COLLIERS INSIGHTS
CAPITAL MARKETS & INVESTMENT SERVICES | ASIA | 3 SEPTEMBER 2019
A PIVOTAL MOMENT: TRENDS SHAPING ASIAN REAL ESTATE
Asia has been a major engine of growth for the global economy for years and, now, it is often at the forefront of technological and industrial advancement. That energy translates to the real estate sector as well. For investors considering properties in Asia, there is no dearth of options which span a spectrum ranging from office space to business parks to warehousing facilities. Even as the world’s economy deals with disruptions from technological innovations and geopolitical challenges, such as the US-China trade war and Brexit, and an overall slowing of growth, Asian real estate remains active. In 2018, based on data from Real Capital Analytics (RCA), total intra-Asian cross-border investment in land sites and completed properties rose 10% to hit a record high of USD98.2 billion. That robust growth is set to continue strengthening.1 As an illustration of this outlook, RCA data show that intra-Asian capital flows stayed firm in H1 2019, rising by 3% over H1 2018 to USD53.8 billion. As this year’s APREA Asia Pacific Property Leaders’ Summit in Shanghai engages industry leaders and market experts to delve into the issues and strategies at play, this paper aims to provide a snapshot of the key trends and opportunities that should inform investment strategies in the coming months and through next year.
TERENCE TANG Managing Director Capital Markets & Investment Services I Asia
DIVERSITY IS REWARDING
In the current climate, it pays to think outside the box in deciding where to channel funds. Investors seeking higher yields and capital appreciation should consider an array of alternative asset classes in Asia in addition to traditional commercial office spaces. The hospitality sector, data and logistics centres, and flexible workspaces offer scope to diversify portfolios as well as be ahead of the curve when it comes to leveraging changes in occupancy profiles.
The effects of fluid work patterns and sectoral shifts are becoming evident in Asian central business districts (CBDs). Once the domain of financial and professional services, demand for prime office space is now being generated by the technology, media and telecommunications (TMT) sector and flexible workspace operators, mirroring trends in other urban centres in Europe and the US. According to Colliers estimates, technology and media companies represent 20% of total Grade A office space in Shenzhen, 12% in Beijing and 17% in Tokyo.2 Meanwhile, net absorption rates point to continued growth in flexible workspace operators and corporate take-up of flexible workspace. Remarkably, this sector accounted for 42% of net absorption in Singapore in 2018.3 Another benefit of the growing demand for office space from TMT companies and co-working space operators is the opportunity to revitalise Grade B offices in Asian cities to expand the pool of available – and aesthetically customisable – spaces to serve this market niche. There is particular growth potential at the premium end of the sector where a full suite of amenities and environmental attributes will add value and ensure tenant retention.
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BANGALORE
As for geography, the TMT sector is open to fringe areas, whereas banks and law firms gravitate towards CBDs. Some of the most attractive submarkets for the tech sector in Asian cities – ranked by quality office stock, accessibility and affordable rents – include outlying areas in Bangalore, Singapore and Shenzhen. Aside from office space, Asia’s growing appetite for travel and tourism means demand fundamentals remain sound for the region’s hospitality sector. For investors in search of yield, hotels provide some spread over traditional assets and, with their typically enviable physical locations, tend to underpin capital appreciation for those seeking to divest. Investment funds in the hospitality sector can also be directed towards new projects or converting existing built assets, and there are different agreement models for both active and passive investors.4 Overall, targeting non-mainstream segments could be lucrative as property valuations rise across countries. Further opportunities are emerging in the form of warehouses in South Korea, for example, where these assets yield up to 7%; or industrial parks in Beijing, which yield as much as 5% as the Chinese capital cements its status as a major artificial intelligence research hub.5
63%
% SHAR E O F GR ADE A OCC UP IE D O FF IC E SPAC E 20 1 8
15%
BEIJING
40% 14%
TOKYO
27%
41%
SHENZHEN 8%
19%
SHANGHAI
31%
HONG KONG ISLAND
12%
16%
SINGAPORE Flexible Workspace + TMT
42%
Finance
TOP 3 T EC H LO C AT IO N S
1 BA N GA LO RE
2 S ING APORE
3 SHENZHEN
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EMBRACING TECH DISRUPTION
Underlying the boom in TMTs and flexible working is the universal tech revolution. This force is giving rise to the Internet of the Workplace (IoW), a digital architecture designed to connect employees and enable them to collaborate and perform efficiently regardless of physical location.
