BREXITAsia Pacific To Weather The Brexit Spillover

June 2016

Asia Pacific To Weather The Brexit Spillover

For Asia Pacific, the impact of Brexit on the economy will largely be contained as the region’s trade exposure to the UK is limited; the shock will be counteracted with appropriate fiscal

and monetary measures

The fall in the British pound presents a buying opportunity for regional investors to increase their exposure in the UK,

a top-tier global investment target; core markets in the Asia Pacific region should see heightened investment activity with

financial conditions likely to remain favorable

There will be no material impact on occupier markets as Asia Pacific’s growth and attraction remain conditioned on

structural factors such as its generally favorable demographic base, rapid urbanization and a rising consumer class among its

emerging countries

Asia Pacific To Weather The Brexit Spillover

Cushman & Wakefield Research Publication 2016

What Happened?

On June 23, 2016, the United Kingdom (UK) held a referendum on whether to remain in or leave the European Union (EU). Although polls indicated that the “Remain” campaign would prevail by a thin margin, the actual vote went the other way, surprising the global equity markets into turmoil.

What Does It Mean For The Asia Pacific Economy?

While the aftermath of Brexit is still unfolding, the immediate effects – gyration in currency markets and a US$3 trillion sell-off in global stock markets before a bounce which started on Tuesday – have been a source of concern as uncertainty could weaken business and consumer confidence. However, we do not believe that this short-term turbulence represents the onset of a new Global Financial Crisis.

Moreover, we expect the economic impact of the Brexit vote on the Asia Pacific region will be limited. The UK is a fairly small export destination for the region, accounting for just about 2% of total exports. While knock-on effects on the EU, which accounts for an estimated 12% of exports from Asia Pacific, could have a deeper impact, the largest economies of France and Germany, however, are expected to remain resilient.

Of greater concern are the currency markets, which have seen the British pound fall by 11.5% against the U.S. dollar following the referendum, before it started to climb again on Tuesday. Post-vote currency fluctuations pose risks for businesses and in turn, for economies in the region that have posted lackluster performance. The depreciation of currencies

Asia Pacific To Weather The Brexit Spillover

2.1% Proportion

of Asia’s exports to

UK

“Any capital outflows will likely be temporary, given that the economic fundamentals of emerging

economies in the region remain intact, and their ample foreign exchange reserves to avert any sharp

depreciation in their currencies.”

across Asia Pacific, with the exception of the yen, could trigger some capital outflows especially from emerging countries, curb overall investment activity and put a damper on growth in those economies.

However, even if this scenario bears outs, the outflows will likely be temporary, given that the economic fundamentals of emerging economies in the region remain intact. These countries also have ample foreign exchange reserves to avert any sharp depreciation. Furthermore, we expect foreign direct investment in emerging Asia to ramp up once the initial uncertainty from Britain’s decision abates.

In Japan, a resurgent yen is putting renewed pressure on Japanese companies as it makes exports less competitive and cuts into repatriated profits, among other effects. This could necessitate further stimulus measures from the Bank of Japan including intervention in the foreign exchange markets.

Brexit’s impact on China has been relatively muted. Thus far, the biggest effect has been seen in moderate capital outflows. Some economists foresee an accelerating drop in the yuan over the coming months as investors flock to the U.S. dollar, but in the near term, the relative strength of the yuan generates new buying opportunities for Chinese investors in Britain.

Foreign direct investment (FDI) flows from the UK, which account for nearly 10% of total FDI flows into India mainly targeting the service sector, particularly companies that specialize in outsourcing, could see a pause. On the other hand, India has emerged to be the third largest source of FDI into UK with an increase of around 65% in 2015; Indian businesses have been using the UK as a base to expand their markets in the EU. However, in the longer term, the demand for skilled Indian workforce as well as trade and investments with India is expected to be sustained.

Cushman & Wakefield Research Publication 2016

“The UK property market has been ranked a top five global investment market for decades, and has been a prime destination especially for regional investors from Singapore, China and Hong Kong. ”

What Does It Mean For Real Estate Investors And Occupiers?

INVESTORS

Current market volatility and the strength of the dollar are expected to indefinitely delay the U.S. Federal Reserve’s plans to raise interest rates, as well as elicit an accommodative policy stance from central banks in Asia Pacific to boost their respective economies. Downward pressure on interest rates will benefit investors, while the appeal of real estate especially in markets offering attractive yield spreads could draw additional capital to the region. Hence, while we anticipate a pause in investment activity in the near term as investors take stock of the situation, we expect continuing favorable financial conditions to boost liquidity and drive property markets in Asia Pacific.

