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Rental and capital values will decline across most of the region on the back of slower occupational and investor demand together with the rapid runup seen in recent years.

Although many of the regional markets are likely to see a major correction in values, underlying longterm drivers and economic growth prospects should ensure that most real estate markets in AsiaPacific return to the growth phase some time in 2010 or 2011.

 The research said that demand for office space in major financial centres is being significantly impacted by job losses in the financial sector, and occupational demand in many other office markets is slowing on the back of weaker economic conditions generally. The retail and residential sectors are vulnerable to faltering retail spending and rising unemployment, while the industrial sector will be impacted by the slowdown in international trade.

Globally, the reduced amount of debt available to fund new transactions has led to a sharp fall in commercial real estate transaction volumes this year. The latest blow to the investment market is the retreat of German openended funds, which are now backing away from new purchases, but have yet to feel pressured to sell.

In the Middle East, the need for more equity and less debt is resulting in a repatriation of funds back to the region. Regional capital market conditions have weakened.

 In AsiaPacific, the number of investment deals remains low. Debt availability continues to be tight and the bid/ask spread between sellers and buyers is inhibiting deal flow, a standoff that is expected to continue over the term.

Capital values of Grade A offices have already declined for several quarters in Tokyo and in the third quarter this year started to contract in Hong Kong, Singapore and Shanghai (Pudong). Capital value growth has also weakened or stalled in other office markets in the region.

Going forward, yields are expected to soften further in most markets as risk premiums and required rates of return have risen. Retail yields held relatively firm in the third quarter of this year, although transactional evidence has been thin. Yields are expected to soften as the gloomier retail market outlook will likely force vendors to price their assets more realistically.

Slowing occupational demand is now more evident. In the office sector, the financial market turmoil is starting to significantly affect the occupational market in major financial centres. Net takeup has been negative and vacancy rates on the rise for several quarters in Sydney, Tokyo, Singapore and Hong Kong (Central).

Office rentals in Bangkok, Tokyo, Hong Kong and Sydney have already moved to the downward phase of the cycle, with Singapore likely to follow suit in the fourth quarter of this year. The largest rental declines over the next one to two years are expected to be seen in the mature markets on the back of a demand contraction and the very strong rental increases observed in recent years.

In the Tier 1 cities in China and some Indian suburban micromarkets, the next two years will see abundant new supply hitting the market while demand will begin to fall. This will result in increased vacancy levels, and thus the risk of a major correction in rentals in the short to medium term.

In the retail sector, vacancy rates in Hong Kong and Singapore generally held firm in the third quarter of this year, though vacancy risks are rising in Hong Kong as more retailers are expected to close their businesses in the coming year. Highend retailers are still expanding in China, though on a more cautious note. Rentals remained firm in major retail markets in the third quarter of this year, though more difficult trading conditions and thinner margins, together with new supply coming on line in markets such as Beijing and India, will likely result in significant downward pressure.

After a sustained period of strong rental rises, most highend residential markets have now moved past the top of their cycle. Rentals in Hong Kong, Shanghai, Singapore and Beijing contracted quarter on quarter. Residential demand will continue to be soft due to freezes and retrenchments, particularly among financial firms, and most markets are likely to see rental contraction through 2009.

In the industrial sector, rentals fell in Tokyo, Beijing and Taipei in the third quarter of 2008 but were steady or grew modestly in other markets. Weaker economic and trade growth is set to slow industrial space demand.

Rental contraction is a major risk, particularly for Singapore's hightech business parks, which were attractive alternative locations to the previously tight CBD markets that are now seeing less demand from occupiers.