PART 1 The Economy

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PA R T 1 : T H E E CONOM Y

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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