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Latest figures from JLL show direct investment into the region’s commercial real estate markets slowed in Q1 2014 but firm maintains forecast for record year-end market volumes
Following a record year in 2013, transaction volumes in Asia Pacific's commercial real estate markets slowed to US$23.1 billion in the first quarter of 2014, down 15 percent year-on-year, according to the latest figures from JLL. Attributing the slowdown to government cooling measures and various seasonal factors, JLL maintains its forecast that full year transaction volumes will surpass those in 2013 as a result of the continued allocation of capital to the real estate sector and improving leasing demand.
Stuart Crow, head of Asia Pacific capital markets at JLL said, "Transaction volumes in Asia Pacific are traditionally lower in the first quarter than the rest of the year as the region experiences the effects of both the Western and Chinese New Year holidays. While investment has been slightly muted by concerns around growth in emerging markets and renewed economic uncertainty in China, we expect transaction volumes to pick up throughout the year as a wave of closed-end funds mature and deals that are already in the pipeline come to market. Coupled with unrelenting demand for commercial real estate, this leads us to maintain our forecast that investment in commercial real estate in the region will outstrip that of 2013."
Outperforming the rest of the region, transaction volumes in the larger markets of Japan and Australia grew by 15 percent and 31 percent respectively, with Japan accounting for an impressive 53 percent (US$12.2 billion) of direct investment into the region's commercial real estate markets in the first quarter of the year. What is traditionally a strong quarter for Japan's investment markets was buoyed further by the increase in the country's consumption tax on 1st April, which meant many investors deliberately brought deals forward.
Dr Megan Walters, head of Research for Asia Pacific capital markets at JLL commented, "During the first quarter of 2014, we saw QE tapering start, and the subsequent cuts to the program coupled with a small increase in interest rates in core markets, has forced investors to focus more on their capital management strategies and reconsider their return requirement. This led to a periodic standoff between landlords and investors and, as a result, price growth has slowed for the time being. However, we fully expect the market to find a balance, particularly as the disconnect between leasing and capital markets that we saw throughout 2013 has started to close, following an improvement in the corporate sector, and perform well for the remainder of 2014."
Portfolio transactions and foreign investors played a prominent role in Japan's regional outperformance during the first quarter of 2014 with a number of large mega-deals boosting overall volumes. Whilst the consumption tax rise could slow investor appetite over the short-term, the general trend in Japan remains positive in both liquidity and transaction volumes with the market set to experience further strong growth in 2014.
Australia's 31 percent year-on-year growth in transaction volumes was in line with expectations with foreign investors accounting for 32 percent of all deals. While investment during the quarter reached a substantial US$4.2 billion, volumes were down 34 percent from a strong year-end in Q4 2014 and it is unlikely that overall investment activity in 2014 will match that of 2013 as both demand and supply slow.
Direct investment in China's commercial real estate markets slowed slightly in the first quarter, down 18 percent year-on-year to US$3.0 billion. Debt markets remain a concern with the high profile default of a Chinese developer, emphasising the potential risk that firms are exposed to and the subsequent stress in the Chinese economy. While concern remains in the residential sector, it is likely that the government will remove cooling policies should the market deteriorate further, in order to avoid significant price declines and further stress on banks. Looking forward to the remainder of 2014, China's commercial property market will likely see acceleration in transaction activity as large pools of capital within private equity groups chase assets.
In Q1 2014, transaction volumes in Singapore declined by 42 percent to reach US$1.2 billion. However, with a number of large en-bloc assets coming to the market, a healthier rental market and improved investor sentiment, volumes are set to pick up during the remainder of the year.
Investment activity in Hong Kong remained lacklustre with volumes reaching US$1.0 billion at the end of quarter one, a year-on-year decline of 69 percent. There is potential for improvement towards the end of the year if Chinese investors look to Hong Kong assets in search of more favourable debt conditions.
The global uncertainty over emerging market growth and the subsequent capital outflow was reflected in Indonesian and Indian markets over the quarter although Indonesia's real estate markets continue to see growth. Policy makers in both countries have reacted by lifting short-term interest rates and deploying foreign reserves in order to protect currency valuations and curb inflation.
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