Real estate investors are now being “careful and prudent” about deploying capital in the face of growing economic uncertainty around the world, said leading Singaporean property investment manager CapitaLand Investment.
Its half-year financial results on Thursday revealed that CapitaLand Investment’s profit fell 38% to $433 million Singaporean dollars ($316 million) for the first half of the year owing to a lower pace of “capital recycling” this year, which the firm had adopted as a cautionary stance against a troubled global economy.
“We’re being very careful, patient and prudent, as I think many of our peers … are,” the company’s chief financial officer Andrew Lim told “Squawk Box Asia” on Thursday.
“There is a lot of uncertainty out there. We are seeing interest rates rising rapidly across many countries in reaction and response to supply side and demand side inflation, which is something we haven’t seen in a very long time.”
“And I think many real estate and capital managers are being very careful about deploying capital and underwriting returns, just because we are just so uncertain about what the next six to 12 months will hold on the macroeconomic side.”
Lim said the firms’ capital deployment this year should hit a more “normalized” SG$3 billion, down from last year’s SG$11 billion.
A recession signal?
One warning sign of an economic downturn or a recession is the restraint that investors exercise over deploying capital for new investments, economists said.
In a note about recessions last month, Oxford Economics said falling investments are often a “key driver” of downturns.
“In the recessionary periods since the 1980s, around half of the decline in the Group of 7 gross domestic product in negative quarters came from investment, even though investment only averaged 20% to 22% of GDP,” Oxford Economics lead economist Adam Slater said in the note.
“As a result, near-term trends in investment are of particular importance given the current concerns about a possible global recession.”
“An investment freeze in the coming quarters is a significant risk.”
Though some indicators showed investment activity in the United States, Germany and Japan still looked strong, business sentiment about future expansions in investments in those places have weakened, Slater said.
The desire to invest in other economies such as China, the U.K. and South Korea has tailed off, he added.
Other indicators that hint at investment appetites, such as the strength of the stock markets, corporate liquidity and profits, indicate “an investment freeze in the G7 later this year looks to be very real,” Slater said.
But while a downturn seems likely, a recession can be avoided, Slater said.
“Investment might be cushioned (for a while at least) by the recent unusual build-up of backlogged capital goods orders caused by supply bottlenecks,” he said.
“Some of the indicators we have looked at also may be less worrying than they first seem. For example, the drop in U.S. corporate profits we forecast for 2022 comes after a very strong rise in 2021, which may act as a cushion.”
As for China, CapitaLand Investment’s Lim said while revenue from properties has come off the boil —particularly after pandemic lockdowns gripped major city centers like Shanghai in the second quarter of the year — the company remains committed to investing in Chinese property.
In the first half of the year, the company’s returns from China suffered not just from slower asset recycling, but also from having to extend rental rebates to its retail property tenants.
“I think we’re starting to see a gradual normalization of operations and the environment in China. We remain very confident, and we are ‘long China’ in the long term,” Lim said.
“We can’t be a leading Asian real estate investment manager if we are not significantly invested in China. And we remain very constructive on China, again, over the long term.”