Top trends 15 r
- 1. december 2014 top trends to watch in 2015 A Cushman & Wakefield Research Publication
- 2. 2 A Cushman & Wakefield Business Briefing december 2014 top trends to watch in 2015 3 foreword In many ways, the property market in Asia Pacific is ending 2014 on a more solid note than when we began the year. We saw the conclusion of peaceful elections in the region’s emerging countries,and concurrently witnessed the luster fade from some of our economic behemoths. Encouragingly, the region moved forward as policymakers across the region vigorously sought to strengthen their countries’ economic pillars,with positive effects that are slowly making their way to the property markets – trends that we hope will pave the way for a better 2015. We are pleased to share our latest report –TopTrends toWatch for 2015 – summarizing our views on relevant issues in the regional economy and occupational and investment environment, and helping guide you in making strategic decisions for the coming year. TOKYO
- 3. 4 TOP TRENDS TO WATCH IN 2015 december 2014 Executive Summary Looking back over the past 12 months since we released our report,“14 Trends for 2014,” our central theme of “moderate growth” held true to a large extent. Economic growth continued to decelerate across the region.As a result, leasing activity came off the boil in the region’s large markets but showed some resurgence as political stability and some policy changes helped to stimulate regional economies in the second half. Japan’s contraction following the consumption tax hike in April took us by surprise, as it did most observers; but we remain confident in Japan’s unswerving commitment to growth. Just as we had anticipated, property fundamentals in Tokyo turned around this year, with rents and prices finally showing some gains. From an investment perspective, we thought the office sales volume in the region would surpass the record level in 2013; at the same time, we forecasted that Asian investors would be a key player in the global arena.And we were right; as of October 31, the annualized office sales volume set a new high in 2014, and the surge in Asian international investments turned out to be even better than expected. Looking forward, this slower macro environment is likely to persist but remain generally supportive of property fundamentals. Regional economic performance, aided by resilient domestic demand, strong policy support, and an improving export sector, will continue to support sentiment and thus, underpin the strengthening recovery in leasing activity across all 30 cities that we track in Asia Pacific.Additionally, speculative construction will remain on an uptrend especially in fast-rising markets across the region, and bring about the emergence of new competitive urban centers.With occupancy costs still on a modest uptrend in most markets in the region, though they are already among the highest globally, further adoption of workplace strategies will become a business imperative. Companies will be well-placed to explore various strategies that would allow them to manage their costs alongside their efficiency and productivity in the workplace.While returns are expected to continue their descent against this slower macro backdrop, lower returns is a new reality that is evolving across the global marketplace. Nevertheless, there are compelling reasons for continued interest in the region as an investment destination.A number of Asia Pacific markets will still have ample room for significant improvement in fundamentals over the long term, especially in light of new regulations and better governance that are poised to foster the continued development of the real estate sector. Furthermore, the extensive availability of financing through domestic and international channels will likely sustain the high volume of transaction activity and pricing in the region. Overall, as we move into 2015, we continue to see a healthy leasing market and active transactions market fueling growth of the office sector in the region. FORECAST SUMMARY While China settles to a new normal of slower growth, the rest of Asia should gain traction on the back of strong policy support, domestic demand, better governance and an energized export sector. Gdp Growth 2015 absorption Growth Lowestvacancies in the reGion inventorY expansion rent increase throuGh 2018 throuGh 2016 5.0-5.3% 20% 10%/YEAR 1-2% absorption to reach a SEVEN-yEAR HIgH IN 2015 Rents will rise in a vast majority of the markets; however, rent increases will be modest at 1.0-2.0% per annum. Rents are expected to be flat to declining in majority of the emerging markets as vacancies trend higher in 2015. With nearly 400 million square feet under construction across 30 cities in the region, the office inventory is expected to expand by 10.0% per year through 2018. Leading the list of high office construction volume relative to existing inventory are cities in India, China andVietnam. grade A vacancy rates are expected to average 7.0-8.0% for core markets, and 16.0-17.0% for emerging markets. TOKYO AUCKLAND BANGKOK MANILA SINGAPORE OVER top trends to watch in 2015 5
