Office and logistics assets offer best combination of yield and income growth in APAC; rebound potential for hotels is high versus lower retail growth prospects

Singapore to achieve a five-year average annual office rent growth of 3.3%, with Bangalore and Melbourne not far behind


  • Singapore prime / Grade A offices look especially attractive with a yield of 3.9%
  • Firm demand is driving the logistics/industrials sector across the region with yields ranging from 4.7% to 5.9%
  • Logistics/industrials markets with five-year average rent growth of over 2.5% include North China, South China, East China and Seoul
  • Markets where the hotel sector offers strong rebound potential include Singapore and Hong Kong SAR
  • Retail sector faces structural threats that will outlast the current recession

 

SINGAPORE, 29 June 2020 – Colliers International (NASDAQ: CIGI; TSX: CIGI), a global leader in commercial real estate services, today released Part Two of the Asia Pacific Real Estate: Still Good Value in a Changed World report, in which prospects for rental growth are discussed and the company’s preferred real estate assets are highlighted. The first part of the report compared property yields with yields on government bonds and equities.

Andrew Haskins, Executive Director, Research, Asia, commented: “Compared to low or negative yields on government bonds and the possibility of falling dividend yields for equity markets, the yields offered by real estate assets in Asia-Pacific (APAC) markets look attractive. Yields in the office sector in developed APAC markets range between 2.8% for prime grade Hong Kong offices at the low end and 5.8% for Auckland at the high end. Logistics/industrial assets in China offer yields ranging from 5.2% to 5.9%, while yields are also attractive in Seoul, Melbourne and Auckland.”

Terence Tang, Managing Director, Capital Markets & Investment Services, Asia, commented: “Given widely varying prospects for income growth, it is even more important now for investors to understand the different risk/return profiles for different real estate sectors. We believe that offices and logistics assets merit lower risk premiums as, over time, cap rates should stabilise or fall in office markets with higher rent growth potential, such as in Singapore, and should fall for logistics assets in general.

On the other hand, hotels and retail assets should command higher risk premiums as they face challenges which might persist for a little longer. However, the recovery potential of the hotels sector in several Asian markets – particularly in Singapore and Hong Kong SAR – adequately compensates for this higher risk.”

John Marasco, Managing Director, Capital Markets & Investment Services, Australia, commented: “We are seeing firm demand for core office and logistics / industrial sectors, particularly in the key gateway cities of Sydney, Melbourne and Auckland. These growth cities are considered future-proof investment destinations with great access to amenities and deep tenant demand in these locations is expected to improve. We anticipate that biomedical and educational precincts, as well as data centres, will continue to be key areas of focus for investors. In general, we expect an increase in transaction volumes for the second half of 2020.”

Office sector facing increased vacancy and reduced demand in the short term

Corporate occupiers have delayed expansion plans due to the coronavirus pandemic (COVID-19) recession, while the proven efficacy of remote working has reduced the chance of a rapid recovery in demand for leasing office space.

If occupiers do expand, in the near-term they can be expected to concentrate on city fringe districts with lower rents. Over the remainder of 2020, only Taipei – and perhaps Tokyo and Auckland – can expect rents to stay firm, as the office markets in all three cities are supported by low vacancy rates and, in Tokyo’s case, high pre-commitment rates for new buildings.

Prospects for rent growth in APAC cities over the medium-term are much brighter than over the short term; the developed office markets with the strongest rent growth potential over the next five years are Singapore, Melbourne and potentially Auckland, while among emerging market cities rent growth potential looks highest in Bangalore.

Interest in logistics / industrial sector to remain firm

Despite firm demand, the supply of warehouses in most Tier 1 Chinese cities is increasing for the first time in several years, pushing up vacancy. The heavy new supply will weigh on rents in the near term, causing flat or mildly negative rent growth in 2020 and 2021; however, supply and demand should level out thereafter, allowing vacancy rates to fall again, and thus easing pressure on rents.

Demand for logistics assets in Greater Tokyo and the south and west of Seoul remain firm.

In Australia, rising use of e-commerce and the lack of industrial space within big cities should fuel demand for industrial premises in close proximity to large population bases, while in Auckland, the industrial sector is currently seeing vacancy rates well below the level in previous cycles, which should help drive rent growth for the next several years.

Hotel sector expected to rebound, initially led by domestic tourism

Hotels across APAC have suffered due to travel restrictions, pushing the average APAC occupancy rate down to below 40% so far in 2020 and to 10% to 20% in extreme cases.

While prospects for 2020 remain tough, history shows that the hotels sector can rebound sharply from a crisis. In general, the segment of the hotels market likely to pick up earliest is domestic tourism. Business demand may well take more time; MICE (meetings, incentives, conferences and exhibitions) travel has been hit hard by COVID-19 and looks set to be the last market segment to recover.

In Singapore, based on historical experience, a pick-up in tourist arrivals after COVID-19 subsides is expected, which bodes well for hotels and tourism-related businesses. In the longer term, the demand drivers for hospitality in Singapore remain intact, including tight near-term supply and more tourist attractions.

Recovery in the Hong Kong SAR hotels sector depends partly on when the territory reopens. While the example of SARS in 2003 suggests a rapid rebound, it is not clear when mainland Chinese tourists will return. However, hotel asking prices have fallen sharply from their peaks, and now adequately reflect operating pressures. In Japan, firm domestic tourist and business demand should support hotels in Tokyo.

Luxury retail sector to struggle due to rising threats

While the retail sector has been resilient in the past, the sector now faces numerous structural challenges including a rising threat from e-commerce (especially in China), high occupancy costs, and a desire for greater ‘experiential’ shopping, which has been difficult for traditional retailers to provide.

Different segments of the retail market have been affected in varying degrees by the changing environment. For example, supermarkets and pharmacies have been little affected, while luxury goods have been heavily affected. In general, suburban malls with a focus on everyday goods or well-managed city centre malls with a good spread of shops and activities should achieve higher rent growth than high street shops with a focus on luxury goods.

 

 

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Media Contact:

Annabelle Taylor