RICS: Property market bouncing back but pandemic risks weigh

Written by Sterling Content
February 5, 2021


Written by Sterling Content
February 5, 2021

What a difference a year makes. In February 2020, the expectation was for further gains in Japanese property due to cheap money and limited supply, despite the looming impact of the COVID-19 pandemic. Fast forward a year and the outlook for Japanese and global property is far cloudier, according to RICS (Royal Institution of Chartered Surveyors) senior economist Sean Ellison.

Speaking at a British Chamber of Commerce in Japan webinar on January 28, Ellison unveiled findings from RICS’ fourth quarter 2020 “Global Commercial Property Monitor,” which showed the recent resurgence of the global property sector, albeit with notable variations between countries and asset classes.

“The impact of the pandemic has been highly uneven for the economy as well as sectors of the commercial property market,” he said. For example, commercial property globally remains “under pressure” while construction markets are back in recovery mode.

“It looks like the global property market hit its low during the second quarter of 2020. Since then, although conditions remain negative, some of the downside pressure eased in quarters three and four,” he added.

Indicating the recent upturn, RICS’ global commercial property sentiment index climbed from its low of minus 37 to minus 24 in the fourth quarter, while the Asia-Pacific index stood at minus 25 compared to its low of minus 38 in the second quarter.

Among asset classes, industrial assets remain “the most favoured asset class,” he said, with “a lot more uncertainties around office and retail property.” In alternative assets, data centres were popular with investors.



Japan bearish

Despite signs of a “broad-based recovery” inclusive of most markets, bullishness has yet to spread to Japan, Ellison said.

“Conditions didn’t get as negative in Japan as they did globally, but they’ve stayed at the same level for the past several quarters. And that appears to be the result of continued uncertainty,” the Sydney-based economist added. “When we asked respondents for their perceptions of the property cycle, a higher share of respondents in Japan believe the market is in a downturn. No respondents from Japan thought the market was at its bottom or in the early stages of a recovery.”

Globally, about half of respondents saw their market in a downturn, but in Japan, the proportion was closer to two-thirds. As a result, “the outlook for Japanese property with respect to rents and capital values appears slightly more downbeat than other markets,” he said.

Japanese respondents also pointed to a scaling back of office footprints, suggesting the trend towards working from home may have a lasting impact.

While some 7.8% of respondents worldwide indicated they would be scaling back their office space in the next two years, the figure in Japan was nearly 10%.

“If occupiers in Japan suddenly cut their office space by 10%, that would have a significant impact on the market, and is obviously contributing to the current uncertain environment,” he said.

Yet, while office and retail property are under pressure in Japan, residential property and logistics are gaining in favour with investors.


Regional gains

Across the Asia-Pacific region, the RICS report indicated an upturn was underway, with Vietnam, Australia, New Zealand and India leading the charge.

Headline rents are expected to decline by 2.3% over the next year across the region, compared to the 4% drop in the third quarter, while capital values are seen falling by 1.7% over the same period compared to a 2.9% decline in the third quarter.

Among sectors, industrial property and data centres are expected to enjoy gains. The office, retail and hotel sectors, meanwhile, will come under pressure due to the pandemic.

“Moving forward, policy measures and how vaccine rollouts are undertaken will affect how expectations pan out in reality,” Ellison said. He gave a warning about the Chinese property market, noting the risk of default among private Chinese property developers due to high debt levels.

The event panellists—comprising London-based Koji Tanaka, founder and CEO of Circle Field Associates, and Singapore-based Miho Asano, CEO of Daiwa Kantei International—were then probed for their insights into the effects of the pandemic by event moderator, CBRE’s Shigeko Mizutani.

Tanaka suggested the UK construction market was starting to recover, thanks to British government measures supporting the housing market, including a salary furlough and stamp holiday duty.

“These measures resulted in a recovery in the housing market; effective countermeasures can work,” he said.

Asano said her firm had noticed a pickup in the Japanese property market after May 2020, when the state of emergency was lifted in Tokyo, with enquiry levels returning to their pre-pandemic state in June.

She also noted a continued compression of “cap rates” due to liquidity measures by central banks.


Tokyo vs Hong Kong

When asked about Tokyo’s potential as an Asian financial hub in the wake of recent events in Hong Kong, Ellison indicated that Japan could seize the moment with appropriate reforms.

“Japan has to its advantage a very deep and developed capital market … [but] the step it needs to take is to [reform] labour laws,” he said.

He noted the ease in which expatriates could previously enter and exit Hong Kong, “whereas the adjustment to Japan, whether language or labour laws, is a major impediment which gives Singapore the advantage at this point, and perhaps Taipei.

“I think it would be very wise for the relevant authorities in Japan to position Tokyo to receive a lot of the relocation [from Hong Kong],” he added. “It’s done all the hard work in deepening its capital markets and acquiring financial expertise, it’s just some [final] steps that are left over.”