Forecasting Asia’s diverse real estate markets

August 11, 2011 / By  

One thing I like about being a real estate researcher with a regional role is the chance to observe up close the ongoing evolution of Asia’s commercial real estate markets. Another is getting to exchange findings and views with colleagues from other regions. It is through this exchange that I come to appreciate that the tasks for real estate forecasters are challenging everywhere, whether in the more homogenous markets of Australasia, North America and Western Europe, or in the nascent markets of Eastern Europe, Middle East and Latin America.

In Asia, some of these challenges relate to the diverse features of the region’s commercial real estate markets. For one, several decades in real estate market developments separates world-class financial centres such as Hong Kong at the one end of the spectrum and up-and-comers such as Hanoi at the other end. As a result, making broad statement about current regional trends is sometimes difficult, let alone projecting future trends.

Like the rest of the world, Asia Pacific’s real estate markets generally move in multi-year cycles characterised by intervening periods of “booms” and “busts”, though there have been major variations across markets and time. Some regional markets have been, and are likely to remain, more volatile than others. Rental movements are generally more rapid in the major financial centres, particularly those which are heavily influenced by sentiment, such as Hong Kong and Singapore. Over the last 20 years, annual rental changes in these markets have been up to 60-80% in nominal terms. Rental movements are less rapid but still highly cyclical in markets such as Tokyo as well as the Tier I cities of China and India, with maximum annual changes of 40-60%. Relatively stable markets such as Seoul and Kuala Lumpur are characterised by weaker cycles, with annual rental changes usually no more than 20%.

Despite significant variations in market developments and cycles, Asia’s real estate markets still share similar fundamental driving forces. Long-term trends in rentals and prices are driven by the current and future demand-supply balance of space, regardless of whether it’s work space occupied by an Indian office worker, shop space needed by Hong Kong retailers or warehouse space used by 3PL operators in China. Future supply of space is known, to varying degrees, as a result of the lengthy construction cycle. Forecasts of future demand for space hinge on, and of course are only as good as, the forecasts of underlying demand drivers such as GDP, employment and retail sales.

To sum up, there are common themes to the diverse real estate markets in Asia. Past, present and future trends of Asia’s real estate markets, like anywhere else, are still essentially driven by the interplay of demand and supply. A good forecaster needs to understand the specific drivers behind demand and supply in each market, as well as consider how these can potentially change in the future.

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