Market Outlook

Despite experiencing four waves of COVID-19 outbreaks and its economic worse performance on record, Hong Kong is poised for further growth. Given a sharp rebound of GDP by 7.9% in Q1 2021, and a forecast of 3.5-5.5% growth for 2021, the commercial real estate market stands out with a positive outlook while adjusting to some “new normals”

– The vacancy rate for Large Multi-Tenant (LMT) logistics facilities in the Greater Tokyo area rose by 0.6 points q-o-q to 1.1% in Q1 2021, marking the first time the vacancy rate has exceeded 1% since reaching 1.1% in Q4 2019. Although the unprecedented surge in demand for facemasks and other daily necessities triggered by the COVID-19 pandemic led to stronger competition for logistics space in 2020, activity now appears to have eased.  That said, overall demand remains stable.

– The LMT vacancy rate in the Greater Osaka area fell to 1.9% in Q1 2021, down 1.8 points q-o-q. This marked the first time the vacancy rate has dropped below 2% since Q2 2016, when it also stood at 1.9%. The fact that rents have risen by 13% over the past two years, combined with increasing uncertainty over future economic performance, has meant that tenants are becoming more cautious, slowing the pace of rent increase.

– The LMT vacancy rate in the Greater Nagoya area fell by 1.7 points q-o-q to 8.6% this quarter. With some 170,000 tsubo of new floor space coming available in 2022, owners are stepping up their promotional campaigns to attract tenants.

– This quarter, CBRE has initiated the publication of LMT indices for the Greater Fukuoka area, where the vacancy rate has remained at 0.0% since Q2 2019. With development of multiple new LMT facilities now underway, properties possessing more user-friendly layouts will command an advantage over the competition.

• Industrial GVA was negative at -6.7% Q4 2020.
• Average super prime industrial rents were up 0.4% across the quarter. Australian super prime rents average $113/sqm
• Super prime yields have compressed by 57 bps y-o-y resulting in record low yields
• Land values for 1.6ha lots increased by 2.5% q-o-q averaging $570/sqm while 0.25ha lots increased by 5.4% q-o-q to $719/sqm.
• Transaction volumes. Transaction volumes above $5m totalled $393m across 18 transactions. This is 78% down on volumes recorded in Q1 2020.

• Investment sentiment has improved since the abolition of double stamp duty in November 2020.
• Property funds accounted for 33% of investment volume in Q1 2021, including half of the ten largest deals.
• Industrial transactions represented 43% of total investment volume, the highest proportion since Q4 2005.
• CBRE expects new standard rates for lease modification for industrial redevelopment to boost investment in the sector this year.

• While there were still companies such as those from the technology sector looking to expand their operations, other tenants are in the process of contemplating ‘rightsizing’ as they adopt remote working practices.

• Leasing activity also came from tenants looking for replacement space as they are being forced to move from older buildings slated for redevelopment later this year. Moreover, due to the construction delays in upcoming new buildings, tenants with expiring leases in the near term may renew their leases or look for alternative space now.

• Sentiment amongst landlords of Grade A offi ces has been bolstered by delays in new supply, more workers returning to offi ces as limits on remote working measures get lifted and a healthy offi ce investment market.

• The overall vacancy rate in Savills basket of CBD Grade A offi ce buildings continued to increase for a fourth straight quarter by 0.3 of a percentage point (ppt) to 7.3% in Q1/2021.

• In Q1/2021, although the URA’s offi ce rental index for the Central Region showed a 3.3% quarter-on-quarter (QoQ) increase, the average monthly rent in Savills basket of CBD Grade A offi ces fell for a fi fth consecutive quarter, albeit at a moderated pace of 1.2% QoQ, to S$9.41 per sq ft. We maintain our -5% YoY rental forecast.

