In the second quarter of 2021, China’s economy grew 7.9% year-over-year and 1.3% quarter-over-quarter, pushing growth in the first half of 2021 up to 12.7%. High value-added industries continued to drive economic growth, as advanced manufacturing and IT services grew by 22.6% and 20.3%, respectively. The global economic recovery also fueled export demand, with export volume increasing by 28%. Retail sales grew by 23% and continued to benefit from strong sales of consumption upgrade products as well as the recovery of food and beverage consumption to pre-pandemic levels. China’s central bank cut the required reserve ratio by 0.5 percentage points in early July, which will release approximately RMB 1 trillion to the market to support steady economic growth for the remainder of the year.

In Beijing, there was a soft pickup in office leasing demand, mainly driven by the continuing relocation trend. Three new buildings were delivered in the second quarter, adding 280,000 square meters of office space to the leasing market. Net absorption increased significantly to 300,000 square meters, with the financial sector and TMT companies accounting for the majority of the leasing demand, as funds and securities companies were expanding. The Grade A office market has recorded rent declines for twelve consecutive quarters, but the pace of the decline has slowed. Overall, rents decreased 6.4% year-over-year and 1.0% quarter-over-quarter, while vacancy edged down to 14.2%, falling 0.8 percentage points quarter-over-quarter. In the Zhongguancun submarket of Beijing, rents were flat and vacancy remained at 2.5%, the lowest level in the city.

Industrial and logistics real estate remained resilient in the major submarkets due to limited supply and strong leasing demand from third-party logistics companies. In Shanghai, industrial rents rose 0.8% quarter-over-quarter and recorded 2.0% growth year-over-year; meanwhile, vacancy edged down 0.9 percentage points to 5.9%, due to strong take-up of the newly completed supply in emerging submarkets. Two new completions of 243,000 square meters were delivered to the market, and absorption totaled 286,300 square meters—the highest quarterly level in three years.

In terms of overall market activity, total commercial real estate transaction volume amounted to RMB 152 billion in the second quarter of 2021, a 31% increase year-over-year and above the level of the comparable period in 2019. Institutional investors, which include real estate funds, insurance funds, and REITs, contributed RMB 77 billion of investment volume in the second quarter—an increase of 210% year-over-year—while foreign investors accounted for 20% of the total volume.

China’s GDP growth continues to normalize in the third quarter.

CNY remained strong during the quarter.

Hong Kong

Hong Kong’s economy grew 7.5% year-over-year in the second quarter of 2021. The improvement was attributed to strong export growth alongside a rebound in global demand. However, the economic recovery remained uneven, with exports performing well while inbound tourism remained frozen. Consumption-related activities improved but were still far below their pre-pandemic levels. Total exports of goods saw strong growth, increasing 20.2% year-over-year, underpinned by the revival of external demand and vibrant production activity in the region. Private consumption expenditure grew 6.8% year-over-year as the fourth wave of the pandemic receded and the labor market improved. The unemployment rate declined meaningfully, falling from a peak of 7.2% in December 2020 to 5.5% in the second quarter of 2021, as the retail and food services sectors recovered.

With limited supply, residential prices rose 3% quarter-over-quarter or 4.3% year-over-year—only approximately 1% below the historical high. Commercial real estate investment transaction volume rose 163% quarter-over-quarter to HK$25.3 billion, the second highest quarterly figure since the fourth quarter of 2018. Property funds collectively deployed HK$5.4 billion, 21% of the quarter’s total, with all acquisitions involving industrial assets. As of June 2021, Hong Kong’s office vacancy climbed to 9.3%—the highest it has been in nearly 16 years—while the decline in rents slowed to 2.6% in the second quarter, following a decline of 3.5% in the first quarter. The rental gap between the central business district (Central) and decentralized office areas narrowed, as some domestic firms returned to Central and leasing demand from mainland Chinese corporates remained resilient.

Hong Kong’s office vacancy remained high, at 9%, as rents weakened.


In the second quarter of 2021, Japan’s real GDP increased 0.5% quarter-over-quarter due to a recovery in capital expenditure, but consumer spending remained sluggish during the government-imposed states of emergencies. However, many economists predict that the economy will continue to improve in the second half of 2021 due to rising domestic vaccination rates and steady increases in exports. As of late October, 70% of Japan’s population had been fully vaccinated. Supported by the government’s stimulus packages, the unemployment rate remained low, at 2.8% as of August 2021.

