In Hong Kong, retail sales fell 32.8 per cent year on year in May, the 16th straight monthly decline. The triple whammy of the collapse in tourist arrivals, a prolonged recession and the Covid-19 pandemic caused prime high street rents to plunge 15 per cent year on year in the first half of 2020, having already fallen almost 20 per cent last year, data from CBRE shows.

In a sign of the severity of the hit to capital values in the city’s retail sector, prices for high street shops in core locations plummeted 25 per cent in the first half of this year, by far the sharpest decline in the Asia-Pacific region.

Yet, for investors seeking to capitalise on the distress in Hong Kong’s retail sector, bargains are few and far between. Presenting its outlook for the city’s property market on July 8, CBRE noted that capital values have fallen “largely to adjust for rental declines. The number of distressed assets remains limited and [rental] yields have only expanded marginally”.

The modest shift in pricing, even in the region’s hardest hit market, shows that Asia’s commercial real estate investment market – which was already in the late stage of the cycle before the pandemic struck, with prime yields in all sectors standing at historic lows in the main markets – has yet to reflect the deterioration in occupier fundamentals in many countries.

In an indication of how negligible the correction in prices has been so far, an internal survey of CBRE’s investment and valuation teams across Asia, conducted between May 26 and June 1, revealed that prime office yields in core locations had risen in just three out of 17 major cities, and only modestly at that.

Even in the more vulnerable retail sector, where yields have increased in most markets, the correction has been minor. In Hong Kong, shopping centre yields in core locations stood in a range of between 3 and 4 per cent at the end of May, more or less where they stood in March and the second-lowest in the region after Taipei.

The survey notes that there is a mismatch between buyers’ and sellers’ price expectations. While investors are pushing for bigger discounts, vendors are standing firm, especially when it comes to prime office and logistics properties.

To be sure, pricing in all real estate markets is currently in a state of flux. Global transaction volumes have fallen sharply since the beginning of this year, partly because of lockdowns and travel restrictions. This has made it difficult for agents to estimate the precise level of yields. The size of the correction in Asia will only become clearer towards the end of this year, when investment activity is likely to pick up.

However, financial and region-specific factors limit the scope for a major price adjustment.

First, unlike the last global economic crisis in 2008, the financial system is in a much stronger position and benchmark lending rates are close to zero.

As Blackrock, a large asset manager, noted in a brief published on April 27, “we are not seeing the same ticking time bombs, such as the US subprime mortgages or leveraged buyouts. Bank balance sheets are not under the same degree of jeopardy”. This increases the holding power of owners of real estate, reducing the scope for sales of distressed assets.

Second, many owners in Asia who sold their properties following the 2008 crash ended up regretting their decision as prices and rents rebounded quickly.

According to a report by AEW, a prominent investor in the region, published last month, capital values in all major office markets in Asia have surpassed their peaks in 2008-09. In Melbourne, Sydney and Hong Kong, they are currently more than double their previous peaks.

Third, there is still a huge amount of capital targeting Asian commercial real estate despite the severity of the Covid-19 shock. A report published by JLL on April 21 noted that there is around US$40 billion of “dry powder” waiting to be deployed across the region. The weight of this capital continues to exert downward pressure on yields.

Fourth, although some parts of the market – particularly the hotel and retail sectors – remain overpriced and are likely to see yields rise significantly from current levels, Asian commercial property still offers investors attractive returns compared with other asset classes.

The massive virus-induced stimulus provided by the world’s leading central banks has pushed benchmark bond yields closer to zero in the region’s developed markets. While stock market dividend yields are higher, corporate earnings have collapsed.

Andrew Haskins, head of research for Asia at Colliers, argues that yields of 2.8 to 5.8 per cent for prime office assets, and 3.5 to 6.1 per cent for logistics properties, in the region’s main markets are attractive. “Rents are under pressure in various city office markets, and a few logistics centres. However, the pressure [on rents] is lower than pressure on corporate profits in equity markets,” he notes.

Lastly, investors have become more risk-averse since the pandemic erupted. Although yield levels are key, stable and reliable cash flows are far more important. Investors are prioritising resilient income-producing properties in prime locations in core markets, which explains why the e-commerce-driven logistics sector has attracted significant investment in recent months, notably in China and Australia.

The gap between buyers’ and owners’ expectations on pricing needs to narrow in order for liquidity in Asia’s commercial property market to pick up. Yet even in the absence of a sharper correction, the region’s real estate market retains its appeal.