PART 1 The Economy

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T H E ECONOMY I RISING INFLATION IN ASIA PACIFIC BE ALERT BUT NOT ALARMED

Inflation is arguably the headline economic news circling the world as the war between Russia and Ukraine continues to ravage in Europe and supply chain stress, after a brief respite at the start of the year, is re-intensifying. Central banks have been forced to act, testing both business and consumer confidence. Following an initial analysis based on data to March of this year, we re-evaluate the situation in Asia Pacific to highlight what’s changed, what has not and the revised outlook.

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APAC - WHAT’S CHANGED: | Inflationary pressures are now clearly evident in the region | Supply chain stress has intensified once again | Central banks are now acting… and aggressively | Confidence is being tested | GDP growth has been revised down, but by varying degrees APAC - WHAT’S NOT CHANGED: | Asia Pacific is still less exposed to inflationary pressures than other regions | Peak inflation is still expected in Q2 – Q3 2022 for most markets | Most labour markets remain tight | Consumers are still spending | Asia Pacific exports remain strong

APAC – WHAT TO WATCH | Trajectory of business and consumer confidence | Stabilisation in fuel pricing | China’s near-term economic data as Shanghai reopens | Demand for regional exports

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The spotlight has firmly been on inflation since the start of the year. Initial opinions that the primary cause of inflation being due to supply chain bottlenecks have given way to greater pressures emanating from the devasting Russia-Ukraine war. The resulting resurgence of supply chain stress has further compounded the situation. Consequently, markets around the world are encountering inflationary environments that have not been experienced for a number of years, or in some cases a number of decades. Clearly this rings the bell of caution, but the situation in Asia Pacific does need to be placed into context compared to other regions. The strongest inflationary forces continue to be felt in parts of Europe and in the U.S. In the U.S. inflation reached 8.6% y-o-y in March of this year and as of May had marginally eased to 8.5%, but the INFLATION

pullback is minor compared to the level of price growth already in the system. To put these figures into context, inflation in the U.S. is at its highest level in the last 40 years and is affecting many aspects of society including food, labour, materials and energy. Similarly, inflation in Europe has sky-rocketed, fuelled by the economic impacts of the Russia-Ukraine war. May’s inflation figure for the Eurozone came in at 8.1% underpinned by a 39% y-o-y increase in energy pricing – a level that it has broadly been at since March. The situation is more severe in the UK with inflation running at 9.1% in May, also a 40-year high, and energy pricing up 53% y-o-y. The Bank of England has recently stated it expects this figure to lift further with inflation to hit 10% in the fourth quarter of the year.

FIGURE 1: CPI FOR SELECTED MARKETS (% Y-O-Y)

2% 3% 4% 5% 6% 7% 8% 9% 10%

0% 1%

Sep-21

May-22

2018-19 avge

Source: Moody’s, Cushman & Wakefield * Australia Q1 2022

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These are extreme results which are placing severe pressure on economic systems in these regions. Turning to Asia Pacific, inflationary pressures have lifted significantly in the past few months across most of the region. Initially this was most evident in Singapore, Australia, India and Japan, though recently data has also shown a strong inflation surge in the Philippines and South Korea, all experiencing an increase of around 150-basis points (bps) or more so far this year. Elsewhere, the rises have been more muted, with inflation rising by less than 60bps in Malaysia and Hong Kong. Ostensibly the main drivers of inflation across the region are food, transport and utility pricing as the world competes for scarce products.

However, this presents both opportunities and challenges. Restrictions on food-grade oils out of Russia and Ukraine has benefited Malaysia and Indonesia via demand for palm oil, while Malaysia and Australia have benefitted from higher commodity pricing. Furthermore, the continued demand for semi-conductors and other electronic equipment has helped support export demand from North Asia. Indeed, it is important to note the significant difference in consumer price inflation and producer price inflation, at least at the regional level. Average CPI increase across the region stands at 2.4% y-o-y as at Q1 2022 compared to 9.0% y-o-y for PPI. Although these measures are not a like-for-like comparison, it clearly shows that producers are facing soaring input prices.

The continued demand for semi conductors and other electronic equipment has helped support export demand from North Asia.

FIGURE 2: ASIA PACIFIC CPI VS PPI (% Y-O-Y)

12%

10%

8%

6%

4%

2%

0%

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

-2%

-4%

CPI

PPI

Source: Moody’s, Cushman & Wakefield -6%

Taking an objective view, inflation in Asia Pacific has risen quickly this year and is likely to rise further over the coming months. New Zealand is currently at a 30-year high, Australia is at a 20-year high and Singapore a 10-year high; all represent significant stress. However, in contrast, several markets remain below pre-COVID (2018-19) averages including mainland China, Hong Kong and Vietnam. So, while price pressures are increasing, they are far from universal across the region.

