By Christine Li, Senior Director & Head of Research for Singapore and Lai Wyai Kay, Associate Director of Research for Asia Pacific.
The US-China trade tension is escalating. President Donald Trump last month accelerated the risk of a trade war by more than doubling planned tariffs to 25 per cent on US$200 billion in Chinese imports in a bid to nudge China to re-think its behaviour. Chinese officials have retaliated. The world’s two largest economies will likely be at loggerheads for months to come.
The proposed tariffs have not been formally imposed and investment confidence and regional currencies have taken a beating somewhat. Still, we expect the impact on commercial real estate to be limited. Pressure on the industrial sector will probably be the greatest, against all other commercial real estate sectors.
Since the trade tension began in late March, the FTSE/ASEAN 40 index, which tracks leading stocks from five Southeast Asian financial markets including Indonesia, Philippines, Singapore, Malaysia and Thailand, has lost about 13% between March and June. It later regained by about 4.2% in July but year to date, the index is still in the red, signaling that investors continue to be concerned about the trade tension.
Most ASEAN currencies have also fallen against the US dollar as emerging markets’ aversion to risk increases. Investors prefer to park their monies in US dollars and Japanese Yen. Currencies in the regional bloc, which count China and US among its biggest trading partners, have come under pressure including the Indonesian rupiah and the Malaysian ringgit. Coupled with continued tightening by the Fed, a number of ASEAN central banks have raised rates to stem capital outflows to maintain stability in their currencies, risking an unwanted drag on economic growth. This situation could be further complicated if the Chinese authority weakens its currency to counter Trump’s tariffs.
Even as US-China trade tensions threaten to derail global economic growth, the extent of the market rout is however far below the volatility levels seen in previous crises such as the global financial crisis, Eurozone crisis and Brexit.
The ongoing tension will also likely lead to slowing foreign direct investment (FDI) into emerging Southeast Asia, should the region get caught in the trade war crossfire.
The recent announcement of new economic initiatives for the Indo-Pacific region seems to suggest that all is not lost for Singapore and neighbouring Southeast Asian countries. According to US Secretary of State Pompeo, US is seeking partnership, not domination in Indo-Pacific region, and will invest US$113 million in new technology, energy, infrastructure initiatives. This move is a positive one considering that the withdrawal of the US from the Transpacific Partnership (TPP) was just over a year ago. The US added a further US$300 million in funding for security cooperation in the Indo-Pacific region at the ASEAN Regional Forum on August 4.
This demonstrates that the US is still keen to keep trade flows active with the rest of the Asia Pacific region. Even if the trade war does escalate in the months to come, the effects of the higher tariffs can be mitigated by trade diversion and supply chain diversification, with exports being diverted from the more expensive China to other competing suppliers such as Vietnam, Thailand and Malaysia.
In fact, Vietnam has already been benefiting from the ongoing trade spat between US and China, as more investors are attracted to the “mini-China” story, which Vietnam is positioning itself as a hub for foreign manufacturing. Private equity giant, Warbug Pincus, in May this year announced a joint venture with Vietnamese developer, Becamex IDC, to develop institutional grade industrial and logistics properties in the country.
Despite rumblings of a trade war, real estate investments in the Asia Pacific, according to Real Capital Analytics, have remained on track for another banner year with overall volumes in the first half of 2018 reaching US$360 billion – the highest ever for the same period. Economic growth in the region, projected at well over 5%, remains the best prospect globally ahead of US and Europe.
The ensuing uncertainty of a trade war could lead to a rise in risk aversion. Commercial real estate and development opportunities continue to operate on the region’s market dynamics, anchored by sustained urbanisation, income growth and investments in infrastructure. Property investments will also benefit from a rising US currency and a pressure to deploy capital.
In the case of Singapore, the escalation of the US-China trade war will have a mixed impact on Singapore’s commercial activity. On one hand, suppliers of intermediate components to China will likely see reduced demand for their goods. If trade through our port slows down, the industrial properties near the port will start to feel the impact, as headwinds in the global trade will lead to weaker occupier demand, especially from trade-related clusters such as manufacturing, wholesale trade, transport and storage.
On the other hand, Trump’s imposition of tariffs on Chinese exports may prompt Chinese companies to shift some of their manufacturing base to Southeast Asia. While the low-cost production lines are expected to move to destinations such as Vietnam and Thailand, high-tech manufacturing activity could conceivably make its way to Singapore to tap on its pool of skilled workers and developed infrastructure.
On the commercial real estate front, as more of such Chinese companies move their manufacturing bases to cheaper alternatives in Southeast Asia, they are still likely to keep their regional headquarter functions in Singapore given the republic’s status as a favoured location for finance and business, together with the city state’s competitive edge over other ASEAN countries.
As a trade war would increase tariffs and most likely the cost of automotive, chemicals, consumer goods, electronics, and metals & minerals, these sectors are identified to be directly impacted by the trade war tariffs.
Based on Cushman & Wakefield’s estimates, the space occupied by companies in these sectors only account for approximately 7% of the 28 million square feet of total office stock in the Central Business District (CBD). In addition, not all of these companies have manufacturing operations in China. As such, the impacted proportion is likely to be significantly less than 7%.
Certainly, if the trade tension were to develop into a full-scale trade war, it will have a more devastating impact on both the US and China, hurting global confidence and derail economic outlook in both countries.
According to a China report, a full-on US-China trade war would also potentially have a large impact on the global supply chain that uses China as a base. China is home to an army of manufacturing facilities and logistics operations that supply, assemble and distribute the components and goods that make up everyday life for much of the world.
We are already seeing capital outflows from the emerging markets in Southeast Asia subjecting the currencies of these nations to some pressure. Singapore being a trade-dependent and open economy, will not be spared of any financial market turbulence and curtailed investment. This scenario is currently not on the cards, even as the two countries continue to exchange threats.
Nevertheless, the long-term growth prospects of the Southeast Asian region remain intact, driven by the rise of the middle class, which is expected to more than double in size by 2030, from 2015 levels. Singapore will continue to support the region’s development and will benefit from its strategic location in a region with promising growth potential.
Note: This story originally appeared in The Business Times Singapore.
Christine Li is the Senior Director and Head of Research for Singapore at Cushman & Wakefield.
Lai Wyai Kay is the Associate Director of Research for Asia Pacific at Cushman & Wakefield.