- 4. 6 TOP TRENDS TO WATCH IN 2015 december 2014 top trends to watch in 2015 7 Regional Economy Settles into “New Normal” of Moderate Growth GDP growth in Asia Pacific is anticipated to continue to hover around 5.0%-5.3% through 2016 as momentum fades in the region’s largest economies. China’s growth is set to decelerate to somewhere between 6.0% and 7.0% in the next couple of years as the government prioritizes economic rebalancing over growth. Similarly,Australian policymakers will continue to facilitate an economic shift in favor of non-mining industries in 2015 amid weak commodity prices. Nonetheless, the rest of the region should gather momentum in 2015.We maintain our cautiously optimistic view on the Japanese economy.The surprise slowdown in 2014 underscores that there are structural issues that need to be addressed to achieve a full-fledged recovery. However, the government’s swift action to recalibrate its recovery program via an extension of the quantitative easing program, another set of tax and spending measures, and postponement of the second consumption tax increase until 2017 should allow the Japanese economy to regain its strength over the next couple of years.The appetite for reform has also been rekindled in most parts of the region. In India, Prime Minister Narendra Modi has made his reform agenda the cornerstone of economic policy targeting a return to a higher GDP growth trajectory of 6% and above.The Philippine government will continue its infrastructure push as President Aquino’s term winds down with elections scheduled in May 2016. By the same token, the newly-installed Widodo government in Indonesia is trying to boost infrastructure spending while reducing existing fuel subsidies.The outlook for Malaysia calls for continued government reforms that should put the country on the path to move up the high-income ranks. In Thailand, growth should accelerate further, as fiscal stimulus kicks in and conditions return to normal on the back of a calmer political climate. 1 There are a number of bright spots in the Asia Pacific outlook that should benefit export sectors and pave the way for a continued recovery, especially in South Korea, Singapore, Hong Kong,Taiwan andVietnam. Specifically, the acceleration of U.S. economic growth, along with the proliferation of free trade agreements (FTAs) and moves towards enhanced free trade within the region, should set the stage for greater trade activity and help compensate for lower growth in China and a fragile recovery in Europe.As in Japan, most Asian central banks have sought to put downward pressure on their currencies, and this trend is expected to continue through 2015 and help to improve the competitiveness of exporters.The broader picture also points to a benign inflation outlook in most parts of the region over the next year. Falling food and energy prices should allow central banks to relax monetary policy, if necessary. Risks to the economic outlook remain largely the same as in the previous year. Geopolitical tension in the region, as well as macroeconomic concerns regarding Europe’s fragile recovery, the U.S. Federal Reserve’s interest rate normalization, policy changes in Japan and China’s slower growth trajectory, have the potential to derail sentiment and erode economic gains. 2015 GROWTH AND INFLATION RATE HO CHI MINH CITY Australia China Hong Kong India Indonesia Japan Malaysia New Zealand Philippines Singapore South Korea Taiwan Thailand Vietnam 0% 1% 2% 3% 4% 5% 6% 7% 8% 0% 1% 2% 3% 4% 5% 6% 7% 2015InflationRate 2015 GDP Growth Source: Roubini Global Economics
- 5. 8 TOP TRENDS TO WATCH IN 2015 december 2014 top trends to watch in 2015 9 Rising Competitiveness in Emerging Asia While rising costs in China have led some global companies to repatriate manufacturing jobs in the last few years, a development called onshoring, they have concurrently created opportunities for emerging markets in the region, which today still boast some of the most competitive cost structures in the world. Notably, even if real wages per worker have risen steadily, mirroring improvements in living conditions and growth over the last decade, they are still one-fifth as high as wages in developed countries. Emerging Asia also has a large working-age population expected to grow at robust rates over the next three decades, which should sustain competitive labor costs, and even provide the scope to adopt a domestic-led model of growth. Equally important is the increasing openness to foreign direct investment, which has nurtured some of these countries’ thriving homegrown industries.We anticipate most of the emerging economies will continue to open up in order to sustain progress. In India, Prime Minister Modi has launched the “Make in India” initiative to lure investment and boost manufacturing’s share to 25.0% from 15.0% of GDP. Office Leasing: Full Speed Ahead The relatively solid economic backdrop could aid a broad-based rebound in office demand in the majority of the top 30 cities tracked in Asia Pacific in 2015. Gains are expected to