Nicholas Spiro

The View | Asia is likely to be a global commercial property market bright spot

With financial market vulnerabilities in focus, commercial property is a pressure point that is causing the most concern

However, the pessimism pervading the US-centric view of commercial property need not apply to the Asia-Pacific, where the office market is more resilient

Reading Time:3 minutes

Why you can trust SCMP

Tourists view cherry blossoms at Seokchon Lake Park, with office towers in the distance, in Seoul, South Korea, on March 30. Rents for grade A offices in Seoul’s central business districts are expected to rise around 5 per cent this year. Photo: Xinhua

Nicholas Spiro

Published: 9:30pm, 3 Apr 2023

In financial markets, analysts and commentators are speculating frantically about the next shoe to drop. The sudden collapse of three mid-sized US banks and the emergency rescue of a systemically important European lender in the space of a fortnight have sharpened the focus on vulnerabilities in the financial system.

The pressure point that is causing the most concern right now is commercial property. Even before the banking turmoil, real estate was under scrutiny. A toxic combination of a large and highly leveraged asset class, the sharp increase in interest rates, increasingly stretched valuations and the pandemic-induced disruption to the office market has undermined sentiment significantly.

A report published by S&P Global on March 17 noted that real estate is the sector in global stock markets that investors have been betting against the most. An S&P500 index of office-focused real estate investment trusts (Reits) has fallen nearly 50 per cent over the past year to its lowest level since early 2010.

More worryingly, more vulnerable US regional and community banks hold nearly a third of commercial real estate mortgages, and own 20 per cent of the sector’s total assets, compared with 13 per cent and 4 per cent respectively for America’s 25 largest lenders, data from Cohen & Steers shows.

The risk is a “negative feedback loop” in which tighter lending conditions lead to debt distress, causing a wave of defaults among office landlords that result in even sharper falls in prices.

This is probably too pessimistic. What is clear, however, is that it is a US-centric view of commercial property. In Asia, the office market – the sector that concerns investors the most right now – is much more resilient. This is mainly attributable to much higher occupancy rates than in the US.

The View | Asia is likely to be a global commercial property market bright spot

With financial market vulnerabilities in focus, commercial property is a pressure point that is causing the most concern However, the pessimism pervading the US-centric view of commercial property need not apply to the Asia-Pacific, where the office market is more resilient

With financial market vulnerabilities in focus, commercial property is a pressure point that is causing the most concern

However, the pessimism pervading the US-centric view of commercial property need not apply to the Asia-Pacific, where the office market is more resilient