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A REPORT ON THE asia pacific  ECONOMY AND

ITS IMPACT ON commercial REAL ESTATE

What will the new decade bring?

The consensus is that good times are ahead for
Asia-Pacific in 2010

With most of the Asian economies, particularly China, firmly on the path to recovery from the slowdown
sparked by the global financial crisis, it is not hard to strike an optimistic note when discussing prospects for
Asia-Pacific in 2010. Consensus opinion (graph 1) calls for economies in the Asia-Pacific region to grow by a
very healthy 5% in 2010. In comparison, other major regions around the world are forecasted to grow at
around half of that or much less. This forecasted outperformance becomes more pronounced when we
exclude Japan. Asia, excluding Japan, underpinned by the two large and rapidly developing economies of India
and China, is expected to grow at a close to 8% rate in 2010. Not surprisingly, as we wade through the flood
of prognosticating for the coming year, a common theme emerges: Gain exposure to Asia or assets classes
that will enjoy Asia’s surging demand.

We are in broad agreement with the general consensus that Asia-Pacific economies will grow strongly in
2010 spurred by renewed confidence that the worst part of the global recession is behind us. At the same
time, if there is one lesson that we all learnt from the crisis, it is that the world’s economies are inter-
connected. Beyond the financial linkages, which enabled distress in the US real estate and banking sectors to
ripple around the world, Asia Pacific’s economies remain heavily dependent on consumer activity in US and
Choonbeng Ang Western Europe, a fact that becomes readily apparent when we look deeper into the recovery presently
February 2010 taking place. A couple of things stand out from the composition of the GDP rebound: first, that trade growth

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Graph 1 | GDP ACROSS the REGION

Source: Consensus Economics

over the second half of 2009 was a key contributor to the economic recovery and; second, that government
spending in Asia-Pacific via stimulus efforts played a significant role in blunting the effect of the downturn.

Trade revival an important factor in the recovery

As the charts on trade growth show (graph 2), there was substantial sequential improvement starting from
the second quarter of 2009. While a good portion of this, particularly related to commodities or basic
materials, can be attributed to intra-regional trade, a significant part of final demand is actually outside of
the region in the US and in EU. From this perspective, Asia-Pacific economies are not decoupled from the
slower growing developed economies. Furthermore, trade is volatile and can increase fluctuations in GDP
growth. Singapore, which has a
Graph 2a | AUSTRALIA: Trade Growth, US$ sa (%YoY) total trade value three times of its
economy, illustrates the point. In
part due to a seasonal drop off in
biomedical production, it suffered
a quarter-on-quarter reversal in its
fourth quarter GDP figures. Hence,
our caveat for continued economic
growth in Asia is that it will depend
to an extent on the recovery of US
and EU economies. That said, a slow
but steady recovery in the developed
economies is our expectation for
2010.

Source:: IMA Asia

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Graph 2b | INDIA: Trade Growth, US$ (%YoY) Graph 2c | SINGAPORE: Trade Growth, US$ (%YoY)

Source:: IMA Asia Source:: IMA Asia

Graph 2d | KOREA: Trade Growth, US$ (%YoY) Graph 2e | HONG KONG: Trade Growth, US$ (%YoY)

20

10

-10

-20

-30
Nov-07

Nov-08
Jan-08

Jan-09
Jul-08

Jul-09
Sep-07

Sep-08
Mar-08

Sep-09
Mar-09
May-08

May-09

Source:: IMA Asia Source:: IMA Asia

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Graph 2f | CHINA: Trade Growth, US$ (%YoY) Graph 2g | JAPAN: Trade Growth, US$ (%YoY)

Source:: IMA Asia Source:: IMA Asia

Graph 3 | GROWTH IN GOVERNMENT SPENDING Fiscal Policy has and will be a plus for many Asia
economies
While trade dependence is a factor keeping Asia economies coupled
with the developed ones, fiscal policy is where we believe many Asia
economies can stand apart from developed economies. One bright
spark is that government intervention helped spur demand, retain
jobs, keep confidence high (graph 3), and essentially blunt the effects
of the global slump for many Asian economies. These measures
worked partially to blunt the effects of the global slump for many
of the economies in Asia. In our view, the positive aspect of the
effectiveness of government stimulus measures in Asia is that many
governments in Asia-Pacific are carrying large amount of current
account surpluses and reserves. In essence, they still have plenty of
ammunition to push ahead with further stimulus measures should
the recovery from the slump slow. Hence we view the flexibility
of Asia-Pacific governments to enact further stimulus measures as
a strong positive that should mitigate the effects of a double dip
should it occur.
Source: IMA Asia

