Asia Pacific: Slowing but Still Growing
The year thus far has been marked by surprises, with momentum in the regional economy shifting to the developed world, away from the emerging economies that had led growth since the financial crisis. Notably, a resurgent Japan is driving the shift, following years of stagnation, indicating promise for Prime Minister Shinzo Abe’s new policies.
At the same time, economic strides in the region’s powerhouses – China and India – have eased considerably. Nonetheless, most ASEAN markets continued their robust expansion. As a result, our baseline outlook for the remainder of 2013 has several changes, though regional real GDP is still forecast to advance 5.0-5.5% for all of 2013.
First, Abenomics – a threepronged approach consisting of structural (economic overhauls aimed at sustaining long-term growth), monetary and fiscal policies – will cause Japan’s GDP growth to shift to a higher gear, from an annual average of nearly 1.0 percent from 2000 to 2011 to 2.0-2.5 percent this year. Additionally, as the world’s thirdlargest economy, we expect Japan’s growth to have global significance.
Hence, Japan’s reflation policies, combined with continuing gradual improvements in the US, will filter to their trading partners within the region and thus, add to upside growth. Second, the slowdown in India is expected to persist with economic growth estimated at 5.05.5 percent for fiscal year 2013-2014 especially as economic reforms have yet to pick up steam.
Third, we are lowering our outlook for China, where growth is transitioning to a new normal of 7.5% as policymakers rebalance the economy. Notably, if it posts a 7.5 percent GDP growth rate for all of 2013, it would be the slowest growth since 1990. Lastly, in Australia, the outlook has also softened on weakening sentiment in China and the retreating resources sector, though efforts are underway to balance away from mining. On the upside, both fiscal and monetary policies in most countries have room to maneuver to be sure, especially given the diminished risk of higher inflation in the region.
Of course, the outlook is not risk-free. While Europe broke out of recession in the second quarter, the upturn is far from adequate to address their deep-seated problems of mass unemployment and high debt. Additionally, the recovery in the U.S. economy is gaining traction, which in turn, has fuelled speculation that the US Federal Reserve is close to a decision to start unwinding the economic stimulus. In our view, we expect the Fed to shift its policy if and only if the US economy shows major improvement. In Asia Pacific, the inexorable slowdown in China and its spillover effects on the region remains the greatest risk. Geopolitics is another source of risk. The ongoing territorial issues in Asia are fueling diplomatic tensions and have begun to impact economic ties.
Solid economic conditions, combined with employment gains, bode well for occupier demand across all 29 cities tracked within the region. While overall occupancies will vary, rents are still expected to advance moderately in most markets through next year. On the investment front, activity has surged across all regions (Americas, Europe and Asia Pacific) thus far this year.
For Asia, such development is credited to better investor sentiment, continued re-allocation of capital to Asia, low interest rates, supportive debt markets, and relatively attractive returns, among others. Investment activity should maintain its positive momentum for the remainder of this year for several reasons. Even as 10-year bond yields have risen modestly, rates in most markets are still relatively low in a historical context. In our opinion, this wide yield spread will continue to be a major driving force for buying in core markets, but also growing demand for higher-yielding assets and value-add investments in secondary or emerging markets. In a scenario where such investment thesis is supported by possible rising rents, the investment demand is expected to remain strong.
Further, over a longer period, negative effects of rising rates should be at least offset by the region’s advantages, including healthy consumer demand and sound property fundamentals. All of these factors should keep properties in Asia Pacific attractive for regional and global investors during the course of 2013 especially as an inflation hedge and total return vehicle. The writer is Managing Director, Research, Cushman & Wakefield,
Jakarta Grade A office rents have nearly doubled over the past three years, from US$20 per sqm in June 2010 to US$39 per sqm in June 2013