APAC commercial property prices were down around 3% on average in 2020, after a 1% rise in 2019. But the coronavirus-induced decline has been modest compared to past downturns, suggesting that the impact on banks’ commercial real estate loans will generally be much smaller this time.
Across individual markets, the pandemic’s impact on CRE prices is mixed. Singapore, Japan, and Hong Kong have been the hardest hit, whereas South Korea, China, and Indonesia have seen modest gains. Meanwhile, Hong Kong’s market is showing signs of a recovery after large price falls in recent years.
Office rents have stayed below the pre-crisis level of Q4 2019 in most APAC economies. Hong Kong and Singapore have fared the worst and retail rents in both cities remain under immense pressure, which could weigh on capital values. But industrial rents in Hong Kong have rebounded, supported by demand from tech and e-commerce players.
While credit risks in CRE loans have risen, APAC banks are generally well capitalised to cope with CRE-related losses. CRE loan exposures are also mostly not elevated. Policy actions offering relief for the sector and a global recovery should provide more support.
Still, banks will need to be vigilant about further price drops and the long-term impact of the pandemic. A key concern is whether the pandemic will trigger fundamental changes in demand for commercial properties, which could lead to chronic oversupply, depressed rents, and defaults.
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