Commercial Property Deals Plunge

Asia Pacific Commercial Property Deals Plunge 40% In Q3

ASIA PACIFIC – Due to the increase in borrowing cost amidst the uptrend in interest rates, data from MSCI showed that commercial property transaction in the region plummeted by 40 percent in Q3 2022 to US$33 billion, the lowest figure for a quarter since 2012, reported The South China Morning Post (SCMP) on Sunday morning (20 November, SGT).

“The rapid changes in the macroeconomic environment are now bearing down hard on the commercial real estate market, and the slowdown has deepened in the third quarter,” explained MSCI’s Head of Asia real assets research, Benjamin Chow.

“Not only is new deal-making activity dwindling, but deals are also falling through, which is a negative signal for upcoming quarters.”

In fact, the percentage of announced commercial property deals that fell through rose to 3.5 percent during the quarter under review, exceeding the long-term average of 1 percent to 1.5 percent.

“When you start to see this trend pick up across most markets… one can only conjecture that it probably has to do something with the rise in interest rates,” noted Chow. “And more importantly, the rate at which interest rates are changing. Each time circumstances change, investors are unsure of how exactly to react.”

It is likely that would-be buyers had later negotiated to reduce their offer prices, but were rejected. “We’ve seen a number of negotiated deals throughout this year that have actually had their final price adjusted downwards from the original price that was agreed at the start of the agreement.”

Looking ahead, Chow forecasted that commercial property transaction volumes would remain weak at least during the early part of 2023, as pricing continues to adjust gradually.

“I think the biggest determinant of how investment evolves will be interest-rate expectations. Currently, the market is frozen for many major economies as sellers naturally hope that the high interest-rate environment will be only transitory, while buyers have lowered their willingness to pay as there is the risk that the high interest-rate environment will continue.”

Meanwhile, Colliers’ Head of international capital John Howald thinks the slump in commercial property deals may even extend beyond 2023 and it could significantly impact key office markets, such as Singapore.

“The next 12 months will be tough for Asia-Pacific as a region, especially for core markets such as Australia, Hong Kong, Korea and Singapore. While it is a wait-and-see situation, what we do know is that it will be a challenging year ahead for commercial real estate across Asia Pacific. The transaction volume slump is likely to continue for the next 12 to 18 months without a major reversal of central bank policies.”

Still, Knight Frank’s Research Head Christine Li thinks that investor would focus on more bite-size transactions over the short-term.

“However, real estate is cyclical, and activity can be expected to pick up in the latter part of 2023 with more clarity emerging on terminal rates,” she said.

Another good thing is that the fundamentals of Asia Pacific’s commercial property market remains sound and it would benefit from a strong greenback, said Cushman & Wakefield’s Head of insight and analysis for the region, Dominic Brown.

“Looking to next year, at the regional level, office demand is forecast to remain firmly in positive territory, albeit with modest rental growth,” he added.

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