the housing market for Greater Tokyo and Greater Osaka has been fairly steady, as the contrast ratio figure, which is normally used to indicate condominium sales, has been above 65% for several months in 2022.

The mid-market residential assets in major cities such as Greater Tokyo (pictured), Osaka and Nagoya are preferred as a defensive asset class due to their stable occupancy rate and low market volatility throughout the pandemic

Unlike the US or European countries, businesses in Japan remain steady amid the persistent weakening of its currency in 2022. The employment market is also at its strongest over the last three years, ranging between 2.5% and 2.6% since April this year without any intriguing rumours of any major layoff plans by big corporations.

The long-awaited opening of its borders for overseas travellers in late 2022 is expected to bring increased business activities, especially for the hospitality and retail market. As the “cheaper yen” is expected to remain for now, the overall economic environment for sectors such as export and tourism are assumed to gain the most, and would not just be limited to major cities, but also spread to regional areas such as Hokkaido and Okinawa.

Mid-market residential assets in major cities such as Greater Tokyo, Osaka and Nagoya have been preferred as among the most defensive asset classes, thanks to the stable occupancy rate and low market volatility throughout the pandemic. This trend is expected to remain strong in 2023. Within the residential segment, there has been growing interest in the luxury or high-end residential market, for both unit sales and the rental market.

Although many developers are already aware that Tokyo has been relatively less pricey compared with other global cities such as London, New York, Hong Kong and Singapore, developers were still waiting to pursue projects as not that many were completed in the past. Until recently, the success of projects by Mori Building Co Ltd and Mitsui Fudosan has given others the confidence to incorporate such products into their development plans. Current high demand from wealthy Japanese and the influx of foreign high-net-worth individuals have spurred market pricing and rent to a historically high level. Therefore, 2023 is likely to be an interesting time for the high-end residential market segment.

To date, one of the main focuses is Japan’s long-term interest rate, which has been kept in check by yield curve control at below 0.25% for the moment. While the Bank of Japan (BoJ) has continued to dismiss any idea about ending its ultra-low interest rate policy, many have started to suggest that the BoJ may soon have to react, as the Consumer Price Index has passed the BoJ’s 2% target level since July 2022 (3.4% as at October 2022).

However, whatever decision that the BoJ makes will likely depend on the nomination of its next leadership in April 2023. The market believes that current governor Kuroda Haruhiko will likely continue to hold the current ultra-low interest rate policy during his term and hand over the decision to amend or continue to his successor. Sentiment towards this policy is expected to influence the lending environment as well as the Japanese yen currency movement.

Troy Griffiths

Deputy managing  director Savills Vietnam

Hanoi and Ho Chi Minh City performed well across all asset classes. The domestic economy has been strong for most of 2022, so consumption is good. Following a robust and continuing 

anti-corruption drive, there has been paralysis in government approvals, which has resulted in fewer completed developments coming to market. This has resulted in a shortage of quality products that match buyers’ or occupiers’ needs.

We forecast that there will be almost a perfect storm impacting 2023 property performance, which will weaken against 2022. The global downturn and softening European and US demand will flow through to the broader Vietnamese economy towards the middle of 2023. Locally, the economy remains strong. However, recent bond clampdowns will affect many of the first-tier developers’ capacity for debt. Finally, after a long run-up, several property sectors are showing signs of slowing. This, coupled with the recent record dismal performance in the stock market, may pressure developers’ balance sheets.

The office markets are already some of the best performing in the region, but with the government’s anti-corruption campaign impacting the real estate market, the office markets will continue to be challenging. Preparation for the next occupation cycle will be critical as space is already insufficient and in high demand.

Industrial continues to be popular, and with a substantial development pipeline, the ready-built properties will be interesting to watch. The government’s unceasing push to provide infrastructure will continue to change the land value arrangement and create fresh opportunities.

Strong and progressive governance, high infrastructure spending and a dynamic legal environment are all extrinsic factors that will continue throughout the near term and benefit the property segment. In very basic terms, a large and dense population, young workforce and low urbanisation will mean a steady march to middle-income prosperity. On the flip side, the short-term pain in the stock market, debt difficulties and the anti-corruption drive will slow the market overall. Recalling the impact of the global financial crisis on Vietnam that was felt in 2010, some two years after the global slowdown in 2008, it seems that Vietnam, now with a strong domestic economy, may also feel delayed effects from the current global economic softening.

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