Monetary policy is likely to remain fairly loose

Besides fiscal policy, monetary policy is another instrument governments and central banks have at their
disposal to influence short-term economic performance. Monetary policy action, through interest rates and
foreign exchange, is commonly used to tune the performance of export-oriented Asia-Pacific economies.
While the headlines typically highlight the China’s undervalued Renminbi, economies like Japan, Singapore
and Korea do intervene in the foreign exchange market to keep their currencies in a range friendly to their
exporters. With trade remaining so significant to Asia-Pacific economies, it is not hard to believe that they

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will retain their stance of trying to keep their currencies competitively pegged. The validity of such a stance
must have been reinforced when exporters from Korea saw their competitive advantage improved vis-à-vis
Japanese exporters due to the sharp depreciation in the Korean Won during the initial stages of the global
financial crisis. With the economies’ focus on managing their foreign exchange rates, monetary conditions are
likely to be looser than they need to be. Fortunately, with consumer price inflation expectations expected to
remain benign for 2010 except for India and Vietnam, most Asia-Pacific economies are expected to maintain
monetary policies that are supportive of the recovery.

A slight note of worry is that, outside of China, supportive monetary conditions have not yet led to a
significant expansion of credit taken up by companies. For sustained growth, we need to see businesses start
to spend and expand, demonstrated by an expansion in credit. Without such expansion, the rate of growth
in Asia-Pacific may be constrained and may not hit the strong numbers currently forecasted by the market.
However, we are buoyed by the continued signs of slow, steady recovery in US and EU markets.

Still we are confident businesses in Asia-Pacific will expand and extend their
footprint
Some of the reluctance to take on credit can be attributed to the palpable caution amongst most businesses
with many anticipating employment opportunities and hence end user demand in the developed economies to
recover slowly. Still we see Asia-Pacific being in a much better shape from a business investment standpoint.
We are still at the start of long term trend that will see many companies shift their focus towards Asia-
Pacific. With the common agreement that the higher revenue growing opportunities are available in fast
developing regions, Asia-Pacific will attract a share of the investment pie larger than its market size currently
deserves. Besides the increase in interest of international MNCs in Asia-Pacific, we can also expect significant
investment contribution from the locally grown business champions. A look at Forbes 2000 Global Largest
Public companies list shows that from 2005 to 2009, the number of mainland Chinese and Indian firms on
the list grew almost 3 times from 51 to 138. With their fortunes on the rise, we would expect many of these
local champions to lead the wave of positive business expansion in Asia-Pacific.

Retail spending performance was credible in 2009 and will do better in 2010
With our expectation of an overall increase in business activities and, hence, increased employment
opportunities, we see a rebound in retail spending in 2010. After suffering a sharp
Table 1 | prospects for cities
dip in the first quarter of 2009, retail spending held up relatively well over the last
three quarters of 2009. We attributed that resilience to the relatively muted job
Bottoming Recovery
losses in Asia-Pacific in 2009. With the return of economic growth in 2010 and
Singapore New Delhi increased job security, we therefore expect retail spending to grow as encouraged
Kuala Lumpur Mumbai consumers start to open up their wallets and spend less cautiously.
Bangkok Bangalore
Ho Chi Minh City Beijing We will see strong end user demand for commercial real
Shanghai estate in 2010
Hong Kong The discussion above provides our background economic outlook for Asia-
South Korea Pacific in 2010. For the most part, our outlook is strongly positive. Hence we are
Sydney anticipating the resumption of strong demand for commercial space to occur. We
Seoul are particularly bullish about the prospects in the cities below (Table 1) where a
Source: C&W Research
combination of improving sentiment and businesses going back onto the expansion

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path will bring cheer to the commercial landlords in those cities. Even in cities where a large amount of
incoming supply is taking place, we are anticipating that with the sharp drop in rentals that happened in 2009,
most of the cities would be entering into a bottoming phase in terms of rents in 2010.

