China/Hong Kong

China’s economy grew 6.5% year-over-year in the fourth quarter of 2020, representing further recovery as compared to the 4.9% year-over-year growth of the third quarter, and registered full-year growth of 2.3%. The swift containment of the COVID-19 outbreak within the nation has supported a quick economic rebound and made China the only major economy in the world to avoid a contraction in 2020. Consumption continued to play a key role in economic growth, with online retail sales of physical goods growing 14.8% year-over-year in 2020. The Chinese central bank has maintained a generally neutral monetary policy but slowed its liquidity injections, as aggregate financing and M2 supply registered weaker growth in the fourth quarter and the loan prime rate (LPR) has remained flat for eight consecutive months.

In Beijing, leasing activity remained subdued due to the economic slowdown, but relocation demand accelerated in the fourth quarter. Net absorption continued to rebound from 8,832 square meters in the third quarter to 60,592 square meters in the fourth quarter, largely driven by relocation demand. Approximately 65% of all leasing transactions came from domestic tenants, as foreign tenants continued to remain cautious. Despite ongoing pressure, tenants from the IT and finance industries remained a steady source of demand, accounting for 43% and 16% of the leased space, respectively. The Grade A office market has recorded rental declines for eight consecutive quarters, as competition between landlords has intensified and tenants have reduced their spending budgets. Overall, rents decreased 7.9% year-over-year or 2.6% quarter-over-quarter, while vacancy edged up to 15.4%, up 1.4 percentage points quarter-over-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 2.8%.

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 0.2% quarter-over-quarter and recorded 2.4% growth year-over-year; meanwhile, vacancy edged up 0.8 percentage points to 8.1%, as leasing of newly completed supply in emerging submarkets slowed modestly.

In terms of overall market activity, the commercial investment market continued to recover in the fourth quarter, with total transaction volume at RMB 56 billion—up 23% quarter-over-quarter. Total commercial real estate transactions in 2020 amounted to RMB 194 billion, down 28% year-over-year. Domestic investors dominated the market and accounted for 79% of the total transactions. However, there was an uptick in inquiries and site inspections by foreign investors despite ongoing travel restrictions. Office remained the most popular asset class, accounting for over 50% of the full-year 2020 transaction volume.

Hong Kong’s economy contracted 6.1% in full year 2020 and 3.0% year-over-year in the fourth quarter, a continued improvement from the 3.5% contraction in the third quarter. The improvement has been attributed to a better external environment and stronger financial market activity. Merchandise export volumes saw moderate year-over-year growth of 5.9% in real terms in the fourth quarter, mainly underpinned by the gradual recovery led by mainland China. Exports of services saw a narrower decline of 29.3% in the fourth quarter, but still recorded a decline of 36.8% in real terms in full year 2020, as inbound tourism remained at a standstill and cross-boundary transport and business services stayed sluggish. Private consumption expenditure posted its steepest ever year-over-year decline, at 10.1% in real terms, but the decline narrowed to 7.2% in the fourth quarter. The unemployment rate continued to deteriorate to 6.6%, the highest level in nearly 16 years and up moderately from 6.4% in the prior quarter.

With limited supply, both transaction volume and residential prices for full year 2020 remained flat despite the economic downturn. The commercial investment market continued to be anemic, totaling only HK$45.5 billion in full year 2020, down 14% year-over-year and hitting its lowest level since 2009. In the fourth quarter, transaction volume doubled to HK$16.8 billion as investment in the office sector picked up significantly, driven by active mainland Chinese buyers and a landmark en-bloc office transaction. As of December, Hong Kong’s office vacancy climbed to 8.3%—the highest it has been in 15 years—while rents declined 13% year-over-year; this was 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 rebounded significantly, witnessing GDP growth of 18.3% in the first quarter as business activity surged.

CNY retreated slightly against the USD.

Hong Kong’s office vacancy climbed to 8.9%, the highest level in 15 years. 