be most pronounced in emerging markets, with traditional growth drivers such as information technology, business process outsourcing, and professional and business services making bigger market plays at a local level and in turn, fueling the expansion of other supporting office-using sectors.The competitive cost structures in emerging Asia will remain a linchpin of a thriving outsourcing industry and fast-rising manufacturing hubs outside of China. In addition, the commitment to structural reforms will progressively squeeze inefficient industries and pave the way for the growth of stronger institutions across many sectors needed to drive leasing activity. On the supply side, emerging markets have been a magnet for new construction. More than 200 msf of office space has been built since 2010 in emerging cities in China, India, and Southeast Asia, and another 280 msf is under construction through 2018. Nonetheless, supply additions will be keeping pace with the rising trend in demand through 2015 except in Chengdu, Kolkata,Ahmedabad, New Delhi, Pune and Hanoi, where vacancies will remain in excess of 20.0%. Come 2016, tenants in Guangzhou and Shenzhen stand to have a multitude of options, with office completions soaring to new highs of 13 msf and 17 msf, respectively. Tokyo will remain in the spotlight in 2015. Recent policy moves indicate that growth remains Japan’s top priority, key to instilling confidence among corporates, which in turn, will be critical to sustaining the current positive momentum in the property markets. Japanese companies are performing very well; their earnings are much better than expected even accounting for the impact of the weak yen.Additionally, we believe ongoing government initiatives will help to foster a resurgence in the city. Infrastructure development for the Tokyo 2020 Olympics is already under way. Plans are in the works to convert 11 projects in Tokyo andYokohama into international business hubs with help from major real estate companies. The initiative is aimed at reclaiming Tokyo’s status as a major international metropolis by creating an environment conducive to attracting foreign corporations. Consequently, we believe the office market recovery is still in an early stage but expect it to be patchy at times. In nearby Seoul, the abundance of brand-new options with generous concession packages will continue to induce a flight to quality in all districts and lead to occupancy gains, especially with office completions set to ease in 2015. For core cities in China, the teeming supply pipeline will bring relief to occupiers in Beijing and Shanghai, after a prolonged period of single-digit vacancies, which even reached as low 2.7% in 2011 and 3.8% in 2012, respectively.Tenants often had to choose from a very short list of vacancies that might not have been the best fit for their operations, and can look forward to the completion of nearly 14 msf and 15 msf in Beijing and Shanghai, respectively, through 2016. Similarly,Taipei will witness over 900,000 square feet (sf) of office completions in 2015.The majority of the projects are located in fringe markets, and provide ample opportunities for cost savings with rent at a substantial discount to the CBD and generous concessions being offered to lure tenants. However, we expect the Xinyi submarket, home to a number of multinational corporations (MNCs), to remain tight. In Hong Kong, caution is still in the air.With high occupancy costs and limited availability in Greater Central, tenants are generally opting to better utilize their office space to keep costs down. On the upside, the Shanghai- Hong Kong Stock Connect scheme has the potential to lead to a huge increase in capital 2 3 0 5 10 15 20 25 Developed Asia Emerging Asia 20162015201420132012201120102009 AVERAGE MANUFACTURING LABOR COST US$PERHOUR HONG KONG Source: Economist Intelligence Unit
- 6. 10 TOP TRENDS TO WATCH IN 2015 december 2014 top trends to watch in 2015 11 flows both into and out of China, with foreign investors being able to access a market valued at about US$2 trillion.This development bodes well for office demand in Hong Kong, but the impact is likely to be most meaningful over the long term. In our view, the mainland banks are likely to be stronger growth catalysts for Hong Kong in the near term given their current small footprint compared to international banks. The recent political tension in Hong Kong is likely to have a positive effect on its rival financial center, Singapore, highlighting the political stability characterizing the city-state. Of course, Singapore and Hong Kong serve two distinct regions: North Asia and China in the case of Hong Kong and Southeast Asia for Singapore.We think Singapore’s rapid rise as the region’s largest center for both commodity and foreign exchange trading, as well as its growth as a wealth management and regional headquarters hub, will continue to make it a choice destination for MNCs. Dwindling options in the CBD will push activity towards fringe and suburban locations in 2015, where occupancy costs are lower compared to the CBD.This trend is likely to reverse in 2016 when the largest premium- grade project currently under way, the 1.9-msf Marina One, will come online in the Marina Bay submarket. Signs are also pointing up in some cities in Australia, with improvements in the financial markets and other non-mining sectors already spurring office demand somewhat.This comes at an opportune time, given that significant new supply that is attractively priced will come on stream in Sydney and Melbourne in 2015. However, a still weak resource sector is expected to keep vacancies in Perth at record-high levels. 