China/Hong Kong

China’s economy grew 3.2% year-over-year in the second quarter of 2020, a strong rebound from the 6.8% year-over-year decline recorded in the first quarter. The rebound was mainly driven by expansion in manufacturing, which was up 4.7% year-over-year, as the easing of lockdowns allowed production to resume, satisfying pent-up demand from domestic and overseas markets. The advanced manufacturing, finance, and IT sectors continued to outperform others, recording year-over-year growth of 10%, 6.6%, and 14.5%, respectively. In the first half of 2020, retail sales plunged by 11.4% year-over-year, but the decline narrowed to 1.8% in June as compared to 16% in March. Online sales’ share of overall retail sales grew to 25.2%, up from 19.6% a year earlier. In response to the ongoing weakness, the Chinese central bank continued to maintain an accommodative monetary policy. As of July, fiscal stimulus introduced by the Chinese government since the COVID-19 outbreak exceeded RMB 8.3 trillion, or 8.6% of GDP.

In Beijing, leasing activity picked up modestly and net absorption returned to positive territory in the second quarter with the easing of lockdowns. The uptick was constrained by overall weakness in the economy and a new wave of COVID-19 infections in June. Overall, rents decreased 6.8% year-over-year or 3.0% quarter-over-quarter, while vacancy rose to 14%, up 2.7 percentage points quarter-over-quarter. Demand from tech companies remained strong, and IT tenants accounted for 33% of newly leased Grade A office space in the second quarter. In the Zhongguancun submarket of Beijing—also known as “China’s Silicon Valley”—rents remained unchanged quarter-over-quarter and vacancy remained tight at 2.1%.

Industrial and logistics real estate remained resilient in major submarkets due to limited supply and strong leasing demand from third-party logistics companies. In Shanghai, industrial rentals rose 0.9% quarter-over-quarter or 4.7% year-over-year, while vacancy edged up 2.2 percentage points to 7.5%, mainly due to the completion of two new projects.

In terms of overall market activity, the commercial investment market continued to soften in the second quarter, with total transaction volume at only RMB 39.6 billion, down 25% quarter-over-quarter. Total commercial real estate transactions in the first half of 2020 were RMB 92.4 billion, down 40% year-over-year.

Hong Kong’s economy contracted by 9.0% year-over-year in the second quarter, slightly lower than the record high 9.1% decline in the first quarter. The economy continues to be weak due to the collapse in tourism, sharply lower trade flows, and social distancing weighing on domestic spending. Private consumption fell 14.5% year-over-year in the second quarter, further deteriorating from the 10.6% decline in the first quarter. Goods exports edged down 2.1% year-over-year, narrowing from the 9.7% drop in the first quarter.

The unemployment rate hit 6.2%, the highest level in more than 15 years and up from 4.2% in the prior quarter. With limited supply, residential prices remained firm and declined by only 5.7% year-over-year, while transaction volume fell by 25%. The commercial investment market continued to be anemic in the first half of 2020 and totaled only HK$16.9 billion, down 54% year-over-year. As of June, Hong Kong’s office vacancy was 8.1% and rents declined 14.2% year-over-year, driven by soft leasing demand in the core submarkets of Central and Tsim Sha Tsui, while decentralized markets like Kowloon East and Kwai Chung experienced milder rental declines.

China’s economy appears to be back on track with second quarter GDP growth of 3.2%.

CNY has strengthened as the economy begins to recover.


In the second quarter of 2020, Japan’s real GDP contracted by 7.9% quarter-over-quarter, as consumption slumped amid the state of emergency that lasted from early April to late May. While the economy is expected to rebound in the third quarter, as economic activity has gradually resumed, many economists predict that a return to pre-pandemic levels will take more than a year. In September, Japan’s parliament elected Yoshihide Suga as the country’s new Prime Minister to succeed Shinzo Abe. The Prime Minister intends to prepare additional economic stimulus measures, which could potentially focus on supporting industries such as hospitality and travel, which are suffering greatly from the pandemic. The government has already implemented a record stimulus package of ¥230 trillion ($2.1 trillion), which is about 40% of GDP.

