Understanding the ‘New Normal’ in Asia’s Commercial Real Estate Market – Real Estate & Construction

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Hong Kong point of view

Significant year-on-year GDP growth of 8% and 7.6% in the first two quarters of 2021 respectively ended the negative GDP growth recorded in 2019 and 2020. Strict pandemic restrictions and near -Absence of local COVID-19 19 cases boosted market confidence, leading to a gradual increase in real estate transaction volumes.

Widespread adoption of remote work and cost concerns have reduced demand for large office spaces, leading to massive corporate downsizing and a preference for flexible tenures and shared office space. Further decline in rents is expected before a rebound in 2022. On the other hand, falling rents and rising vacancy rates provide tenants with a range of office relocation and restructuring options.

Due to social distancing orders and travel restrictions, retailers have reduced costs and increased profitability by reducing their physical presence and improving their online sales channel. As rents in major commercial areas have fallen to record lows since the 2003 SARS outbreak, retailers such as American Eagle Outfitters and Decathlon have absorbed vacant homes that previously housed high-end luxury brands in anticipation of the reopening of the city’s borders and the recovery of the tourism industry.

The industrial sector has rebounded faster than the other two commercial sectors, with its investment transactions representing a large percentage of commercial real estate transactions in 2021. The meteoric rise of e-commerce during the pandemic has boosted demand for logistics, spaces cold storage and warehouse. facilities. In addition, considering the rapid development of telecommunications and 5G technology, the need for instantaneous data analytics, reliable internet and cloud services and sufficient storage for data has further increased the demand and expansion of data centers.

The government has supported the commercial real estate market through various initiatives in different sectors. Most notably, the removal of the double ad valorem stamp duty in November 2020 and a 10% increase in loan-to-value ratio caps since August 2020 are encouraging buyers to borrow more money to acquire non-residential properties. Additionally, under a pilot program launched in March 2021 by the Department of Lands, land premiums for lease amendments for the redevelopment of pre-1987 industrial buildings are now charged at standard rates. Finally, leasing and investment transactions have been stimulated by financial incentives and border control measures. While the consumer voucher program has increased local consumption, medium-term plans for cross-border travel are aided by ongoing discussions between the governments of Hong Kong, China and Macau.

Japan’s point of view

The Japanese real estate market is one of the largest in the world in terms of transaction size due to a variety of factors, including the ability of foreigners to hold freehold land interests, Japan’s stable yields and the business environment. low risk investment. Although the pandemic has affected the real estate market in Japan, its impact has not been as severe as in other countries hard hit by COVID-19, such as the United States and Europe. Investor demand for Japanese real estate remains strong as the market is generally seen as an attractive option during times of instability and turmoil in the global market.

The commercial office sector in Japan stagnated in 2020, with many owners opting to watch the market before taking significant action. However, it looks like more assets are expected to enter the market in 2021 and beyond. The sector is expected to become more active as the COVID-19 pandemic continues to subside. With the growing adoption of remote working and an expected influx of vacant office space over the next few years, questions remain as to how rental rates and returns will be affected.

Unlike the office sector, the pandemic has led to a surge in demand for certain asset classes in Japan. Spurred by the pandemic, the rise of e-commerce and remote working has created the need for large-scale, state-of-the-art data center and logistics facilities. Several large-scale logistics facilities have been sold over the past year and more are expected to enter the market in the near future. Likewise, major data center developers and operators have entered into contracts to build several data centers and campuses in Japan. Demand for these asset classes is expected to continue to rise for the foreseeable future.

Other asset classes that have seen growth in demand over the past few years and are expected to continue to grow include: (i) multi-family residential portfolios, as they offer investors regular returns and a default rate relatively low, and (ii) student accommodation. .

Finally, a segment of the market that remains small but is expected to grow exponentially is the ultra-luxury residential market, particularly in Tokyo and ski resort areas such as Nagano and Hokkaido. Driven primarily by ultra-high net worth individuals overseas, this segment has started to show signs of recovery from the effects of the pandemic and demand is expected to soar.

Overall, the real estate market in Japan remains buoyant. While uncertainty persists for other sectors that have been hit harder by the pandemic, such as retail and hospitality, traditional asset classes such as commercial offices are expected to experience a definite rebound. Investor optimism remains high for the Japanese real estate market and demand for a variety of asset classes is expected to continue over the next few years.

h2.* Address the legal aspects of real estate transactions*

We are seeing the growth and recovery of two robust commercial real estate markets, but the legalities involved before and after investment or rental decisions should be kept in mind. Interested investors should seek legal advice prior to acquisition to ensure their position is closely protected and to be aware of any mousetraps or complex government requirements. With the help of an experienced legal expert, businesses will be well positioned to maximize the benefits of current market circumstances.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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