THE fallout from the global subprime crisis has had a varied impact on property markets across the Asia Pacific. Demand for office, residential and retail space has held up well, but investment volumes are likely to fall this year, says the latest property digest by Jones Lang LaSalle.

"While the property markets in Asia Pacific have lagged both the United States and Europe in being impacted by the subprime fallout, there is evidence that they will not escape unscathed," said Jane Murray, head of research, at Jones Lang LaSalle, Asia Pacific.

"To date, this has been seen mainly in relation to investment volumes while leasing activity and associated indicators have posted another healthy quarterly result."

Demand held up well in the region's office markets during the first three months of this year. Office tenants have a renewed focus on costs, but this is yet to be reflected in staff cuts, said the report.

Combined with minimal new supply in most markets in Asia Pacific, vacancy levels in the office sector have remained low.

Beijing, Bangkok and Jakarta are exceptions to this trend, each seeing significant injections of new supply to the market by the end of the year. Rentals have reached new highs in key financial markets including Tokyo, Singapore and Sydney, where Grade A vacancy levels are all below 5 percent.

In Tokyo, a sharp slowing in rental growth is under way and in Singapore, there is a beginning of a softening in prelet rates.

Shanghai has begun to brace itself for slowing demand in its Pudong New Area among its vital financial services tenants.

At the other end of the spectrum, the Manila office market has seen strong growth in business process outsourcing, due to the increased emphasis by multinational companies on lowering operational costs. Many companies are moving from expensive CBD locations to cheaper peripheral, said the report.

Singapore, for example, is seeing strong enquiry levels for built-to-suit options in business park locations, driving up rental levels there.

Buoyant labor market conditions and solid domestic spending in most markets continue to support the retail sector across the region, except in Japan, where consumer demand remains sluggish. Additional factors driving retail sales included the growth in tourist numbers and expansionary government budgets in Singapore and Australia. However, high occupancy costs as well as supply constraints remain the major impediments to retailer expansion.

Similarly, the luxury residential sector has continued to see strong leasing and sales activity.

In the investment side, the region's capital markets have also been somewhat affected by the US subprime crisis, according to the digest.

While direct commercial real estate investment in Asia Pacific jumped 27 percent to a record US$121 billion in 2007 from a year earlier, a decline in overall transaction volumes in the region is expected this year.

The impact on asset pricing and transaction volumes has been strongest in the region's major, or more mature, markets. In Tokyo, Singapore, Sydney and Melbourne, office capital values appear to have peaked, while a slowing in price growth is also likely for the Hong Kong market.

However, Jones Lang LaSalle estimated that there might be still plenty of equity looking to be placed in real estate assets by investors who are less reliant on debt funding, and a more general pickup in investment levels is expected toward the end of the year. Moreover, there seems to be a re-emergence of Japanese investors in overseas markets, particularly in the developing markets of China, India and Vietnam.

"Despite challenging global conditions and devastating natural disasters, China remains the strongest growth engine in the Asian economy," noted Kenny Ho, head of research for Jones Lang LaSalle, China. "We expect investor and end-user sentiment to pick up in the second half of this year as China celebrates the Beijing Olympics."

Underpinned by rapidly changing economic and financial environments, the next 12 months promises to be a particularly interesting period for the global and regional property markets, the digest concluded.

Within Asia Pacific, some softening in occupier demand and associated indicators is likely. However, the underlying market fundamentals remain good. Relatively attractive returns and significant structural changes will help to shore up regional investment over the short to medium term.