>INFLATION OR DEFLATION WHICH WAY IS ASIA HEADED? (CUSHMAN AND WAKEFIELD)

A REPORT ON THE ASIA PACIFIC ECONOMY & ITS IMPACT ON COMMERCIAL REAL ESTATE

Young populations and low debt levels enhance long-term real estate investment opportunities in many asian countries

A logical strategy
The current debate raging is whether we are headed for inflation. And if so, what will be the effect on commercial real estate prices? Recent Government and central bank actions have resulted in unusual monetary and fiscal policies ranging from quantitative easing in the UK, ‘cash for clunkers’ in the USA and very large bank loans in China. Some view these policies, put in place since the credit crunch hit a year ago with the collapse of Lehmann, as being inflationary. Others argue that with output running at well below capacity, inflation is impossible, and deflation is the more likely scenario. Here we separate out consumer price inflation from asset-price inflation, and discuss that in the medium- to longer term, inflation is the more likely scenario for Asia, not including Japan. This goes to show that investing in certain Asian real estate asset markets remains a logical strategy in the present economy.

Figuring out where we stand
Consumer price indexes are currently low in most Asian countries, as demand and prices of things like commodities have fallen along with global GDP output. Real estate asset prices are falling as the availability of debt is curtailed, leading to a shifting of yields upwards. Governments across the globe are printing and spending money in an effort to restart credit flows put a floor under falling asset prices and boost consumer demand. But what will happen next in Asia? Generally there are two schools of thought:

1.Printing and spending money will prove to be inflationary and in high 1. inflationary times one should not hold cash, but rather real assets including real estate.

2. We are in a deflationary period and prices will continue to fall, as demand is far below the global economy’s output capacity. In a deflationary period, it is better to hold cash, as you will be able to get a better deal tomorrow.

In order to prop up weak economies and put cash back into the seized banking system, governments and central banks have introduced regimes of increasing money supply with exceptionally low interest rates, for example in the USA and UK. Usually, low interest rates:

1. Drive investors to put money into assets - and that includes real estate – compressing yields. The opportunity cost of holding savings is reduced, pushing investors to buy assets.

2. Drive down the value of the currency against other currencies.

3. Are linked to increasing money supply, which can have an inflationary effect on goods and services.

An easy way to see the interconnection of these three points is to think about the prices of money1.

1. The price of money relative to time --> interest rates
2. The price of money relative to foreign currency --> exchange rates
3. The price of money relative to all goods and services --> inflation rates

To see the full report: ASIA PACIFIC ECONOMY