Asian real estate markets, particularly Hong Kong and mainland Chinese cities, have been materially impacted by the US-China trade war, with the fallout expected to continue amid escalating tensions between the two countries.
In a detailed research report published Monday, real estate services firm Colliers International outlined specific ways in which the extended trade sanctions will impact capital flows and leasing sentiment. Here are the salient takeaways from the report.
- Drop in Asia outbound capital
Asia-to-global capital flows in real estate, including completed assets and land sites, fell 33 percent year-over-year in H1 2019 to $16.1 billion, according to data by Real Capital Analytics quoted in the report. Colliers initially expected Asian outbound capital flows to rebound 21 percent in 2019. However, the firm no longer believes that the “recovery in global-to-Asia investment interest will continue at the pace” it expected. As such, it has now lowered its estimate of Asian outbound flows to $47 billion in 2019, the same as the 2018 volumes.
2. Drop in Asia inbound capital
Global capital flows into Asian real estate declined 28 percent YOY in H1 2019 to $7.9 billion, according to RCA’s preliminary findings. If the trade war continues, Colliers believes it will lead to fewer US enterprises, especially manufacturing groups, wanting to invest or expand into China. In its view, US enterprises expanding into Asia would also prefer leasing rather than buying or building facilities, which would further impact investment volumes.
As such, Colliers has lowered its estimate for inbound capital flows in 2019, from $30 billion to $24 billion, essentially amounting to zero growth from 2018 numbers.
3. Worsening leasing sentiment in China
Trade tensions, coupled with other factors, have led to what Colliers describes as a material slowdown in office leasing demand in Shanghai and Beijing in H1 2019. For the whole of 2019, Colliers expects net absorption in the Shanghai office market to drop 37 percent, average Grade A office rents to drop 4.7 percent and vacancy rates to rise by over 8 percentage points to 22.1 percent YOY, as multinational companies look to curtail expansion plans amid the escalations. A similar outlook is forecast for other key Chinese cities and more so for Hong Kong.
4. Drop in US industrial market occupancy
Colliers notes that most of the impact of the US-China trade war is seen in Asia, with a “minimal” impact expected on the US office market. But the country’s industrial demand, in port and manufacturing markets, is expected to suffer. The property services firm expects demand from manufacturing occupiers for industrial assets – which comprised 13 percent of total industrial transactions in H1 2019 – to decline, especially in the Midwest and Southeast regions, if the tariff war continues.