Office real estate fundamentals remained stable during the second quarter, with office vacancy rates in Tokyo rising slightly from 1.5% to 1.9% for Grade A and from 2.0% to 2.7% for Grade B. Osaka office vacancy also remains low, at 1.7% for Grade A and 2.1% for Grade B. Office vacancy rates are expected to rise slightly due to the economic slowdown and the increase in companies seeking to reduce costs. However, tenants looking to expand or consolidate office space have started to consider relocating to higher-quality, well-located office buildings.

In the logistics sector, the pandemic continues to be a catalyst for e-commerce, as tenants continue to expand their warehouse needs. The vacancy rate for large multi-tenant facilities in the Greater Tokyo area remained low, at 1.5% in the second quarter. Given that rents continue to rise in prime areas, tenant demand is expanding to newer and more affordable facilities. Due to the limited supply of such modern facilities, there is robust demand from tenants seeking to upgrade from older facilities.

Real estate transaction volume in the second quarter decreased 37% year-over-year. However, expected yields on office, residential, and logistics assets in prime locations continue to decline as investor demand for such assets increases. Many corporate owners are now contemplating selling non-core assets to improve their balance sheets. Banks continue to be active in real estate lending, and the capital markets are expected to remain healthy.

Tokyo office fundamentals remained strong and steady.

Tokyo Grade A office cap rate spreads remain wide as compared to historical lows.

J-REIT yields continue to fall to low levels, driving up property values.

South Korea

In the second quarter of 2021, South Korea’s GDP increased 0.8% quarter-over-quarter, mainly driven by a healthy recovery in consumption across multiple sectors. The Bank of Korea (BoK) revised its GDP growth forecast for 2021 to 4.0%, up one percentage point from its previous forecast. The BoK expects the Korean economy to recover on the back of a robust increase in consumption and exports. In August, the BoK raised its benchmark policy rate for the first time in almost three years, up 25 basis points to 0.75%. Although the BoK is committed to sustaining the economic recovery through monetary policy, it has indicated it will be gradually adjusting its accommodative monetary policy. With the spread of the Delta variant, confirmed cases of COVID-19 in Korea have increased to approximately 2,000 per day; to tackle the recent rise in cases, the Korean government has implemented stricter social distancing rules. The vaccination rollout has been relatively slow, as there has been an insufficient stock of vaccines; however, approximately 37% of the population is fully vaccinated and 61% of people have received first doses.

On the real estate front, the spread between prime office cap rates and Korean government bond yields tightened to 240 basis points, slightly below the 10-year average. The spread tightening can be attributed to higher interest rates and compressed cap rates, with cap rates for prime office assets at historic lows. Despite the pandemic, office fundamentals remain robust, with strong tenant demand for office space and heightened investment appetite for stabilized core office assets. Investment activity momentum in the commercial office sector continued in the first half of 2021; transaction volume hit $7 billion, which is 56% of last year’s record-high total volume. Prime office vacancy in Seoul was 12.3% in the second quarter, down 260 basis points; the decrease can be attributed to the robust tenant demand for office space. Net absorption of existing office space in Seoul has remained positive since 2020, and vacancy is expected to stabilize, as there is limited new office supply coming in the near term.

Leasing and investment activity in the logistics space remained robust, with the outbreak of COVID-19 expediting the continued growth of the e-commerce industry. Modern and efficient logistics facilities in the greater Seoul area have only frictional vacancy—2.8% as of the second quarter. Cap rates for logistics centers have compressed sharply over the past three years, decreasing approximately 200 basis points. For the first time, several prime logistics assets have traded at cap rates near prime office cap rates of 4.0%.

Residential prices in Seoul continued to rise, with apartment prices increasing 17.9% year-over-year as of August. The government’s restrictive supply measures in core Seoul markets have contributed to price increases in the sector. Hotel and retail sectors have remained sluggish since the eruption of the pandemic, mainly due to the sharp decline in tourists visiting Korea.

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Significant absorption of office space during the quarter helped to reduce vacancy in the Seoul office market.

Cap rates spreads have tightened as Treasury yields have seen some improvement.

Following sluggish growth in 2020, the Korean economy recovered significantly in the first half of 2021.

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