2 Core markets:Australia, Hong Kong, Japan, New Zealand, Singapore, South Korea,Taiwan and the Chinese cities of Beijing and Shanghai. Emerging markets: India, Indonesia, Malaysia, the Philippines, Thailand,Vietnam and the rest of the Chinese cities, including Macau. 3 Source: Nikkei 2015 SUPPLY AND ABSORPTION 2015 Absorption 2015 Supply INMILLIONSF 0 3 6 9 12 15 Hong Kong Adelaide Auckland Brisbane Taipei Singapore Perth Melbourne Sydney Seoul Shanghai Tokyo Beijing Hanoi Kolkata Bangkok Ho Chi Minh City Mumbai Ahmedabad Kuala Lumpur Chennai Shenzhen Guangzhou Pune Hyderabad Jakarta Chengdu New Delhi Manila Bengaluru TAIPEI
- 7. 12 TOP TRENDS TO WATCH IN 2015 december 2014 top trends to watch in 2015 13 Non-Core Locations:The New Downtown Non-CBD locations will also successfully compete by offering desirable locations with significantly lower rents.With buoyant economic growth over the past decade, the cost of office space in most core locations, for example in first-tier cities in China or even in Jakarta, has doubled compared to five years ago, and rapid leasing has left those markets in a supply crunch. Consequently, absorption is beginning to reflect a growing interest in the suburbs, and companies are less eager than before to move to city centers. In particular, the surge in new projects in emerging suburban markets provides opportunities for companies to secure high-quality office space relatively cheaply, which on average, could be at least 40% lower than rates in core cities. In some cases, such as Beijing’s CBD, rents in prime buildings could be close to double the level of up-and-coming submarkets such as Wangjing. Those “urbanizing” suburbs that offer easy access to workplaces and a sufficient amount of mixed-use urban amenities offer some of the greatest real estate opportunities.A case in point is Kowloon in Hong Kong.The area’s improving accessibility to public transportation and its live-work-and-play environment, along with the affordability and availability of its options relative to Greater Central, have been a major impetus for the decentralization trend. Rents in this market are set to fall 8.0-10.0% over the next two years as more supply comes online while demand remains modest, at the same time that rents in Greater Central are set to rise once again as a pick-up in demand chips away at prime vacancies.These factors are expected to make this submarket more cost- competitive, which will in turn further incentivize occupiers to decentralize. However, high relocation costs could further limit significant tenant movements. Technology Knows No Boundaries The technology industry is clearly prospering, having been a strong pillar of leasing activity in the region in 2014. There are good reasons to believe in the immense upside potential of the new technology sector in Asia Pacific, especially with rising domestic consumption, urbanization and the rise of the mobile commerce platform.The numbers tell the story.Asia Pacific remains the growth leader globally, which will allow the region to breed a wealthy consumer base, especially in emerging countries, and the critical mass needed to sustain the sector’s long-term viability over the next decade. For example, approximately 65.0% of Southeast Asia’s estimated population of 735 million by 2030 is expected to belong to the middle-class category. We estimate that e-commerce revenues will reach about US$1.5-2.0 trillion each in China and India over the next 10 years. In our view, therefore, the technology sector has positioned itself just right during its nascent stage in these growth markets, and has compelling prospects. There are, of course, differences between the current high-tech boom and the previous one. Most technology companies that are fast expanding their footprint around the world have gone public in recent years, are profitable and are more mature than companies that created a frenzy some 15 years ago before fizzling out. Needless to say, not all technology companies will succeed in this highly competitive marketplace. Furthermore, the surge in growth in e-commerce, cloud computing, and big data stand to have positive ramifications for data centers and warehousing/logistics space to house the required back-end infrastructure. Balancing Costs and Efficiency in the Workplace Workplace strategy continues to play a pivotal role among companies for recruiting high-quality talent, and in recent years, many companies have embraced open, collaborative work environments to promote innovation and enhance