The transaction volume of standing assets was US$42 billion in the first half of this year, down almost 50% year-on-year. Investors are clearly cautious, but the decline in activity is also linked to a marked deterioration in lending conditions (Exhibit 1, left chart).
As during the Global Financial Crisis, tighter lending conditions hit investment activity simply because assets have to work harder to make the numbers add up -and this is a tough sell into a downturn. But there is also evidence that tighter lending conditions hurt investment activity because it dampens investor sentiment. This in turn implies investors will become more active when lending conditions stabilize -a precursor to an improvement -or outright ease (Exhibit 1, left chart).
Such an improvement in lending conditions now looks to be in the cards. A lending conditions survey we have been running for a number of years is reporting either stable or improving lending sentiment across the region (Exhibit 1, right chart). Over the course of 2Q, borrowing costs continued to rise in Australia, Hong Kong and Singapore -largely driven by further hikes of central banks' base rates -but credit spreads have either stabilized or moved lower. South Korea reported the largest improvement, with banks now offering a higher loan-to-value (LTV) ratio since the start of the year and spreads have compressed significantly.
As long as the economic and financial outlooks remain uncertain, investors will be on their toes, but early signs of lending conditions stabilizing imply investment activity is set to pick up in the coming quarters.
Note: *Financial Conditions Index gauges the overall looseness or tightness of financial conditions in an economy. The APAC series is the average of FCI for Australia, China, Japan, and South Korea.
Note: *PGIM Real Estate Lending Conditions Barometer is constructed based on an internal survey via interaction with lending institutions across major markets in the Asia Pacific region. A scoring system is developed to reflect changes in the lending conditions. The survey is conducted on quarterly basis.
