U-turn in business sentiments to impact office take-ups
In office markets where the supply cycles have peaked or are starting to peak, such as in Singapore, Beijing and Tokyo, absorption is more important than ever. We have seen a fair amount of corporate expansion in these markets which has helped to soak up a significant level of supply coming through. Clearly, not all the excess office demand were generated from better trade conditions, and long term trends also point to the emergence of new office tenants such as from the technology sector. However, it is definitely against the backdrop of brighter business prospects which have boosted the confidence of companies to tie themselves down to office leases and to increase their employee numbers. Any drastic U-turn in business sentiments will have an impact on office absorption, and that could amplify the supply imbalance in these markets.
As corporates ramp up their capital expenditure, there is an effect on the labour markets too. The job markets in Japan, Singapore, Hong Kong and Australia, amongst others, are at their tightest in the last ten years. This situation has intensified in the last two years as companies doubled down on hiring. The only piece of the puzzle that has been glaringly missing has been the wage growth that is being expected as a result of the tight labour markets. We had been rather hopeful that the momentum from the economic expansion in recent times will finally find its way into wages. Indeed, the Japanese government also put in place policies and tax benefits to encourage companies to raise wages, in the hope of spurring the lethargic domestic consumption.
Focus on non-discretionary retail real estate
The retail sector continues to suffer, partly due to an overall slowdown in retail spending, and also from the substitution effect of online retailing. Prime retail high streets in Sydney, Melbourne, Tokyo and Hong Kong have relied heavily on tourism footfall and spending. The domestic consumer has steered clear of discretionary spending, or at least have cut back on that, making it hard for prime retail rents to see strong growth. In the absence of domestic consumption growth, investors should focus on non-discretionary retail, such as suburban malls which are supported by wide residential catchments. In fact, should the impact of a slowdown in trade dampen the already dim prospects in domestic consumption, it further makes the case for investors to play to the resilient tune of non-discretionary retail.
In the logistics sectors, the mega trends of technology and e-commerce have been the factors propelling investor interest in the last few years. Fundamentally, whether the retail spending is made online or physically, any impact on consumer confidence is likely to be felt if the trade spat worsens. Also, we tend to forget that logistics do not just serve the retailing or 3PL segments. In a market such as Japan, the manufacturing sector is a major demand source for modern logistics, and to a lesser extent, this is probably similar in China and Australia.