productivity.Technology and the professional and business services sectors have a significant head start, and are now refining some of their earlier workplace concepts. Some companies have already reversed policies relating to telecommuting, even pulling back from the extreme openness concept that was earlier driven by an efficient use of the floor plate and has now been replaced with a growing concern for effectiveness. Ever-tightening regulatory requirements are changing the business models for financial institutions.Additionally, a variety of factors continue to crimp returns: low interest rates, sluggish global economic growth and still-anemic loan demand, as well as legal problems that continue to afflict some banks.As such, we expect financial institutions to continually adjust their approach to property, with portfolios being rationalized and new initiatives undertaken to reduce the cost of workplaces especially in high-cost markets. In regional financial centers such as Hong Kong and Singapore, which currently are the most expensive locations in Asia Pacific, recent demand from large financial institutions has largely been for decentralized space, with back offices and more cost-conscious operations moving out of high-rent submarkets into lower-cost decentralized markets. Meanwhile, law firms across the region have largely been a driver of high-end office space in the heart of the business districts, and have yet to embrace decentralized locations. Some new space concepts such as activity-based work settings, collaborative spaces or lawyer lounges, seen in the UK and other parts of Europe, are also appearing 4 5 62015 RENTS 0 3 6 9 12 15 Non-CBD CBD JakartaSingaporeHong KongShanghaiBeijing US$/SF/MONTH 2015VACANCY RATES 0 5% 10% 15% 20% JakartaSingaporeHong KongShanghaiBeijing
- 8. 14 TOP TRENDS TO WATCH IN 2015 december 2014 top trends to watch in 2015 15 in some firms in Australia.Though law firms tend to be more conservative than, say, financial sector companies, acceptance has been good and results show increased collaboration between legal partners and their associates, while retaining some distinction in terms of role and hierarchy. Going forward, while several law firms in the region have already “rightsized” over the past 12 months, we still anticipate law firms to expand in high-growth markets in the region with continuing preference for prestigious space. However, such firms are more likely to take less space, and be more efficient, especially as costs in the region remain on an upward trajectory. 7 NEW DELHI AHMEDABAD MUMBAI PUNE HYDERABAD CHENNAI BANGKOK HO CHI MINH CITY KUALA LUMPUR SINGAPORE JAKARTA BRISBANE AUCKLAND SYDNEY MELBOURNE ADELAIDE PERTH MANILA TAIPEIHONG KONG HANOI GUANGZHOU SHENZHEN SHANGHAI BEIJING CHENGDU SEOUL TOKYO BENGALURU TENANT FAVORABLE NEUTRAL LANDLORD FAVORABLE Emerging Emerging EmergingCore Core Core New efficiency New efficiency New efficiency 60 80 100 120 140 160 180 200 IT Banks Legal SFperemployee OFFICE SPACE PER EMPLOYEE AnotherYear of Diminished Rent Growth Expectations Single-digit rent growth is expected across the top 30 cities tracked in the region for 2015 and 2016. For core markets, Grade A rents are forecasted to rise another 1.0-2.0% per annum through 2016, with Tokyo posting the highest rent growth on the back of ultra-low vacancies. Rents in Singapore are expected to move up once again in a favorable supply/demand environment in the prime office market, but the pace will be slower relative to the 10% surge in 2014 as office completions will pick up in 2016. Hong Kong’s Greater Central is also set for a modest uptick in Grade A rents on account of better economic sentiment, after drifting sideways in 2014. In Seoul, leverage will slowly shift away from tenants as landlords begin to limit the concessions they are willing to offer to secure deals. Meanwhile, tenants will see some measure of leverage return to them as new supply ramps up in Beijing and Shanghai so that rates will continue to inch down from their current high levels. Similarly, Grade A rents in major markets in Australia will continue to slide as vacancies trend higher. For emerging markets, average rents are forecasted to increase moderately, at 0.5-1.0% per year through 2016, as rampant supply will restrain landlord leverage. Jakarta, Shenzhen, Manila, Chennai and Bangkok will buck the trend with above-average annual rent growth of 4.0-5.0%, though this pace represents the third consecutive year of slowdown for those markets. Note: New efficiency are an average of newer developments of < 4 years MUMBAI
