China/Hong Kong

As a result of the COVID-19 outbreak, China’s economy contracted 6.8% year-over-year in the first quarter of 2020, the largest and most significant decline since 1992. Monthly data suggests that activity improved in March, as efforts to contain COVID-19 were relaxed. The contraction in industrial production eased from -13.5% year-over-year in January and February to -7.3% in March. The services production index similarly improved, rising from -13.0% to -9.1%. In response to the ongoing weakness, the Chinese central bank implemented new monetary policy supports, including lowering the 1-year and 5-year prime rates by 20 basis points and 10 basis points, respectively.

Shelter-in-place orders in many Chinese cities and concerns about economic uncertainty created additional downward pressure on office leasing demand. Most tenants put expansion plans on hold, driving a sharp decline in leasing activity. In Beijing, net absorption was negative in the first quarter, and leasing activity declined 60% year-over-year. Overall, rents decreased 5.0% year-over-year, while vacancy stood at 11.3%, unchanged from the previous quarter. Demand from tech companies remained strong, as many of the Chinese internet giants continued to grow. For example, in the Zhongguancun submarket of Beijing – also known as “China’s Silicon Valley” – rents remained unchanged quarter-over-quarter and vacancy edged up modestly to 1.8%, up 0.5 percentage points.

Industrial and logistics real estate remained resilient in major submarkets due to limited supply and strong leasing demand from fresh food e-commerce and third-party logistics (3PLs) companies. In Shanghai, industrial rentals rose 0.9% quarter-over-quarter, while vacancy dropped 1.3 percentage points to 5.3%.

In terms of overall market activity, the commercial investment market continued to soften in the first quarter, with total transaction volume at only RMB 58 billion, down 30% quarter-over-quarter.

In the first quarter, Hong Kong’s economy shrank 8.9% year-over-year – the largest contraction on record – as tourism collapsed, trade flows slowed sharply, and social distancing weighed on domestic spending. Unemployment hit a new high of 4.2%, the highest level in more than nine years and up from 3.3% in the last quarter. With limited supply, residential unit prices remained firm and declined by only 1.4% year-over-year, while transaction volume fell by 31%. The commercial investment market continued to be anemic in the first quarter – down 37% year-over-year – and we expect that to persist for the rest of 2020. As of March, Hong Kong’s office vacancy was 7.5% and rents declined 7.7% year-over-year, driven by softening leasing demand in the core submarkets of Central and Tsim Sha Tsui.

China’s economy displayed a significant recovery in the second quarter, with GDP growth of 3.2%.

CNY maintained its relative weakness against USD through the pandemic.


In the first quarter of 2020, Japan’s real GDP contracted at an annual rate of 2.2%. Many economists predict that the economy will further contract in the second quarter, as the government declared a state of emergency that lasted from early April to late May. To support the economy, the Japanese government has approved a record stimulus package of ¥230 trillion ($2.1 trillion), which is about 40% of GDP. This package includes providing cash payments to all residents of Japan and subsidies to small and medium-sized companies suffering from the impact of COVID-19. As a result, the current unemployment rate has remained at 2.9%, and the number of corporate bankruptcies remains low. Japanese banks are well-capitalized and continue to lend, albeit with slightly more conservative assumptions.

Office real estate fundamentals remained strong during the first quarter of 2020. Vacancy rates for Grade A offices are low, at 0.9% in Tokyo and 0.5% in Osaka, and vacancy rates for Grade B offices in Tokyo and Osaka have fallen to 0.4%. Some research analysts believe that vacancy rates will likely rise slightly due to a global recession and more domestic companies adopting work-from-home measures. However, in the near term, the office market is expected to remain relatively stable, as most of the supply for 2020 and 2021 has been pre-leased, and a sharp increase in unemployment is not expected in Japan.
In the logistics sector, the e-commerce market continues to expand in response to COVID-19. In the first quarter, the vacancy rate for large-scale, multi-tenant facilities was at a record low of 0.5% in the Greater Tokyo area. Given that rents continue to rise in prime areas, tenant demand is expanding to facilities in newer, more affordable submarkets. The supply of modern facilities is still very limited, so there is strong tenant demand to upgrade from older facilities when newly built space becomes available. Supported by robust fundamentals, investor interest in the logistics sector continues to grow, from both domestic and international buyers.

Like other listed REIT markets, the Japanese REIT (“J-REIT”) Index plunged approximately 27% in the first quarter, though it has recovered slightly in the second quarter. Notably, logistics J-REITs are trading at a 50% premium to NAV – higher than pre-COVID-19 levels – reflecting investor expectations of growing demand from e-commerce. In contrast, hotel J-REITs are trading at a 50% discount to NAV in response to sharply reduced domestic travel, the ongoing shutdown of inbound tourism, and the postponement of the Tokyo Olympics to 2021.

Office occupancy remained at record low levels, and rents are still on the rise given strong fundamentals. The impact of COVID-19 has yet to be felt in the office market.

Cap rates compressed in early 2020, as institutional investors continue to seek core properties with yield.

The J-REIT Index – led by industrial REITs – has begun to recover, though hotel REITs have lagged.

South Korea

In the first quarter of 2020, economic growth in South Korea declined 1.3% quarter-over-quarter, mainly driven by the drop in private consumption and exports. As expected, the Bank of Korea’s (BoK) economic growth forecasts for 2020 are lower, stemming from the impact of the COVID-19 pandemic. The BoK lowered its benchmark policy rate from 1.25% to 0.75% in March 2020, followed by a further rate cut to 0.50% in May – the lowest it has ever been. The rate cut is in-line with the BoK’s accommodative monetary policy, which aims to help sustain economic growth.

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 300 basis points, which is above the 10-year average of approximately 250 basis points. Investment activity in the commercial office sector was robust in the first quarter of 2020 at $2 billion, up 14% year-over-year. However, the quarter’s robust investment volume can largely be attributed to deals that were signed prior to the outbreak of COVID-19. Prime office vacancy in Seoul’s major business districts declined further to 6.8% in the first quarter, down from 7.7% in 2019 and the lowest it’s been in ten years. However, most of the leasing activity in this quarter stemmed from lease agreements signed prior to the outbreak of COVID-19, therefore we may witness a slowdown in leasing activity given the current environment.

Residential prices in Seoul continued to rise, with Seoul apartment prices increasing 6.2% year-over-year as of June 2020. The current government is implementing new policy measures aimed at curbing speculative investments in the residential sector, including stringent regulations for mortgage loans, among other items.

Leasing and investment momentum in the logistics space 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 are nearly fully leased up, with only frictional vacancy. Cap rates for logistics centers have continued to compress; however, a spread of approximately 100-150 basis points still exists for logistics cap rates, as compared to that of prime office cap rates.

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Office vacancy continued to improve, although the impact of COVID-19 is likely to curtail demand in the coming year.

Cap rates have compressed as investors seek yielding assets.

As expected, GDP growth turned negative in the wake of the pandemic.

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