Challenges for Asia as 2020 economic growth set to stall

On Tuesday, the IMF released their bi-annual World Economic Outlook, with the growth forecasts for 2020 grabbing the headlines. While some have been predicting a more violent drop in output over the next 12 months, the IMF numbers were still quite sobering.

Global economic output is forecast to contract three percent in 2020, while Asia as a region is set to see zero growth, the lowest growth collectively for nearly 60 years. This is notably lower than during the Asian Financial Crisis of 1997 (+1.3%) and the Global Financial Crisis of 2008/09 (+4.7%). For the growth engine of the world economy of the last three decades, this drop in Asian growth is unprecedented during modern times.

While China and India, the two behemoths of the region are still expected to see growth remain in positive territory, significant drops across much of emerging and developed Asia will bring many challenges to real estate markets.

Activity and sentiment down across regional property markets

From Knight Frank’s teams across the Asian region, we know that the lockdowns that have been implemented have brought a sharp reduction in activity and sentiment. By mid-April, all of our teams with the exception of China were seeing markets largely freeze up, with a drop in active requirements, completed transactions and an increase in deals postponed. This is across both residential and commercial real estate spaces. 

While the region remains in lockdown this trend is expected to continue, although the uptick in activity in China gives us some optimism for what we could see as countries move into the recovery phase. China’s residential markets have spluttered back to life, while industrial markets have most notably been active over the last two weeks. Although constrained by the drop in external demand and a tepid and cautious return to consumption, China’s example does provide us with some optimism for other Asian markets. 

Shape of the recovery

While the IMF figures paint a grim picture for 2020, much discussion is on the shape and type of recovery we are going to see across the region. The direct impact in a number of key sectors, increase in unemployment, and the corresponding impact this will have as it multiplies through the economy means that the scars from 2020 are likely to be felt for some time. However, we also know from SARS and other more temporary economic shocks that economies can bounce back.

The IMF, under a base case scenario, that the virus will be under control in the second half of the year, are forecasting that the Asian economies could do just that, with strong growth across the board in 2021. While there is much uncertainty around these numbers, this optimistic scenario should be food for thought for investors and owners in these markets. 

Opportunities in uncertainty

So how should real estate owners, developers and investors be viewing the Asian markets? Well for current owners it is about being defensive, getting discussions going with tenants, being flexible, looking for win-win scenarios in order to maintain occupancy levels. It is perhaps the time to reposition assets, sell off non-core property or look to diversify into areas that are likely to see steady demand.

For those looking at the markets with cash, then the current turmoil could present some opportunities. Sectors more resilient to the coronavirus, such as logistics, healthcare and datacentres would be an obvious strategy, or buying repriced assets that could rebound in 2021. Distress is also likely to selectively come through in several markets, with developers or investors looking to improve balance sheets or partner up with overseas equity. Hospitality and certain residential segments could certainly be two areas where opportunities emerge.

Ultimately, as the IMF and our teams know, 2020 will be a challenging year. But from challenging times can often emerge winning strategies.