Correction looming for 'stubbornly high' real estate prices in APAC

THERE are growing concerns that a market correction may be on the cards next year for Asia-Pacific (APAC) real estate, which has thus far been resilient amid the coronavirus pandemic, particularly when compared to Western markets.

A regional forecast report by non-profit education and research institute Urban Land Institute (ULI) and PwC released on Tuesday noted that the Covid-19 outbreak has had a limited impact on local real estate markets this year.

However, stress may surface soon, particularly in China, India and Australia, which will likely be sources of forced sales next year.

So far, investors that were anticipating a cascade of defaults as recession took hold have largely been disappointed this year. While APAC's property investment volumes fell 38 per cent year on year in Q3 2020, prices and cap rates remained mostly stable, according to Real Capital Analytics data.

Governments' huge stimulus and employment-support programmes have temporarily staved off the impact of deep recessions. In APAC, governments have also mostly held back from writing blank cheques, although banks and landlords have been supporting their cash-strapped customers instead of calling loans or terminating leases.

This has sustained many "essentially insolvent tenants, shoring up occupancy rates and maintaining landlords' balance sheets at near pre-Covid levels", according to the ULI-PwC report.

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The region's buyers and sellers are also in a standoff over asset pricing.

"Buyers are underwriting lower values and cap rates based on an assumption of lower (or no) growth, together with expectations for declining rents," the report added. On the other hand, owners are generally strong enough financially to avoid forced sales, and so have been holding out in the hopes of early turnarounds in both the economy and the pandemic response.

That being said, conviction is growing that artificially high asset prices - and, with them, investors' profits - are due for a fall, as hopes for a V-shaped economic recovery are fading fast.

One analyst said the economic impact of government funding has translated into lower real estate transaction volumes as businesses have been propped up by such support, delaying the appearance of distress in the market.

But distress "will come, for sure, whether it's corporates selling assets, investors whose income streams have dried up and are unable to meet interest-rate coverage ratios, or banks or receivers themselves stepping in as creditors", the analyst added.

Expectations of investor profitability have thus declined to levels approaching the 2009 lows of the global financial crisis, the ULI-PwC study found.

Another reason pricing has remained "stubbornly high" in the region is that valuers have been reluctant to write down asset values, relying on technical caveats about market uncertainty and hopes for an economic rebound next year.

An Australia-based interviewee believes that next year, especially in the first quarter, there will be more pressure on landlords to be realistic in valuing their assets, when job furlough schemes are removed, unemployment rates rise and other asset classes are repriced.

In China, smaller property developers have been finding it challenging to obtain bank financing due to a liquidity squeeze, and thus might soon liquidate assets to finance land purchases at attractive valuations. Larger players may also divest assets to "reposition their first power so they can go on an acquisition spree", said a Shanghai-based foreign investor.

India has seen an implosion of local non-bank finance firms, causing developer finance to be in shorter supply than ever. With the significant industry consolidation and demand for distress capital on a massive scale, foreign institutional and private-equity funds are thus looking to India as a source of opportunistic investments.

And in Australia, the economic impact of Covid-19 has been among the most acute in the region, with further rental declines expected as unemployment worsens and government support falls away. Investors also look to Australia as a source of distress because its mechanisms to sell off distressed assets are more front-and-centre than the rest of APAC. This greater market transparency may therefore open up more buying prospects there.

Meanwhile, Singapore, Tokyo and Sydney continued to rank as the top markets for investment and development prospects in the region.

The three markets each promise "a sense of safe harbour in an increasingly hostile global environment", in terms of both geopolitical and economic risks, said ULI and PwC in a joint statement on Tuesday.

Ong Choon Fah, ULI's Singapore chair and Edmund Tie's chief executive, noted that Singapore's reputation for neutrality has attracted a steady stream of investors and corporate occupiers that may opt to avoid current uncertainties in Hong Kong.

The Emerging Trends Asia Pacific report by ULI and PwC was based on a survey of 391 real estate professionals as well as 134 interviews. Respondents included investors, developers, property company representatives, lenders, brokers and consultants.