Ultimately, it should be recognised that inflation in Asia Pacific, although increasing, is somewhat more benign than seen elsewhere. Although there is a lot of water still to navigate, long term inflation expectations (as seen in the Australian 10-year inflation break even rate) remain within target bands. As such current forecasts expect the worst of these inflationary pressure are acting at present through to early Q3 for the majority of markets, before stabilising over the remainder of the year and then starting to normalise from 2023.

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INTEREST RATES

Rising inflation has forced central banks to act both earlier and more aggressively than previously envisaged. The U.S. Fed lifted rates by 75bps in June (the first of such a level since 1994) following a 50-basis point rise in May. Simultaneously the bank has also signalled the beginning of the reduction of its balance sheet (quantitative tightening). These measures are squarely aimed at reigning in rampant inflation – a distinct change from the recent past when rate hikes were targeting policy normalisation while trying to push inflation higher but without hurting the labour market. In this vein further rate hikes will follow. Where the U.S. Fed has led, others have followed albeit once again at varying speeds. Within Asia Pacific, central

banks in New Zealand, South Korea and the Monetary Authority of Singapore led the pack, with rates rising by up to 175bps so far in this tightening cycle. In recent months central banks in India and Australia have joined their ranks, with both lifting interest rates earlier and more aggressively than their recent commentary would have suggested. In the past two months the RBI has lifted a cumulative total of 90bps, while the RBA has lifted 125bps from May to July. Likewise, the Philippines also moved policy rates higher for the first time in years and Bank Negara Malaysia has also made two consecutive 25-basis point hikes. In contrast, the PBoC is facing a different challenge. Inflation is comfortably below

transitory but rather that they are more entrenched and so require swifter action. Of course, this requires a balancing act of being aggressive enough to curb inflation but not so aggressive as to blunt the post COVID economic recovery. Confidence remains key here and it is clear that both consumer and business confidence has taken a hit of late. Notwithstanding, consumers are continuing to spend at least for now and many markets continue to record positive real sales volume growth, both year-on-year and quarter on-quarter, though as the effects of interest rate rises take hold the level of growth is expected to slow. These remain key indicators to watch as central banks progress further into the tightening cycle.

the 3% target rate, but economic growth is facing increasing headwinds. The ongoing zero-COVID policy pushed Shanghai into a lockdown, dramatically curbing economic growth. Restrictions are now easing, which should provide a boost, but this may not resolve issues associated with a sluggish property market and relatively weak domestic consumption. The PBoC has therefore become more accommodative in its approach and further easing is likely over the remainder of the year in addition to the Government’s recent tax relief package. For the rest of the world, it’s clear that central banks no longer subscribe to the thesis that inflationary effects are

FIGURE 4: CONSUMER CONFIDENCE (NEUTRAL = 100)

110

FIGURE 3: CENTRAL BANK POLICY RATES 2010-2025

108

10%

106

9%

104

8%

102

7%

100

6%

98

5%

96

4%

3%

94

2%

92

1%

90

0%

-1%

AUS

CHN

EA19

UK

JPN

KOR

NZ

US

Australia

Mainland China

India

Japan

South Korea

New Zealand

Singapore

US

Euro Zone

UK

Source: OECD, Cushman & Wakefield

Source: Moody’s, Cushman & Wakefield

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ECONOMIC GROWTH

Putting these factors together, the global economy has entered choppier waters and the growth outlook has been revised downwards by approximately USD1.3trn in 2022 since the start of the year. At the regional level, growth in Europe has been revised downwards substantially, accounting for two-thirds of global total, with North America accounting for a further 20%. More positively for the Asia Pacific region is that the outlook for many markets remain relatively unchanged from the start of the year. In part this has been due to ongoing strong demand for goods produced in the region despite the obvious global headwinds and that

domestic consumption remains buoyant across most markets with the lifting of domestic movement restrictions and reopening of international borders. The extent to which this situation continues, i.e. robust regional economic growth, is somewhat dependent on China and the strength of its rebound from the current movement restrictions which have started to dent intraregional trade. This remains a critical indicator going forward. At the sub-regional scale New Zealand and India have seen the greatest downwards revisions to 2022 growth since the start of the year. The former is predominantly due to lower demand in

China for dairy products together with the aggressive rate hikes of the RBNZ which could push rates into restrictive territory at around 4% (according to recent policy announcements), though these negative effects maybe partially offset later in the year by increased international tourism. Similarly, inflation in India has increased dramatically of late, which will likely see the RBI also turn more aggressive in its approach and therefore likely to stymie growth. Lastly Singapore’s growth outlook has been dented as global supply chains and therefore global trade, upon which the city-state is highly dependent, have come under greater stress.