While the vote has led to some uncertainty and caused investors from the region to re-evaluate their exposure to markets in the UK, those who take a longer-term view cannot ignore the robustness and resilience of the British market, which is one of the most highly regulated, liquid and transparent in the world. The UK property market has been ranked a top five global investment market for decades, and has been a prime destination especially for regional investors from Singapore, China and Hong Kong.

Retreating British Pound

1.30

1.35

1.40

1.45

1.50

1.55

1.60

US

$ p

er G

BP

Source: Investing.com, Cushman & Wakefield

Asia Pacific To Weather The Brexit Spillover

This is not expected to change anytime soon. In fact, some investors will see a window of opportunity to buy into a world-class market – such as Guo Guangchang, chairman of Chinese private conglomerate Fosun Group, who said on Tuesday that his company is increasingly eyeing development opportunities in Europe and particularly the UK amidst the current volatility.

Key gateway cities in North America and APAC could benefit in the short term where fundamentals and attractive pricing allow. In addition, we expect the Asia Pacific region to gain from the diversification of funds from the UK, driving heightened investment activity in core Asian markets. Japan and Australia have been primary destinations for foreign capital over the last three years. Opportunities in Hong Kong, South Korea and China resulting from corporates and developers selling their assets to pare down debt and recycle capital could draw more investor interest. Similarly, Singapore could see fresh inflows of capital especially as its office market negotiates the current rental down cycle. While a recovery in Singapore’s office market is likely to be gradual especially as it works off the large volume of new supply, we can expect Singapore to benefit from its stature as a global financial hub.

OCCUPIERS

In general, decision making is anticipated to slow within certain global business sectors more than others as occupiers pause to gain a better understanding of the ramifications for their operations. However, it is also anticipated that until there is further clarity surrounding the terms of the potential exit of the UK from the EU – something yet to be enforced – that their occupancy decisions will continue to be based primarily on local market conditions rather than global uncertainty. Consumer and business confidence metrics will be some of the most important indicators to monitor as they have strong correlations with leasing fundamentals and ultimately signal the future direction of vacancy and rents.

However, beyond the short-term volatility, we do not expect Brexit to materially impact occupier markets in Asia Pacific other than perhaps through some rebalancing of portfolios. The region’s growth and attraction remain very much conditioned on structural factors such as its favorable demographic base, rapid urbanization and a rising consumer class especially among emerging countries.

“However, beyond the short term

volatility, we do not expect Brexit

to materially impact occupier markets in Asia

Pacific other than perhaps some rebalancing of

portfolios.”

Cushman & Wakefield Research Publication 2016

THE SILVER LINING

In the long run, we expect the region to weather any Brexit-induced volatility as favorable domestic factors take center stage once again, cementing Asia Pacific as the fastest-growing region in the medium term. This, in turn, should ensure that fundamentals in the region’s commercial real estate markets remain compelling.

For more information, contact:

Cushman & Wakefield (C&W) is known the world-over as an industry knowledge leader. Through the delivery of timely, accurate, high-quality research reports on the leading trends, markets around the world and business issues of the day, we aim to assist our clients in making property decisions that meet their objectives and enhance their competitive position.

In addition to producing regular reports such as global rankings and local quarterly updates available on a regular basis, C&W also provides customized studies to meet specific information needs of owners, occupiers and investors.

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This report has been prepared solely for information purposes. It does not purport to be a complete description of the markets or developments contained in this material. The information on which this report is based has been obtained from sources we believe to be reliable, but we have not independently verified such information and we do not guarantee that the information is accurate or complete. Published by Corporate Communications.

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CAPITAL MARKETS

Gary Hollis Managing Director, Capital Markets Asia Pacific T +(65) 6317 8350 Gary.Hollis@cushwake.com

RESEARCH AND INVESTMENT STRATEGY

Sigrid Zialcita Managing Director, Research and Investment Strategy Asia Pacific T+ (65) 6232 0875 sigrid.zialcita@cushwake.com

GLOBAL OCCUPIER SERVICES

Jason Whitcombe Managing Director, Global Occupier Services Asia Pacific T +(65) 6232 0896 Jason.Whitcombe@ap.cushwake.com