IoW allows for productivity-enhancing services such as glitch-free video conferencing, virtual document sharing and hot desking, as well as cost-saving facilities such as ‘smart’ lighting, temperature control and automatic check-in at reception. Powering these features are the advancements in and adoption of cloud computing, which will no doubt be accelerated by the rollout of the 5G mobile network. Companies migrating to the cloud can store and process almost limitless amounts of data, and enforce decentralised structures with multiple remote teams. The clouded workforce, increasingly seeking out adaptive and flexible offices in the TMT and financial services sectors, is upending the commercial real estate industry. It is prompting occupiers to cut back on floor space requirements and the resources needed to run and maintain their infrastructure. This means property owners and managers will need to pilot innovative solutions and be open-minded to asset enhancements to meet changing demands and stay competitive. From the perspective of the hospitality and industrial property sectors, enhanced use of robotics and automation have the potential to transform or disrupt workflows and, in turn, spatial and energy requirements as well. Being responsive to such developments will help achieve value from these maturing, alternative asset classes.
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I oW POW E R E D IoW A DOPTER
>> Technology infrastructure is almost entirely cloud-based
>> Core business functions spread across multiple hubs that scale according to business needs
>> Hubs employ BYOD and IoT technologies to enhance the working environment, and enable employees to work freely across teams and locations
>> All technology infrastructure is cloud-based >> No central location exists; employees log in independently from various IoT-optimised flexible workspaces or their homes
>> Employees form teams dynamically in response to business demands, using online platforms and collaboration tools to communicate, cooperate and achieve goals
WITHSTANDING GLOBAL HEADWINDS
Looking at the macro picture, it’s clear 2019 has been a challenging year. Central banks are closely tracking geopolitical issues such as the trade war and the potential of a no-deal Brexit to contemplate6 and deliver rate cuts.7 But, while the uncertainty poses a threat, the global economy is forecast to expand by 3.2% in 2019 and 3.5% in 20208 amid generally low interest rates, creating a supportive environment for high property investment volumes.
Asia, in particular, is a bright spot as the world’s fastest-growing major region. Increasing wealth and urbanisation, amid a push for sustainable development, will continue to drive real estate values for the foreseeable future. By 2030, Asia will account for two-thirds of the global middle class9 and (with Africa) nearly 90% of the world’s rural-urban migration by 2050.10 The impact of these trends is already being felt in key markets like China, where Colliers expects a fresh supply of commercial properties to meet strong demand over the next five to 10 years while a stable economy and increasing salaries continue to drive the retail segment.11 Despite the favourable long-run outlook for property investment volumes in Asia, the US-China trade war appears to be weighing on investment property capital flows. RCA data for H1 2019 show that capital flows from other regions of the world into Asian property markets fell by 28%, to $7.8 billion. While this preliminary total will probably be revised upwards, Colliers now assumes that global-to-Asia property capital flows for 2019 as a whole will probably remain the same as 2018 at around USD24 billion. However, Colliers estimates intra-Asian capital flows will increase by 8% as compared to 2018. Asian investors are ramping up their commitment to Asian markets. Based on RCA data, intra-Asian property capital flows, which had strengthened gradually over 2016–2018, stayed firm in H1 2019, rising by 3% to $53.8 billion. For the full year, it seems reasonable to expect intra-Asian capital flows of around USD110 billion, up by 8% YOY, reflecting lively activity by Hong Kong, Singapore and South Korean capital in particular. Many factors have encouraged the growth of intra-Asian investment, including familiarity with the business culture, relatively close proximity between buyers and sellers, and the ability to operate within a more manageable time zone.12
ASIA PROPE RT Y C AP ITAL FLOWS (US$ B N ) 10
2010
11 36 15
2011
9 38 21
2012
10 36 35
2013
13 60 44
2014
18 42 62
2015
18 47 63
2016
17 78 73
2017
17 90 47
2018
24 102 16
H1 2019
8 54
A si a -to-Gl ob a l
Gl ob a l - t o -A s i a
I n t ra -A s i a
Note: Preliminary figures for H1 2019, as of 23 July. Data cover office, retail, industrial, hotel, apartment properties and land development sites. Source: Colliers International, Real Capital Analytics (RCA).
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BEIJING
O R
I
A SI A CA P RAT ES Q 2 20 1 9 Qo Q MOVEM E N TS
HONG KONG YANGON
O R
BANGKOK
O R
I O R
I HO CHI MINH CITY
SINGAPORE OFFICE R E TA I L INDUSTRIAL QoQ MOV EMEN T
up
flat dow n
I
O R
I
O R
I
O R
I
MANILA
JAKARTA
O R
O R
O R
TAIPEI
SEOUL
I
I
TOKYO
O R
I
SHANGHAI
O R
I
GAUGING CAP RATES
In the first quarter of 2019, cap rates remained flat across Asia in the office, retail and industrial segments. That trend was in
I
line with New York, Paris, Frankfurt, Toronto and other leading cities.13
The second quarter saw more variety with Beijing office cap rates, and Shanghai office and retail cap rates, nudging up by 0.5%. Cap rates for Singapore offices moved slightly downwards and there was a decrease in Hong Kong industrial cap rates by 0.25%.14 And even though the era of consistent yield compression may appear to be over in most markets, there is little immediate sign of cap rates rising significantly.
