New Zealand Commercial Design Trends Series NZ Commercial Design Trends Vol. 30/6 - Page 29

Below:Distinctive new Grade A office developments in Singapore include South Beach Tower, due for completion in the fourth quarter of 2014. More than half the space in the building is under negotiation and RaboBank has already secured approximately 2800m2. With the onset of the global financial crisis (GFC) in late 2007, financial markets were faced with an unprecedented shock. While the crisis had its roots in the US mortgage market, the flow-on effects through the rest of the financial system were substantial, and commercial property was not exempt. Commercial property was impacted on two fronts. Within capital markets, at the onset of the crisis in 2008 and 2009, liquidity dried up, borrowing costs skyrocketed, and many investors were forced to deleverage. At the same time, the underlying tenant demand for commercial property was hit as businesses and consumers tightened their belts. The combined effect was a sharp fall in the value of many commercial property assets. Income returns offered some protection, but in many cases the fall in capital values was large enough to push total returns into the red. After 2009, the dynamic shifted as the initial effects of the crisis wore off and liquidity started to return to the market. In response to the financial crisis, policy makers globally cut interest rates and encouraged liquidity with schemes such as the Troubled Asset Relief Program (TARP) and Quantitative Easing, while at the same time cutting interest rates to historically low levels in an effort to spur growth. The resulting excess liquidity and low interest rate environment has seen investors become increasingly focused on income yield, a fact which has benefited Asian office markets. From 2010, the relatively attractive yields on offer for Asian office property, together with relatively stronger underlying economic growth, have caused an inflow of international capital, which has helped support returns. Since 2010, this capital inflow has been the primary driver of office property returns with yields firming over most markets. The impact of the crisis was most pronounced in the office markets of North America and Europe where a long run-up in commercial property values had encouraged borrowing and speculation. Asian markets were shielded to some degree by more resilient domestic demand, lower borrowing, less institutionalised commercial property markets and less speculative development. Figure 1 below demonstrates how the office property investment market cycle in Asia differed from that in the United States and the United Kingdom. Figure 1: In both the American and Asian markets, returns fell from 2007 and bottomed out in 2009. However, whereas returns in the United States fell sharply for two years before recovering, returns in Asia softened in 2008 and were only marginally negative in 2009. The UK downturn was also quite pronounced but it preceded the other two markets by about a year. Within Asia, the experience was different across national markets. In Korea and Taiwan, total returns were never negative. Returns in Korea fell sharply from almost 27% in 2007 to just over 5% in 2008, but stabilised in subsequent years. Taiwan’s returns fell in 2009, but bounced back strongly in 2011 to double their pre-crisis level. These markets benefited from close links to the Chinese economy and strong domestic growth. Both these factors kept the underlying demand for office space high, which in turn supported returns. In F