In the fourth quarter of 2020, Japan’s real GDP increased 2.8% quarter-over-quarter, driven by a rise in consumption, capital expenditure, and external demand. This is the second consecutive quarter of growth after three quarters of decline. However, many economists predict that the economy will shrink again in the first quarter of 2021, as the government implemented a second state of emergency, which was extended to late March in Tokyo and the three surrounding prefectures. Nonetheless, the Nikkei 225 Index reached over ¥30,000 for the first time since 1990, as central banks around the world—including Japan’s—have embarked on significant monetary easing. To help the economy recover from the pandemic, the Japanese government approved a third stimulus package of ¥73 trillion ($0.7 trillion), building on the record stimulus packages totaling ¥230 trillion ($2.1 trillion) from last April and May. The third package includes extensions of subsidy programs to promote domestic travel and help companies maintain employment. As a result, the current unemployment rate remains low at 2.9%.

Office real estate fundamentals remained stable during the fourth quarter. Tokyo office vacancy only increased from 0.9% to 1.2% for Grade A stock and from 0.7% to 1.4% for Grade B stock. Office rents declined by 2.7% to ¥37,650 per tsubo for Grade A and by 1.9% to ¥23,250 per tsubo for Grade B. Vacancy rates are likely to rise slightly due to a slowdown of the economy after the second state of emergency and an uptick in companies seeking to reduce expenses.

In the logistics sector, the e-commerce market continues to expand in response to COVID-19. The vacancy rate for large-scale, multi-tenant facilities in the Greater Tokyo area remained historically low at 0.5% in the fourth quarter of 2020. 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.

Real estate transaction volume in 2020 increased 5.7% year-over-year to ¥3.8 trillion, mostly driven by large acquisitions from international buyers. J-REIT investment volume remained unchanged during 2020, showing strong liquidity despite the pandemic. While investor appetite is expected to continue in 2021, the current COVID-19 situation is likely to encourage a flight to quality for office, logistics, and residential assets.

Tokyo office fundamentals remain strong despite the pandemic. 

Cap rates have tightened, but spreads are still wide as compared to the previous peak in 2006-2007. 

The J-REIT index has recovered significantly, driving down yields.

South Korea

In the fourth quarter of 2020, the Korean economy grew 1.2% quarter-over-quarter, mainly driven by increased investments and exports. For full year 2020, the Korean economy contracted 1.0% amid the COVID-19 pandemic. The Bank of Korea (BoK) forecasts that the Korean economy will grow 3.0% year-over-year in 2021, on the back of a global economic recovery. The BoK continues to maintain its accommodative monetary policy, and the benchmark policy rate remains at 0.50%, the lowest it has ever been. The spread of COVID-19 in Korea has been relatively moderate, with new confirmed cases below 700 per day in recent weeks. Vaccinations began in February 2021, and approximately 1% of the population had been vaccinated as of the end of March.

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 290 basis points, which is still above the 10-year average of approximately 260 basis points. Despite the pandemic, cap rates for prime office assets continued to compress and are at historic lows. Investment activity in the commercial office sector was extremely robust, driven by abundant liquidity in the Korean market and heightened investor demand for stable core assets. In 2020, office transaction volume reached a record high of $12 billion, which surpasses the previous record by 13%. Prime office vacancy in Seoul’s major business districts was 14.4% as of the fourth quarter, and vacancy increased due to the completion of a few new large office assets in the Yeouido business district.

Leasing and investment momentum in the logistics sector remains robust, with the outbreak of COVID-19 catalyzing 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 compressed rapidly over the last three years, decreasing approximately 200 basis points. In fact, for the first time ever, a few prime logistics assets recently traded at cap rates near prime office cap rates of 4.0%.

Despite tight regulations aimed at curbing speculative investments in the residential sector, residential prices in Seoul have continued to rise, with Seoul apartment prices increasing 16.0% year-over-year as of March 2021. Ill-conceived government measures, such as restricting supply in core Seoul markets, have contributed to price increases in the sector.

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Seoul’s office vacancy remained high, as new supply from a few large properties weighed on the market.

Cap rate spreads continue to tighten, although they are wide by historic standards. 

The Korean economy is showing early signs of a recovery. 

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