This article is from the Australian Property Journal archive
THE impact of the COVID-19 pandemic on commercial property prices has been modest compared to past downturns, suggesting the hit on banks’ commercial real estate (CRE) loan books will be much smaller than anticipated.
Asia Pacific commercial property prices were down around 3% on average in 2020, after a 1% rise in 2019, according to economists Lloyd Chan and Adam Slater of Oxford Economics.
Price movements have been mixed across countries in the region. Singapore, Japan, and Hong Kong have been hardest hit down between 3% to 6%, although still a better result than the 8% drops in the USA and UK.
Modest gains were recorded in South Korea (up 4%), as well as China and Indonesia. After a period of large price falls, Hong Kong’s market is showing signs of a recovery. Its prices were down 3.2% in the December quarter, compared to a 12.4% fall in the June quarter as the pandemic intersected with the domestic political crisis.
Chan and Slater said possible factors supporting capital values include a relatively well contained COVID-19 situation in the APAC region and the low interest rate environment.
“The modest price decline suggests that the region’s CRE sector has been relatively resilient, implying that the negative spillover effects on banks will likely be smaller than in previous downturns,” they said.
“Indeed, much larger property price declines were seen during the 1997-1998 Asian financial crisis and the 2008-2009 global financial crisis. During the Asian financial crisis for example, nonperforming loan ratios jumped to around 15%-25% in several APAC economies, where the share of property exposures in total loans and loan-to-value ratios were elevated at more than 25% and 80%, respectively.”
“Still, banks will need to be vigilant about further price drops and the long-term impact of the pandemic. A key concern is whether the pandemic will trigger fundamental changes in demand for commercial properties, which could lead to chronic oversupply, depressed rents, and defaults.”
Office rents have remained below pre-crisis levels as cities were emptied of their workers. Hong Kong and Singapore have fared worst and retail rents in both cities remain under immense pressure. Demand from tech and e-commerce has driven a rebound in Hong Kong industrial rents, while hotels have been left mostly idle with travel halted.
A global economic recovery in 2021 and rising vaccination rates across the world are expected to ease pressure on the CRE sector, but Oxford Economics expects the pace of the rebound to be moderate as vacancy rates will take time to normalise.
Credit risks in CRE loans have risen, they said, but banks in the region are generally well capitalised to cope with CRE-related losses.
“CRE loan exposures are also mostly not elevated. Policy actions offering relief for the sector and a global recovery should provide more support.”
China, Vietnam, and Australia each have lower shares of CRE exposures than they did several years ago, while shares in Cambodia, Thailand, and Hong Kong have been stable. South Korea has an elevated share but prices have stayed resilient, implying that the credit risks of its CRE exposures appear to be contained, the economists said.
Singapore has allowed loan relief measures for small and medium enterprises, and extended the timeline for REITs to distribute their dividends. Hong Kong raised the loan-to-value cap on CRE mortgages from 40% to 50% in August, and China has boosted infrastructure investment to stimulate the economy and support property developers.