- 9. 16 TOP TRENDS TO WATCH IN 2015 december 2014 top trends to watch in 2015 17 With annual rent increases moderating since 2011, tenants with three-year leases will, by and large, face slightly higher renewal rates in 2015. On average, rents will be up 6.0-7.0% for core and 7.0-8.0% for emerging markets from 2012. However, tenants in Jakarta, Singapore and Manila will face a significant rent bump upon lease renewal, with average rates in 2015 higher by nearly 50.0%, 28.3% and 27.0%, respectively, than in 2012. Meanwhile, those in Ho Chi Minh, Ahmedabad and Chengdu stand to achieve some cost savings, with rents expected to be down 8.0-10.0% from 2012. 2016 RENT GROWTH -6% -3% 0.0 3% 6% 9% 12% 15% Hanoi Ho Chi Minh City Kuala Lumpur Guangzhou Chengdu Shenzhen New Delhi Hyderabad Kolkata Bengaluru Mumbai Pune Bangkok Manila Chennai Jakarta Ahmedabad Beijing Brisbane Shanghai Sydney Perth Melbourne Auckland Adelaide Taipei Hong Kong Singapore Seoul Tokyo 2015 RENT GROWTH -6% -4% -2% 0.0 2% 4% 6% 8% Hanoi Ho Chi Minh City Chengdu New Delhi Kolkata Kuala Lumpur Pune Mumbai Hyderabad Ahmedabad Guangzhou Bengaluru Bangkok Chennai Manila Shenzhen Jakarta Perth Brisbane Melbourne Shanghai Sydney Adelaide Beijing Auckland Taipei Hong Kong Seoul Singapore Tokyo -20% -10% 0.0 10% 20% 30% 40% 50% Perth Shanghai Beijing Brisbane Melbourne Hong Kong Auckland Seoul Sydney Taipei Adelaide Tokyo Singapore Ho Chi Minh City Ahmedabad Chengdu Kolkata Guangzhou Hanoi Kuala Lumpur Mumbai Hyderabad Bengaluru New Delhi Chennai Bangkok Shenzhen Pune Manila Jakarta -5% -0% -5% 0.0 5% 10% 15% 20% 25% 30% 35% Perth Brisbane Shanghai Beijing Melbourne Sydney Taipei Auckland Hong Kong Adelaide Seoul Singapore Tokyo Hanoi Ho Chi Minh City Chengdu Kolkata Kuala Lumpur New Delhi Guangzhou Mumbai Hyderabad Ahmedabad Bengaluru Pune Shenzhen Chennai Bangkok Jakarta Manila Y-O-Y RENT GROWTH 3-YEAR RENT REVERSION 2015 20152016 2016 *5-year rent reversion for Australian cities
- 10. 18 TOP TRENDS TO WATCH IN 2015 december 2014 top trends to watch in 2015 19 100 150 200 250 300 350 400 Singapore New York City Metro London Metro San Francisco Metro Los Angeles Metro Sydney Tokyo Melbourne Yield spreads (bps) Lowering Returns Expectations, Lengthening Time Horizon The continuation of subdued rent growth in the region over the next year suggests another period of lower returns; but this is a new reality that is evolving elsewhere in the world. Securing access to core products in the region, while inevitably difficult, can yield an unlevered IRR of 7-8% on a five-year period if successful.The perpetuation of low interest rates in Japan and Australia also provides some attractive opportunities with yield spreads in both countries the highest in the region. On the opportunistic side, cap rates are in the 10.0-12.0% range, while development returns can range between 15.0-20.0% for core markets and 30.0-35.0% for fast-rising emerging markets.We also believe there is room for cap rate compression for certain markets over a 5-10 year period. In Japan, the incipient recovery will not just benefit the top-grade assets, but also Grade B properties in Tokyo and secondary markets.This trend also holds for India, where real estate fundamentals and capital markets are on the cusp of a turnaround, supported by a reform-oriented government that can steer the country back to stronger growth; and Manila, where a resilient economy is continuing to support a thriving commercial real estate sector. (See Investment Opportunities in Select Markets). We also believe that the region can handle an orderly increase in interest rates without serious disruption to the economy and property markets. Its solid economic landscape should continue to strengthen property fundamentals, and thus offset the impact of gradually rising interest rates. Hong Kong and Singapore will likely be most vulnerable in the region, as higher interest rates could weigh on consumer spending and investment, and have repercussions for their residential property markets. Nonetheless, their economies should be prepared for any shocks, with prudent macroeconomic policies, strong financial sectors, and large foreign reserves. 8 Investment Opportunities in Select Markets Japan Total transaction volume across the commercial and logistics sector of US$28.8 billion this year through November 20 has already exceeded last year’s volume of US$27.4 billion. End users, and in particular cross-border investors, have been active, in part, due to the weaker yen but also on strong investor sentiment. Properties in Japan across all sectors are characterized by stable income returns. Offices have averaged just below 4.0% in Tokyo’s CBD and over 2.0% in Osaka and Nagoya in the last eight years, while yields in Fukuoka register a higher 4.5%.The residential sector, which has attracted international investors of late, averages 3.5% across the major cities.Against the historically low bond yields, spreads for offices in Tokyo, Osaka, Nagoya and Fukuoka are registering 350-500 basis points (bps) while those in the residential sector are even higher at 400-500 bps. India As the economy starts picking up, office assets will be amongst the first to benefit as pent-up demand kicks in. Besides traditional growth areas, several factors like the spread of banking and the surge in e-commerce are expected to create their own momentum.The recently announced REIT legislation and relaxation of FDI rules will facilitate ease of entry and exit for investors in this segment.These assets attract investors who prefer stable and predictable returns with some scope for