Elsewhere the impacts are more benign so far and indeed Australia, Malaysia and Indonesia have received a modest boost from increasing commodity prices. However, this should be tempered with a more uncertain outlook both globally and regionally over the coming months. Greater clarity could be restored if central banks can walk the tightrope of policy normalisation and successfully tame inflation without having too deleterious effects on their national economies, but they will need to simultaneously clearly signal their intentions every step of the way.

FIGURE 5: 2022 GDP OUTLOOK BY FORECAST VINTAGE (FEBRUARY VS JUNE)

2% 3% 4% 5% 6% 7% 8% 9% 10%

More positively for the Asia Pacific region is that the outlook for many markets remain relatively unchanged from the start of the year.

0% 1%

February

June

Source: Moody’s, Cushman & Wakefield

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Property is a lagging indicator and so the impact on local property markets will continue to unfold. Certainly, the region started the year on a positive note, with positive office net absorption of over 17 million square feet in the first quarter and preliminary analysis suggests momentum has been broadly maintained in the second quarter for many markets, albeit with localised dampening in mainland China. Furthermore, office rents have stabilised across the region with more markets starting to record modest quarter on-quarter growth. The industrial sector remains robust, with strong demand starting to lead to increasing rental growth in some markets, most markedly in Australia, Singapore and parts of South East Asia. Lastly, the investment market has had a lacklustre start to the year, no doubt clouded by the inflation outlook, down around 15% on 2021 as at April, though it should be remembered that calendar year 2021 was a record for investment. As markets navigate the current economic conditions, the impacts on the property sector will become clearer, though there are presently a few fundamentals that occupiers and investors should consider: COMMERCIAL REAL ESTATE

OCCUPIERS | Inflation linked rental escalations – annual rental escalations are comparatively uncommon in the majority of markets in Asia Pacific, though are more prominent in Australia and India. More often, these escalations are at a specified nominal rate, though can be inflation linked. Occupiers should check any rental escalation clauses and plan for cost increases accordingly. | Position in the market cycle is a dominant driver of market rents, rather than inflation per se. As such, it is not a de facto outcome that higher inflation will lead to higher market rents. Occupiers should conduct a thorough market review in locations with forthcoming lease expiries to fully understand the local competitive landscape.

INVESTORS | The region is only at the beginning of the rate tightening cycle. Investors need to prepare for further rate hikes over the coming months and so should ensure they have clarity on their debt position and any potential forthcoming refinancing requirements. | Property yields have been on a downward trajectory for several years, most markedly and recently in the industrial sector. While it is unlikely that this will reverse immediately, upward forces have increased markedly as spreads have narrowed. Most tier 1 markets in Asia Pacific are now in the position where property yield spreads to 10-year government bonds are below their longer-term average – a sharp reversal from the start of the year.

| Economic rents for new developments need to be carefully scrutinised. Construction costs have risen dramatically the world over and former assumptions may no longer be applicable. | Keep a close eye on competition from offshore capital. Current market conditions could keep investor attention closer to home, but could also sharpen attention on fewer, select markets that show greater immunity to current conditions and stronger growth potential. | In light of the above, investors would do well to aggressively challenge their assumptions when making buy and sell decisions in this market.

| Construction costs have increased dramatically, which potentially could affect occupiers in two ways. Firstly, rents on new developments seeking

pre-commitment may be revised upwards to meet economic rent

requirements. Secondly, fit-out costs have also increased which need to be factored into capital expenditure budgets. | Labour market forecasts remain little changed and the war for talent is expected to continue. Occupiers should still focus on appropriate workplace strategies that engender talent retention and attraction.

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CONTACTS DR. DOMINIC BROWN Global Head of Demographic Insights, APAC-lead dominic.brown@cushwake.com

About Cushman & Wakefield Cushman & Wakefield (NYSE: CWK) is a leading global real estate services firm that delivers exceptional value for real estate occupiers and owners. Cushman & Wakefield is among the largest real estate services firms with approximately 50,000 employees in over 400 offices and approximately 60 countries. In 2021, the firm had revenue of $9.4 billion across core services of property, facilities and project management, leasing, capital markets, and valuation and other services. To learn more, visit www.cushmanwakefield. com or follow @CushWake on Twitter.