Fixed Income Insights
Key Highlights:
- Commercial real estate markets globally are struggling with the secular force of hybrid working, reinforced by the cyclical headwinds of cost control and high interest rates
- A key concern is whether the downturn could materially impact banks, the main lenders to the sector
- Separately, we take a look at Asian currency bonds, which are out of favour in most global asset allocations yet could be worth reconsidering
Is the continuing downturn in commercial real estate a risk to bank balance sheets and AT1 bonds?
Commercial real estate markets globally are struggling with the secular force of hybrid working, reinforced by the cyclical headwinds of cost control and high interest rates. Polarization is continuing in Europe. Central, flexible, green Grade A offices remain in demand. Other areas risk obsolescence. In the US, the office market is under severe pressure: national office prices are already 20 per cent off their peak. Commercial real estate in Hong Kong is seeing record-high vacancies: rents fell 6 per cent year-on-year in 2023. The question is whether the downturn could materially impact banks, the main lenders to the sector.
Why Asian currency bonds are worth a second look?
A strong US dollar and the view that Asian currency bonds are difficult to access means they are out of favour in most global asset allocations. Yet inflation in most of Asia has been lower than elsewhere, resulting in shallower hiking cycles post pandemic. Growth forecasts for most of emerging Asia are reasonable without the need for monetary stimulus. And Asian central banks may also be keen to avoid currency weakness at a time when it could be unnecessarily disruptive to economic prospects. While each country has its unique idiosyncrasies, could the overall market be worthy of reconsideration by investors?