Singapore | April 2020

Economic impact
of COVID-19:
Mitigating factors
for Asia Pacific
real estate
Contents Introduction
Investors have asked whether the current scenario will be similar to the financial crisis in
2008. We present six mitigating factors for Asia Pacific real estate markets.
Introduction 3
How is the situation different from 2008?
Mitigating factor 1 “A global recession that could be worse than in 2008”
4
Global central banks and governments keeping vigil
In March 2020, when COVID-19 started to affect countries
outside of Asia, global equities and bonds corrected
Mitigating factor 2 6
sharply. The IMF estimates that the global economy
Measured risk appetite has entered a recession that will be worse than in 2008
following the global financial crisis (GFC). Governments
across the globe have cut interest rates, rolled out fiscal
Mitigating factor 3 8
support and accelerated lending support.
Under-allocation to real estate may help offset denominator effect Notably, there are key differences between the GFC
and COVID-19 crisis. The former started with high
leverage levels, a dislocation in the subprime mortgage
Mitigating factor 4 9 markets, a loss in confidence in extending credit and
Interest rates are lower, providing positive asset yield spreads rising default rates amongst financial institutions.
The contagion only spread to operating companies
when lending was halted, and to real estate funds
Mitigating factor 5 10 and companies when they needed refinancing. Some
Lower supply in the pipeline portfolio managers reduced their investments in real
estate to maintain the weights between equities, bonds
and real estate in their portfolios. Recovery from the
Mitigating factor 6 10 resulting recession took almost a decade.
Interest rates are lower, providing positive asset yield spreads
The current economic shock initiated by a health event
has sharply affected consumer spending. Operating
2 | JLL
companies face severe cash flow issues and will try
to draw down on available credit facilities in the face
of rising defaults. Airlines, which have been the most
affected, have started to raise funds. Singapore Airlines
announced it would raise SGD 10 billion of debt and
SGD 5 billion of equity through a rights issue to stay
solvent. Highly leveraged consumer companies,
including hotel operators, retailers, F&B and events
companies may follow suit. We expect the economic
recession to affect different asset classes differently (see
“COVID-19 Global Real Estate Implications”, 22 March
2020). Apart from that, real estate could also be affected
if debt refinancing for assets becomes tighter if banks’
loan facilities become stretched or portfolios need to be
re-balanced.
Whilst the exact trajectory of the current crisis is
unknown, we see six factors that demonstrate that Asia
Pacific real estate is better prepared to deal with this
economic shock than ten years ago.
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Mitigating factor 1
Global central banks and governments keeping vigil
Firstly, governments around the world are easing
monetary policies and providing significant fiscal
support. Asset purchasing programs, which were
effective during the GFC, are being implemented at a
Fig 1: Fiscal support and monetary easing in Asia Pacific and the US
similar or larger scale. Many central banks have also
embarked on more aggressive and creative measures
including lending against stocks and corporate bonds to
shore up liquidity.
To address any short term liquidity gaps, central banks
have learned to inject liquidity into the system. For
example, the US Federal Reserve has provided a Primary
Dealers Credit Facility to allow abundant liquidity for
banks and Commercial Paper Funding Facility to deliver
short-term lending for working capital needs for many
businesses. For small to mid-sized companies who are
most vulnerable to the recession, many governments
are already taking into account special emergence
lending programs such as granting those companies
access to a discount window, a facility previously only
accessible to top tier banks.
commercial mortgage-backed security (CMBS) spread,
we observe that many loans continue to be originated
and at a lower interest rate, due to lower benchmark
interest rates by central banks.
A commonly used metric to gauge liquidity risk within
the global financial system is the Ted Spread, which
measures the difference between the three-month
Treasury bill and the three-month LIBOR based in USD.
The Ted Spread remains relatively stable and sit at much
lower than the 2008 peak, giving little indication of any
rise in liquidity issues.

While some buyers are struggling to figure out the

China
Fiscal Stimulus | Delivering funding
supports for hard-hit region as well as
businesses; corporate and personal tax
cut continues for 2020
Monetary easing | Injecting liquidity into
repo market while cutting several of its
key rates
Japan
Fiscal Stimulus |$1 Trn stimulus aid
announced
Monetary easing | Scaling up the
BOJ’s asset purchase program
including ETF, REITS
Australia appropriate pricing for a loan, due to widening the
Fiscal Stimulus |$138 Bil stimulus
package launched
Monetary easing | $64 Bil worth
special lending program announced;
Cut base rates by 50 bps Fig 2: The TED Spread

Korea Hong Kong Singapore

Fiscal Stimulus | $9.9 Bil stimulus
package announced coupled with $40.6
Bil USD special lending to small business
Monetary easing | Slashed call rates
by 50bps
Fiscal Stimulus |$37 Bil corona virus Fiscal Stimulus |$41 Bil spending
aid implemented stimulus implemented
Monetary easing | Cut base rates by
114bps

Malaysia United States

Fiscal Stimulus | $57.5 Bil spending
stimulus implemented
Monetary easing | Reduced policy rate
by 25bps
Fiscal Stimulus |$2 Tril stimulus
package launched
Monetary easing | $1.5 Tril liquidity to
be injected; cut Fed Fund rates by 150
bps; decided to lend against stocks
and corporate bond; currency swaps, Source: Thomson Reuters
MMLF, CPFF also announced