Office real estate fundamentals remained strong during the second quarter of 2020. Tokyo office vacancy decreased from 0.9% to 0.7% for Grade A and increased from 0.4% to 0.6% for Grade B. Office rents declined by 0.4% to ¥38,850 per tsubo for Grade A and by 0.2% to ¥24,000 per tsubo for Grade B. Vacancy rates are likely to rise slightly due to a slowdown of the global economy and an increase in companies seeking to reduce expenses by adopting long-term work-from-home policies. However, we believe that given the small size of urban residences, the cultural importance of workplace attendance, and frequent job rotations, the impact of work-from-home is likely to be subdued in Japan. In the logistics sector, the vacancy rate for large-scale, multi-tenant facilities in the Greater Tokyo area remained at a historical low of 0.6%. Rent increases in prime areas are driving tenants to newer, more affordable submarkets. Supported by robust fundamentals, investor interest in the logistics sector—from both domestic and international buyers—has continued to increase. Hospitality and—to a lesser extent—discretionary retail have been negatively impacted by sharply reduced domestic travel, the ongoing shutdown of inbound tourism, and the postponement of the Tokyo Olympics to 2021.

Real estate transaction volume in the second quarter fell by 22% year-over-year, mainly due to a decline in investment by domestic buyers such as Japanese REITs. Although the Japanese REIT Index—which plunged in March—regained some ground in the second and third quarters, it remains down 20% year-to-date.

Office fundamentals remain strong with few signs that COVID-19 is affecting demand.

Cap rates continue to compress as local institutions seek yield in today’s low interest rate environment.

J-REITs have begun to recover, but the recovery is uneven, with industrial REITs leading and hotel REITs lagging.

South Korea

In the second quarter of 2020, economic growth in South Korea declined 3.2% quarter-over-quarter, driven by a sharp drop in exports. Due to the impact of the COVID-19 pandemic, the Korean economy faces headwinds, and the Bank of Korea (BoK) forecasts that the Korean economy will contract by 1.3% in 2020 but will recover and grow by 2.8% the following year. The BoK maintained its accommodative monetary policy and its benchmark rate at 0.50%, the lowest it has ever been.

On the real estate front, the spread between prime office cap rates and Korean government bond yields (i.e., 5-year treasury bonds) stood at 320 basis points, which is above the 10-year average of approximately 260 basis points. Investment activity in the commercial office sector continued to be robust, with investment volume above $3 billion in the first half of 2020. Prime office vacancy in Seoul’s major business districts was 9.3% as of the second quarter, which is below the 10-year average of 10.6%. The low vacancy rate can be attributed to the robust tenant demand for office space in Seoul. Net absorption of office space in Seoul was positive in the first half of 2020, despite COVID-19.

Residential prices in Seoul continued to rise, with Seoul apartment prices increasing 11.5% year-over-year as of September 2020. The current government has been and is continuing to implement tight regulations aimed at curbing speculative investments in the residential sector. With the introduction of these regulations, there has been volatility in the sector.

As expected, the hotel and retail sectors have been impacted by the sharp decline in tourists visiting Korea.

Leasing and investment momentum in the logistics sector remains 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. Cap rates for logistics centers have continued to compress; however, a spread of 100-150 basis points remains for logistics cap rates, as compared to that of prime office cap rates.

For more information on Asia Real Estate, visit

Seoul office vacancy increased as tenants slowed their expansion due to the pandemic.

Cap rates remain wide, as institutional investors continue to seek yielding assets.

As expected, GDP growth remained negative due to the pandemic.

Angelo Gordon’s Capital Markets Perspectives

AG Capital Markets Perspectives (“CMP”) provides our portfolio managers’ views on the credit, real estate, and private equity markets. To access this quarter’s CMP and past quarterly reports, please complete the form below.

You will now be directed to the Angelo Gordon corporate site.

Proceed Cancel