Asia Pacific office markets may be resilient but definitely not immune to the euro crisis, says the latest report of DTZ. The latest DTZ Research report quantifies the impact of a double-dip economic slowdown in Asia Pacific and its impact on office markets, due to the Eurozone crisis. The report considers a downside scenario and compares it to DTZ’s base case forecasts. The analysis assesses the extent of the impact of the downside scenario on individual markets, highlighting those most at risk.
Office markets in the key Asia Pacific financial centres are hit hardest, with Hong Kong, Singapore, Sydney and Tokyo all experiencing significant downgrades to rents and capital value forecasts. With the exception of Sydney, Australian markets show greater resilience to the declines. While the downturn has a large impact on Asia Pacific markets, they fare much better than those in Europe which see the direct impact of the downturn.
The report is a follow-up from a recent report considering the impact of the downside scenario on European office markets. The downside scenario assumes disorderly defaults take place in Greece, Ireland and Portugal, but these countries remain in the eurozone. The turmoil associated with this moves the eurozone economy back into recession.
The downside scenario impacts Asia Pacific economies via several channels. Asian exports are hit as European economies re-enter recession; weakened sentiment impacts on business investment and consumer spending; and falls in global equity markets reduce wealth, which in turn also curtails consumer spending. Overall, GDP growth in the Asia Pacific region falls to 3.7% in 2012 and 2.1% in 2013, compared to base case forecasts of 5.4% and 5.9% respectively.
Anshul Jain, CEO- DTZ, India, says, “Even as India mirrors sentiments in Europe, economic growth under the downside scenario is expected to moderate to 7.6% as compared to base case growth of 8.5% during 2012-16, making it second fastest growing large economy. However, as several large European countries face double dip recession in 2012-13, significant exposure of Indian markets to these economies will curtail GDP growth to 5.9% in 2012.
High reliance of Indian IT sector and exports markets in Europe will bring caution in office space take up across markets in India as most corporate will hold back expansion plans. This coupled with large upcoming supply will curtail office rental growth. Business and financial hubs like Delhi-NCR and Mumbai will witness a 17 and 18% drop in rentals respectively.
Mumbai will also witness a sharp downgrade in rental growth prospects under the debt crisis scenario, with growth expectations being scaled back from 2.9%pa for the period 2012-16 to 0.6%pa. Rental correction under downward scenario across other cities like Pune, Chennai and Bengaluru will be over 20% for the period 2012-16. Additionally, yields will rise in the near term (2012), but by 2016 yields will be marginally lower than the base case.
The downside scenario has been given a 20% probability, compared to a 45% probability for our base case forecast. Under the scenario, Hong Kong, Singapore, Japan, South Korea and Taiwan, suffer recessions in 2013, when their economies shrink by more than 1%. Australia shows the most buoyancy under the debt crisis scenario, with growth slipping only marginally, from 3.6% per annum to 3.4% per annum for the period 2012-16. As a result, occupier demand for offices across the region would be reduced as firms scaled back expansion plans and in the markets hit hardest, there would be a reduction in headcount.
Hans Vrensen, Global Head of DTZ Research, says, “Under the downside scenario total returns in Asia Pacific between 2012 and 2016 drop 29% to 7.3% per annum. However, this is markedly less than in Europe, where capital values fall sharply and total returns plummet 59% from 7.8% per annum to 3.2% per annum. Tokyo is impacted the most in Asia Pacific where returns decline from 10% per annum to 3%. In Europe, the most affected market is Dublin where projected returns fall from 12.3% per annum to 1.1%.”
Fergus Hicks, Associate Director Forecasting & Strategy Research at DTZ and co-author of the report, comments: “Under our scenario, prime yields in most Asia Pacific office markets rise in the near term. The rises are sharpest in the financial centres such as Hong Kong and Singapore, where yields are around historic lows. By 2016, the outlook for yields is more varied. In the financial centres of Hong Kong, Tokyo and Singapore, which take the biggest hits to their occupier markets, office yields remain above our base case forecasts.
However, lower government bond yields under the scenario partially feed through to office yields in Seoul and the Australian markets, pushing them lower compared to the base case forecasts. In India and China, office yields under the scenario are little altered in 2016 from our base case forecasts.”
The DTZ Fair Value Index score falls from 57 under the base case to 35 under the crisis scenario, reflecting the weakened outlook for total returns. While 24 of the 30 markets covered are rated either HOT or WARM under the base case, this drops to 15 under the scenario. Beijing and Melbourne both remain HOT under the scenario, indicating that they still offer attractive investment opportunities.
Ben Burston, Associate Director, Forecasting & Strategy Research at DTZ and co-author of the report, says, “Our Fair Value Index results show that if the eurozone debt crisis escalated further, investors in the region would be advised to focus on markets with less reliance on export demand from Europe and the United States. Looking forward however, we estimate that by 2013, market pricing would be markedly more favourable for investors with opportunities in several markets including Hong Kong and Singapore. This would represent a stronger and faster recovery than that forecast for Europe, where we think it would take until 2014 for investment prospects to improve.”