Source: JLL estimates

4 | JLL Mitigating factors for Asia Pacific real estate | 5

Mitigating factor 2
Measured risk appetite
Following the GFC, regulatory changes have been on high leverage to enhance returns. This has changed As real estate values have been rising for several years, asset classes and stable yielding assets with lower
introduced to reduce leverage and excessive risk-taking due to the GFC. Today, we estimate that European and the majority of investors have become gradually more income variability. The caution can be seen in the
within financial institutions. In 2008, a significant US funds deploying capital into Asia Pacific invest about cautious in the last three years, favouring lower leverage real estate funds raised in Asia Pacific in 2019, which
number of financial institutions also had their own 70% of their offshore portfolio into core assets. In Asia levels, broader diversification across geographies and dropped to a nine-year low.
real estate investment funds, which had to be sold or Pacific, there is a strong preference for core assets,
liquidated. These are no longer prevalent due to new while only 40% of funds surveyed by Hodes Weil prefer
regulations. Furthermore, in 2008, a material portion opportunistic strategies. Fig 5: Amount raised by opportunistic funds holding a final close between 2008 and 2019
of real estate funds were opportunistic funds that took 20 30
18
Fig 3: Risk preference, by location of institution 25
16
14
20
12
10 15
8
10
6
4
5
2
0 0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Amount raised by opportunistic funds (USD billions) No. of Funds Closed

Source: PERE, JLL estimates

Source: Hodes Weill 2019 report, JLL estimates

For pension funds, we estimate that loan-to-value ratios that average LTV ratios are lower in Asia Pacific than
do not go beyond 20-40% on an asset level. Our recent EMEA or the Americas.
survey of leverage levels for prime office assets shows

Fig 4: Loan to value ratios on average for prime office assets by region

Source: JLL estimates

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Mitigating factor 3
Under-allocation to real estate may help offset denominator effect
In 2008, when global equities markets underwent
a severe correction, some pension funds became
unintentionally overweight real estate assets due to
the sudden decline in their overall portfolio value
Fig 6: Target and actual allocation to real estate by location of institution in 2019
Source: Hodes Weill 2019 report, JLL estimates
According to the Hodes Weill report, while target
allocations to real estate continue to rise globally over
the last few years, most investors remain under-invested
in the asset class. Despite actively investing in real
estate, most institutions find that rising equity markets
have capped real estate weightings in portfolios, which
continued to lag target allocations.
While the sharp correction in equity markets in March
this year could have pushed up investors’ portfolio
weightings in private real estate momentarily, we believe
8 | JLL
Mitigating factor 4
Interest rates are lower, providing positive asset yield spreads
(denominator). Some funds sold real estate assets, Compared to 2008, interest rates are lower and more The positive spread provides some buffer above cost
despite poor market timing, in order to correct this importantly, commercial asset yields are above of funding, even if incomes were to be slightly affected
‘denominator effect’. government bond yields. This positive spread was not by the economic recession. Potentially, given the
there in 2008, as investors were bullish about rental substantial liquidity injected into markets and extremely
growth in 2007-2008 and acquired assets at yields low interest rates, renewed interest in real estate
below the cost of funding in anticipation of growth. investment could result in some yield compression.
Fig 7: Office passing yields spread over 10-year bond in 2019 versus 2007
Office yield spread (%)
Seoul
3.2% -0.2%
Tokyo
2.6% 0.6%
Hong Kong
1.6% 0.0%
Singapore
1.5% 0.1%
investors are unlikely to sell real estate assets to correct
their weightings. Most of the 40-50 investors we spoke
to over the last two weeks still have dry powder and
need to deploy capital into Asia Pacific real estate, but
are taking time to assess the implications of the current
crisis before making their next steps. Several investors
are open to taking advantage of the disruption
and expect 2H2020 to be a golden opportunity to Sydney
acquire assets.
3.3% -0.8%
2019 2007
Source: JLL
Mitigating factors for Asia Pacific real estate | 9
Mitigating factor 5
Lower supply in the pipeline
In 2005-2008, positive sentiment globally drove a
significant increase in construction activity. As a result,
the upcoming pipeline supply of office space in
2009-2013 was 9.2% on an annual basis. In contrast,
Fig 8: New supply over existing stock in Asia Pacific
Source: JLL
Mitigating factor 6
Swifter recovery from COVID-19
Finally, while high infection rates were first discovered
in Asia Pacific, decisive and firm containment measures
have enabled governments to slow the spread of the
virus in the last two months. Swift action, cooperative
businesses and compliant citizens have all contributed
to the outcome. In China (see “Are green shoots
emerging in China?”, 8 April), most of the employees
10 | JLL
the upcoming supply of office space in most cities in
2020-2024 is much lower at 5.6% on an annual basis.
We expect the lower underlying vacancy in 2020-2024
to provide support for rents and capital values.
have resumed work in offices while flights to and from
Wuhan have resumed. Whilst the economic impacts
will still be felt, we believe the swifter recovery and
deep resilience of Asia Pacific cities could contribute to
stronger investor interest over the next few quarters.
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Regina Lim Sungmin Park, CFA
Executive Director, Asia Pacific Senior Research Manager, Asia Pacific
Capital Markets Capital Markets
+65 97833297 +65 90625867
Regina.lim@ap.jll.com Sungmin.Park@ap.jll.com

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