Real estate dilemma

The local real estate sector may be in for more difficult times ahead.

A recent study by international real estate consulting firm Jones Lang LaSalle says that fourth quarter 2008 property market indicators are expected to reflect a significant slowdown across many markets in the Asia Pacific region.

In the office sector, occupational demand and rentals are likely to contract further in key financial centers, where downsizing by banks and other financial institutions is accelerating.

According to the study released just recently, the retail sector has held up relatively well to date, but it is also set to see a major slowdown in many markets as consumer spending wanes and unemployment rises.

Residential markets, both high-end and mass, are also seeing weaker conditions generally, with some major price corrections in markets that have seen big run-ups in recent years, it added.

It noted that in the Asia Pacific region, the past two weeks have seen further signs of economic deterioration, both in mature and emerging economies. Arguably the most worrying trends relate to China, which until recently was expected to hold up relatively well, but is now seeing a raft of negative indicators, including a slump in manufacturing and mounting job losses, it added.

The study also revealed that most investors remain sidelined, waiting for forced selling to begin in earnest and property prices to reflect distressed levels. Middle East investors have started to retreat from Asia and have cancelled development projects and joint venture development plans, it said.

Jones Lang LaSalle also pointed out that despite the ongoing efforts of governments and central banks on both fronts, global property markets continue to be plagued by tight credit and rapidly weakening economic conditions. In particular, China – once expected to weather the crisis – is seeing signs of economic deterioration.

It likewise revealed that corporate occupiers are pulling back on near-term occupancy objectives and deferring “blend-and-extend” transactions in office, industrial and hotel sectors around the world.

Occupiers in virtually all sectors, it said, are taking a “wait-and-see” approach to leasing commitments out of strategic choice or financial necessity. Some industry sectors continue to report increased capital spending, particularly in healthcare and petrochemicals.

Value denial continues to afflict many owners and investors, even as property market fundamentals continue to decline. Pricing has declined as much as 25 to 30 percent or more in many areas, yet most owners seem to crave evidence – as measured by a history of closed transactions - that the bottoming process is in place, it said.

It stressed that the key question for owners and investors is whether to sell now or wait. But it suggested that from the current vantage point, holding may not be the best strategy. Property fundamentals will almost certainly worsen two years from now as leasing rates are re-set and vacancies rise, which could have a negative impact on value, it added.

On a brighter note, the study showed that some industry sectors continue to report increased capital spending, particularly healthcare and petrochemicals. Sustainability also remains a focus for corporations, with many indicating continued interest in sustainable strategies, given the cost savings they ultimately deliver.

In addition, Jones Lang Lasalle pointed out that a number of occupiers express ongoing support for expansion in emerging markets throughout Asia Pacific.

It stressed that while the forecast remains murky, there are several key signs that may signal a move further toward recovery. In Asia for instance, the reemergence of the high-net-worth investor who has been sitting on the sidelines for several years now may provide the first boost of confidence to the marketplace. 

One thing that may hit our real estate sector real bad is the expected drop in OFW remittances. Most real estate developers attest to the fact that OFWs account for a really large part of their sales, especially those that cater to the P1.5 to P3 million residential condominium unit market. In fact, the past few years saw many developers setting up international sales offices just to go after the OFWs as well as Filipinos and former Filipinos residing abroad who have kept their ties back here.

As far as the office market is concerned, we may experience very soon a glut in office space. Many of those that built and built may soon realize that they (the buyers) are not coming after all. Office rental rates may soon drop, as a consequence of depressed demand and too much office space available.

The current crisis will definitely separate the men from the boys. Developers who have gone through and survived the Asian financial crisis and consequent real estate debacle in the late ’90s will not allow themselves to be victims again so we are pretty sure that they are more careful this time. But many which have sprouted just to cash in on the recent boom in the property market may have to be extra careful, lest they be burned.

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