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MAKING SENSE OF THE TRADE WAR
Despite the generally buoyant mood, heightened tensions between the US and China over tariffs could still upset the balance. So far, the direct impact of the trade war on Asia’s real estate industry has been hard to quantify, but renewed sanctions could certainly give investors pause for thought.
If the dispute should escalate, technology and manufacturing firms in southern China, notably in Shenzhen and Guangzhou, could experience a near-term loss of faith, resulting in reduced headcount and consequently weaker demand for office space. South China is the country’s fastest-growing and most dynamic region, but it also has the highest degree of interconnection of imports, exports and supply chains with the US. Colliers anticipates a near-term reduction in confidence among technology hardware and other manufacturing groups in South China, affecting demand for office space in China’s tech capital of Shenzhen in particular. However, investors would also be wise to not be too bearish about Shenzhen. The city scores positively on a range of property-related criteria: heavy investment in R&D has broadened Shenzhen’s technology base far beyond originally dominant hardware manufacturing; GDP is set to remain above the national average; and the Greater Bay Area plan has the potential to turn the Pearl River Delta market over time into an economic and technology powerhouse. East and North China are also affected. The continuation of serious trade tensions may well encourage MNC occupiers to curtail expansion in Shanghai and Beijing, and some may consider to relocate. As with South China, investors should not be too negative about prospects for Shanghai and Beijing. According to Colliers’ recent investment survey¹, over 90% of all investors in China remain positive about the country’s long-term outlook. In fact, 49% of respondents indicated they were willing to invest regardless of external factors, while 44% stated that they were waiting for more clarity over trade war developments.15
Asia’s two regional finance hubs, Hong Kong and Singapore, will also be affected, but in different ways. In Hong Kong, prolonged volatility could hit the stock market making the city vulnerable to retrenchment, given its position as an international finance hub and its reliance on MNC tenants who take up 60% of Grade A office space. Additionally, the recent large-scale protests may further incentivise investors to move to places like Singapore and Tokyo.16 Singaporean investors in real estate, meanwhile, are apparently unfazed by the retaliatory tariffs. China is a top destination for outbound capital from the city-state and Singapore’s real estate investment volumes in China increased 32% year-on-year to SGD10.4 billion (USD7.6 billion) in 2018, driven by large acquisitions in commercial properties and residential and mixed-use sites.17 Against this backdrop, Colliers assumes that US investment will keep flowing into Asia, but increasingly into markets outside greater China. Should there be more tariffs, US enterprises may relocate their projects from China to South East Asia or India, which would then fuel demand in industrial and logistics segments in these markets. The confluence of these factors makes for an exciting time in Asia. The region’s commercial real estate sector remains an appealing destination offering an assortment of opportunities and promising returns to all investors appraising their portfolio strategy for the remainder of 2019 and beyond.
1
Colliers Insights – Investor Pulse: Asian Property Capital Flows, April 2019
2
Colliers Radar – Changing Dynamics: Implications of New Occupier Profiles for Property Owners, March 2019
https://www.colliers.com/en-gb/singapore/about/media/2019-06-21-top-micro-markets-sg
3
https://www.colliers.com/en-gb/singapore/insights/colliers-blog/globalconf-govinda-singh-hotels
4
Colliers Global Conference Presentation
5
https://www.nytimes.com/2019/07/28/business/economy/fed-rate-cut.html
6
https://www.cnbc.com/2019/07/02/reserve-bank-of-australia-cuts-cash-rates-to-an-all-time-low-of-1percent.html
7
https://www.imf.org/en/Publications/WEO/Issues/2019/07/18/WEOupdateJuly2019
8 9
http://oecdobserver.org/news/fullstory.php/aid/3681/An_emerging_middle_class.html https://www.un.org/development/desa/publications/2018-revision-of-world-urbanization-prospects.html
10
Colliers Radar – Looking from Above: Scouting for New Opportunities in China’s Investment Property Market, June 2018
11
Colliers – Wei Leng Conference Questions
12
Colliers – Asia Cap Rates, Q1 2019
13
14 15
Colliers – Asia Cap Rates, Q2 2019
Colliers – Building on Strength: Investors Agree Momentum is Stronger than Drag, 4 July 2019 Colliers Radar – An Uneasy Truce, July 2019
16
https://www.colliers.com/en-gb/singapore/insights/colliers-blog/globalconf-tricia-investment-trends
17
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