Trading Game
Trade disputes and economics have ruled 2019 globally, and will continue to do so for the rest of the year.
Trade disputes and economics have ruled 2019 globally, and will continue to do so for the rest of the year.
It was a busy June in Hong Kong. The suddenly escalating Us-sino trade war (an extra 15% in tariffs on US$200 billion worth of Chinese goods as of May 10, increased tariffs on US$60 billion worth of American goods into China as of June 1) and political unrest in Hong Kong had office tenants practising caution, delaying leasing decisions and slowing down rental activity in Central, where rents fell by 1% in May. Decentralisation continues apace, and the still embattled retail sector is also expected to be hurt. On the upside, the residential market picked up slightly, with volumes up 4.9% over April, according to Knight Frank. Things could be much better, but they could also be much worse, and it begs the question of what's going on around the world.
Close to Home
As stated: it could be worse. Cushman & Wakefield's mid-year Global Macro Forecast stated that the worldwide economic growth will not meet the robust 4% it reached in 2017, but the predicted 3.3% is reasonable, and added that while slowdowns cause anxiety, they are necessary and often beneficial. Ultimately, “Assuming no major policy missteps, the global expansion will continue [and] property markets have proven they perform just fine when growth is ‘good but not great',” said Cushman & Wakefield in its report.
GDP growth in Asia Pacific is another story, predicted to be a global best in 2019 at 4.5%—despite Chinese credit tightening. Trade war or no, Asia Pacific's commercial markets are relatively healthy, and rank among the world's most expensive. According to research released by CBRE in June, six of the 10 most expensive CBD business sub-markets in the world are in
Asia. While Hong Kong still leads the way (Central and Kowloon), as of mid-2019 Beijing's Finance Street (with rents averaging US$187.77 per square foot per year), Beijing CBD (US$177.05), Marunouchi/otemachi in Tokyo (US$167.82) and Connaught Place in New Delhi (US$143.97) fill out the top ten. With most of Asia Pacific having some degree of trade with China, each market will remain as strong as ties do. South Korea, Australia and Vietnam all have strong economic links to China, and as long as the trade issues don't leech into individual deals, property markets will remain stable.
Notable exceptions on the office list include traditional powerhouse locations such as Singapore and Shanghai as well as fastemerging markets like Ho Chi Minh City and Jakarta—though Singapore and HCMC were the region's fastest gainers, at 17.3% and 9.6%, respectively. “Asia Pacific is again recalibrating the global benchmark in prime office rents as demand and supply dynamics continue to prompt prices to hit new heights across core business districts,” says CBRE'S head of occupier research, Asia Pacific, Ada Choi. “As corporations continue to look to attract and retain talent by securing office environments of the highest quality, we expect this momentum to carry over into 2020 despite macroeconomic and geopolitical headwinds.”
Farther Afield
Speaking of those headwinds, Cushman & Wakefield stated, “The global economy has cooled and by extension, so too have the property markets. The combination of fading fiscal stimulus in the US, escalating trade tensions, tighter credit policies in China, four rate hikes by the Federal Reserve in 2018 and Brexit uncertainty has contributed to the slowdown. Trade is slowing this year, as is investment and global consumption.” That certainly sounds dire, but markets are finding ways to adjust, and property is following, at least for now.
The threat of a “No Deal” Brexit has loomed over Europe for most of 2019, and Theresa May's decision to resign leaves the UK deal as murky as it was prior to her announcement. The next deadline is October 31 and it could be a “No Deal” departure. Still, Brexit and trade are having little impact on London's West End office market, which ranked second in the world behind the SAR at US$222.70. Additionally, the European office sector was the world's most active so far in 2019, with record occupancy and take-up, a great deal of that rooted in MNCS hedging their bets.
Trade war or no, Asia Pacific's commercial markets are relatively healthy, and rank among the world's most expensive.
Overall, global office vacancy rates are at record lows and rents have crept up 3.1% so far this year. Regardless of falling absorption rates in the industrial sector, “occupancy rates remain either at or near record highs in most first-tier and second-tier cities around the world. The key engines that drive demand for industrial-logistics space remain firmly intact. Namely, ecommerce continues to thrive and consumers continue to spend,” said Cushman & Wakefield. And despite what Hongkongers may be up to right now, globally consumer spending remains solid.
Though there is no evidence of property markets being adversely affected by the trade dispute, business sentiment is shaky in export-reliant economies like Germany, Canada, Singapore and South Korea, where the trickle down is most keenly felt, and fears that the industrial sector could soften if flows are impacted are sitting on the periphery.
Still, Cushman and Wakefield expects brighter days ahead. “Our baseline assumption is that a Us-china trade agreement will be reached in the second half of 2019. Some of the thornier issues may be kicked down the road, but at least a symbolic agreement or temporary halt is more likely than not. The benefits of a graceful resolution versus the alternative create a strong economic incentive to get a deal done. A trade agreement would quickly restore consumer and business sentiment in both the US and China and would likely lift global equity markets. These would boost economic activity—spending and investment—and most sectors, including commercial real estate, would benefit,” finished Cushman & Wakefield. Brace yourselves for an eventful second half.