Key Takeaways

1. Co-investment is a nifty tool of capital management that delivers efficiencies to both LPs and GPs.
2. A Category I / II AIF is not permitted to invest more than 25% of investible funds in a single investee company. This restricts the formation of dedicated co-investment vehicles.
3. The IFSCA issued a circular in late 2020 permitting AIFs in GIFT City to disapply the 25% diversity requirement subject to certain conditions.
4. More recently, SEBI released a consultation paper on the concept of ‘accredited investors’, which contemplates an enhanced degree of flexibility (including on the diversity requirement) for funds populated solely by AIs.
5. These new measures are likely to facilitate the proliferation of co-investment activity in India.

Manufacturing property as an asset class is rising in importance as more new or rejuvenated production locations outside of China emerge, with transactions of manufacturing assets growing 19% p.a. since 2011.

In the logistics sector, online grocery sales – the fastest-growing category of online retail sales in Asia Pacific – is predicted to rise 30% p.a., driving demand for last mile delivery facilities.

In this report, we examine:

• China Plus One strategies and the opportunities for industrial property occupiers and owners
• Opportunities in the last mile and cold chain segments of logistics networks
• The most attractive cities in Asia Pacific for industrial occupiers and owners
• Investment trends in key markets

Most major regional economies continue to make steady progress after a devastating 2020 and ‘reform and recovery’ should emerge as the key themes of the year. While a smooth transition to normality is not assured (as India has shown) a pick-up in transactions volumes suggests a growing confidence among regional real estate investors as Asia continues to outpace both Europe and the US.

Capital Markets

With economic recovery gaining traction, preliminary real estate investment volume in Singapore increased by 11.5% q-o-q, to $3.523 bn for Q1 2021.

Office

Supported by the tight vacancy, the rental decline in the Grade A (Core CBD) market was arrested after four quarters of correction. Conversely, the Grade B market continued to grapple with higher vacancy rates and rents registered a further decline.

Business Parks

The performance of the business park market softened slightly in Q1 2021. Negative net absorption was noted, contributed by the City Fringe submarket.

Retail

There has been a slowdown in rental declines of prime retail spaces. Landlords continue to maintain a flexible stance towards rental expectations.

Residential

The strong performance in the residential market has further shored up homebuyers’ confidence and take-up of new launches.

Industrial

Leasing activity was stable in Q1 2021, albeit slowing down from the strong performance of the previous quarter. Transactions consisted mainly of renewals and relocations, along with a handful of new set ups and expansions.

Across the Asia Pacific region, property markets started the year on a strongAcross the Asia Pacific region, property markets started the year on a strongnote, with office, industrial and logistics assets driving the ongoing recovery.

In China, the busy first quarter saw end-users and investors, including foreign investors, closing major deals in keycities. There was a resurgence in investor interest in Hong Kong and Singapore, while Japan witnessed the completionof a number of commercial and residential transactions. In Korea, low interest rates and liquidity continued to fueldemand for office space, a trend likely to persist as competition intensifies for a shrinking pool of assets, while Taiwansaw demand spike for commercial properties. In Australia, a typically quiet quarter witnessed heightened activity in theoffice segment, while New Zealand’s property market, buoyed by policy changes, low interest rates and expectations ofreopened borders, is gearing up for an active year.

In the region’s emerging markets, India saw healthy demand for residential and commercial assets, and investorsremain bullish about the market’s medium to long-term prospects. Vietnam’s property sector is in the midst of arebound supported by government reforms, while Indonesia’s property market is benefiting from a smooth rolloutof vaccines and policy changes that should strengthen purchasing power, improve market confidence and encourageinvestment. Thailand is also witnessing higher levels of market activity, especially in the logistics, warehousing andindustrial sectors, but a rebound in the hospitality sector will depend on the resumption of international travel. In thePhilippines, where the economy shrunk last year for the first time since 1998, the property market is likely to pick upfollowing the easing of quarantine restrictions and the deployment of vaccines. Meanwhile, in Myanmar, the ongoingpolitical turmoil will affect the near-term outlook, but the market is expected to retain its long-term growth potential,especially in the infrastructure and industrial segments.