appreciation. In the current environment, buyers appear to outnumber sellers, with keen interest from global investors.While there is a positive outlook for this asset class, investors should ensure they choose their portfolio carefully to ensure that the yields they paid for remain undiluted. The Philippines The strong economic performance of the Philippines in recent years has contributed to heightened investor interest in the local office market, reinforced by the country’s credit rating upgrade.The positive investor sentiment in the office sector is reflected by recent significant transactions such as SM Group’s acquisition of five Grade A office buildings and recent record-level bid prices on two sites auctioned in Bonifacio Global City (BGC). Investor confidence is also observed in the growing number and positive reception of upcoming strata-title office buildings.The positive take-up of these office building has been driven by both local and foreign investors, as the latter seek to gain exposure to property they can acquire at full ownership. In particular, average pre-sales take-up of upcoming strata-title offices is estimated at around 70.0-80.0%.Assuming sustained rental and capital value growth, we estimate office yields to range from 5.0-7.0%. OFFICEYIELD SPREADS IN SELECT GLOBAL CITIES Yoshiyuki Tanaka President, Cushman & Wakefield Asset Management Japan Joe Curran Country Manager Philippines Shouvik Purkayastha Executive Director, Capital Markets Group India SINGAPORE
- 11. 20 TOP TRENDS TO WATCH IN 2015 december 2014 top trends to watch in 2015 21 Investment Activity Still Heating Up As explained in our latest report,“Global Forecasts 2015-2016,” the pattern of modest economic expansion will continue into 2015.While the U.S. Federal Reserve has announced plans to gradually unwind nearly six years of easy-money policies, we believe that it is likely to show patience on rate-hike decisions.Additionally, the bias remains for easing in Europe and Japan as they step up efforts to revive economic recovery. In our view, the recent decision by Moody’s Investors Service to cut Japan’s sovereign debt rating is not cause for significant concern; even the bond markets have not shown any adverse reaction not to mention that most of Japan’s debt is owned by domestic investors. Consequently, we expect Japanese Government Bond yields to remain low over the near term. China also stepped up its stimulus efforts by recently cutting lending and deposit rates, which should help alleviate financing strains.We maintain our view that against this backdrop, global financial conditions will remain relatively accommodative for the foreseeable future, with the 9 major central banks maintaining their commitment to bolster economic activity and income growth.Therefore, financial conditions will continue to support an appetite for risk and a search for yield on the part of global investors. Considering further that growth markets such as India and Indonesia have worked to reduce financial risk, even embarking on reforms that will make investing there more attractive over the long term, including progressive moves to allow some foreign participation inVietnam, we can reasonably expect that more, not less, funds will be flowing into Asia next year. A case in point is India.The Indian government passed REIT legislation in the Union Budget in July 2014.While it will take some time for REITs to take off in India, this development is welcome news for the capital-starved commercial real estate sector. Availability of long-term capital could be a growth catalyst, and could spur the development of the property management sector, which involves management of those REIT assets.An equally critical impact is that REITs could facilitate greater transparency by relaxing the information constraints that have typically characterized emerging markets.The availability of information should make investors more comfortable with investing in emerging markets; at the same time, it should help lower the cost of capital, which today remains quite high in India. Singapore is another example.The Monetary Authority of Singapore has recently put forward several proposals to strengthen corporate governance, align incentives, enhance operational flexibility, and improve transparency for the SREITs.We view these proposed changes to REIT rules as positive as they could improve investors’ trust in managers and support the further development of this sector in the city-state. Recent FTAs also augur well for investment activity. Under the recently signed China- Australia Free Trade Agreement, private Chinese investors will be able to buy commercial property up to a value of AUD1.0 billion without requiring approval from Australia’s Foreign Investment Review Board.We believe this change is likely to result in increased transactional activity in the market, especially considering the significant interest among Chinese investors in investing in Australian property. Overall, we expect office investment volume in 2015 across the region to be on a par with or even surpass the estimate