Increased investment demand and prices will lead to increased transaction

volumes
2010 is also shaping up to be a strong year for real estate investment. With demand from real estate end
users returning, we think investors in core real estate assets will start to aggressively explore opportunities
to deploy their funds. This demand will be underpinned by the supportive monetary policy that most
Asia-Pacific economies will adopt for the most of 2010. Real estate, being a preferred investment class in
the region, is likely to see renewed interest from investors as they seek to shift more money away from
lower yielding cash-like instruments. We believe this would create the conditions for asset-price inflation,
particularly as they come against a backdrop of a strongly performing economy.

Risks are therefore on the upside for asset-price inflation. However, we do not believe that a bubble in real
estate prices will develop in most parts of Asia-Pacific in 2010. With the world sensitized to the adverse
effects of asset-price inflation, particularly if it is accompanied by significant amounts of debt, government
would be keen to pro-actively head off any unsustainable increases, particularly in the residential sector. With
a wide variety of possible policy actions that governments could implement, we are confident that they would
be able to successfully head off any significant asset-price bubbles from building up in their economies.

Nonetheless, with both investor demand and prices increasing, total transaction volume in 2010 is likely to
increase by at least 15-20% over the 2009 figure of 210 billion USD.

Given historical experience that prime assets are usually the first to recover off a slump, we believe this class
will again reassert itself as the first investment choice amongst investors. Yields will likely stay flat or decrease
as increased buyer demand and improved seller sentiment push prices upwards at around the same rate or
higher than underlying rent fundamentals.

The decade outlook

The year 2010 also marks the beginning of a new decade. While this is widely touted as the Asian century,
we have no doubt that the region will see challenges and difficulties, and that economic growth will not be
a straight and smooth path upwards. Despite the likely gyrations, we do think that there are a few enduring
themes that would drive real estate in Asia-Pacific in the next decade.

Urbanization continues: Residential demand has a long way to go

There were fears at the start of the crisis that massive amounts of unemployment would reverse the
urbanization trend of major developing cities in Asia as the massive loss of jobs creates a huge wave of
migrant workers returning back to their rural hometowns. That fear was predicated on the expectation of a
possible extended deep recession. Even under such adverse conditions, studies have shown that there is no
conclusive evidence that such a drastic structural reversal would occur.

As it turned out, the slowdown in Asia-Pacific was a lot shorter and shallower than expected and cities
continued to grow. With this in mind, we expect that the residential demand in Asia-Pacific has a long way

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to go, particularly in the mass-market or lower-end segment and rental units as cities grow to accommodate
migrant or expatriate workers. We also see the high-end segment doing well as the growing and transforming
economies create a large pool of the newly rich. The growing upper class would hence drive significant
demand for high-end luxury residential units.

Retail: Still under shopped

Based on a comparison between developed countries and non-developed countries of per-capita retail space,
we think much of Asia-Pacific is still under shopped. Hence we still see strong potential for significantly
more retail spaces to be built. At the same time, many of the economies are on the cusp of seeing a large
increase in discretionary spending as the per capita income increases significantly beyond what is needed for
subsistence spending. There will be demand for new and diverse retail options. We also believe that a change
in attitudes towards the use of credit and a stronger bent towards consumerism is underway, particularly
amongst the younger generation. All these are strong factors that we believe will help drive the long-term
prospects of the retail sector in Asia-Pacific.

Office and industrial: Riding the coattails of economic growth

With our expectation of long-term growth in developing economies, we are likely to see sustained demand
for office and industrial buildings. While a lot of office and industrial supply is also being built, we are of the
opinion that sustained demand will blunt any downward trend in rents over the decade, especially in the
developing economies. Historical studies have shown that in periods of strong demand, rents can continue to
climb despite substantial influxes in supply. We are expecting to find more incidences of such counterintuitive
situations happening in the next decade.

A good 2010 and a good decade

Everyone likes to start the New Year on a good note. Fortunately, it has not been too difficult to write
positively about the prospects for real estate for 2010 and, indeed, even for the new decade ahead. The
economies in most parts of Asia-Pacific look set to enjoy healthy growth. This will spill over positively into
real estate assets, be it in end-user demand or investment demand. This is good news for real estate asset
owners and, coming after steep drops in rents in 2009, real estate users should still be paying rents much
lower than they were in early 2008.

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