of US$60 billion of significant office sales closed in 2014 by 5-10%. Smaller players will fuel intra-regional investments while markets like Tokyo and Australia will be attractive to investors making their first foray into the region. For China, office investment activity will likely to be focused on Shanghai and Beijing, while restrictive cooling measures continuing into next year, rather than student protests, will continue to dampen transaction volume in Hong Kong. We also expect investment activity in Singapore to benefit from continued increases in core office rents. ASIA PACIFIC INVESTMENTVOLUME $0 $20 $40 $60 $80 $100 $120 $140 2006 2007 2008 2009 2010 2011 2012 2013 2014* 2015F US$Billion Office Others * annualized Note: Only include transactions that are above US$25 million; excluding land sales KUALA LUMPUR Source: Real Capital Analytics
- 12. 22 TOP TRENDS TO WATCH IN 2015 december 2014 top trends to watch in 2015 23 9 Asia’s Rising Clout on the Global Stage Asian international investments have been grabbing headlines, especially with activity ramping up over the past two years. Notably, total investments are estimated at nearly US$78 billion in 2014, which is just shy of the record of US$80 billion posted in 2013. China has been the most visible because of investors’ predilection for trophy assets in gateway cities and landmark deals, and the trend is likely to continue given continuing ample liquidity and the increased sophistication of investors. Singapore and Hong Kong investors have also been major sources of capital as cooling measures in their countries have driven them to go overseas in search for yields and diversification. Furthermore, the lower cost of funds in these markets has allowed investors to bid more competitively for overseas acquisitions, particularly in higher-yielding markets like Australia and the UK.With the globalization of real estate, combined with an abundance of capital and relatively conducive financial conditions, expect Asian capital to gain an increasing share of global transaction volume, with a wider reach into core-plus and peripheral markets. Considering that Asian investors tend to buy and hold, and thus have the option of a more flexible sale date,Asian capital may prove to be a tonic for some of the dormant Western markets. 10 CONCLUSION In summary, the region’s office sector is expected to remain on solid footing even as slower economic growth will become the norm over the near term. In addition, the region will remain a growth destination for companies that seek to capitalize on the relatively favorable economic and demographic prospects of emerging markets as well as positive developments occurring in mature countries. Strong capital availability, combined with healthy leasing conditions across the region, will provide a diverse array of opportunities for all types of investors. Of course, there are concerns – geopolitics, weak global growth, policy missteps – that cloud the outlook; but risks are here to stay. CROSS BORDER INVESTMENTS BY ASIA PACIFIC INVESTORS SYDNEY Source: Real Capital Analytics 0 10 20 30 40 50 60 70 80 90 2010 2011 2012 2013 2014* 2015 US$Billion * annualized Only include transactions that are above US$25 million APAC AMERICAS EMEA
- 13. 24 TOP TRENDS TO WATCH IN 2015 december 2014 top trends to watch in 2015 25 Sigrid Zialcita Managing Director, Research,Asia Pacific +(65) 6232 0875 sigrid.zialcita@ap.cushwake.com John stinson Executive Managing Director, Capital Markets,Asia Pacific +(65) 6232 0878 john.stinson@ap.cushwake.com richard middleton Executive Managing Director, CIS, EMEA/Asia Pacific +(852) 2956 7075 richard.middleton@ap.cushwake.com simon lynch Executive Managing Director,Valuation & Advisory,Asia Pacific +(852) 2956 7038 simon.lynch@ap.cushwake.com Cushman & Wakefield is the world’s largest privately held commercial real estate services firm.The company advises and represents clients on all aspects of property occupancy and investment, and has established a preeminent position in the world’s major markets, as evidenced by its frequent involvement in many of the most significant property leases, sales and management assignments. Founded in 1917, it has approximately 250 offices in 60 countries, employing more than 16,000 professionals.It offers a complete range of services for all property types,including leasing,sales and acquisitions,equity,debt and structured finance, corporate finance and investment banking, corporate services, property management, facilities management, project management, consulting and appraisal. The firm has nearly $4 billion in assets under management globally.A recognized leader in local and global real estate research, the firm publishes its market information and studies online at www.cushmanwakefield.com/knowledge. ©2014 Cushman & Wakefield, Inc.All rights reserved. Cushman & Wakefield, Inc. 3 Church Street #09-03 Samsung Hub Singapore 049483 Tel: +65 6535 3232 www.cushmanwakefield.com/knowledge For more information about C&W Research, contact: For more information about C&W’s business lines, contact: HONG KONG