Market Outlook

Sydney has continued its progression as a hyperscale cloud destination, with Amazon Web Services, Microsoft Azure, Google Cloud, and Alibaba all continuing their local market inroads in a bid for further market share. Each has been intrigued by the plethora of locally based mid- and large-size enterprises currently reviewing their IT strategy, along with the many government and educational organizations pursuing modernization initiatives from the NSW government and ATO on down. As each service signs up new clients…

Sydney has continued its progression as a hyperscale cloud destination, with Amazon Web Services, Microsoft Azure, Google Cloud, and Alibaba all continuing their local market inroads in a bid for further market share. Each has been intrigued by the plethora of locally based mid- and large-size enterprises currently reviewing their IT strategy, along with the many government and educational organizations pursuing modernization initiatives from the NSW government and ATO on down. As each service signs up new clients, the need for further local capacity continues to grow, leading to large-scale development.

AirTrunk is leading the way in large development, with SYD2 aiming for year-end completion and the second phase of SYD1 in serious planning. The developments support the company’s continued growth across Asia, with sites in Singapore, Hong Kong, and Tokyo all under construction. Fujitsu recently announced a further expansion to their Western Sydney site, with another 20 MW coming online early next year, and the Alpha DC Fund, NextDC, Macquarie, and Digital Realty are all working on new capacity.

The local investment acquisition market has stayed quiet to date in 2020, though anecdotal reports of investors looking for acquirable assets continue to circulate. Other assets throughout the country have traded hands, with the A$417 million sale-and-leaseback of Telstra’s Melbourne-area campus as the largest single-asset transaction to have been signed for this year. Assisted by an exceptionally rare 30-year lease term, the acquisition could show the potential for data centre deals with strong tenancy. All considered Sydney remains a strong and well-provisioned market which should continue well into the next couple of years.

Tokyo is rapidly becoming a regional hub for hyperscale deployments, as the xScale joint venture between Equinix and GIC nears first phase completion and development continues from the Digital Realty/Mitsubishi Corporation partnership on their latest site. These developments have…

Tokyo is rapidly becoming a regional hub for hyperscale deployments, as the xScale joint venture between Equinix and GIC nears first phase completion and development continues from the Digital Realty/Mitsubishi Corporation partnership on their latest site.

These developments have now been joined by AirTrunk, who confirmed their long-rumored entry to the market with the 60 MW first phase of their new 300 MW TOK1 campus to be operational by the end of 2021. This site thus has the potential to be the highest capacity campus locally at full build-out and serves as a major confirmation of both market potential and specifically the rapidly developing data centre cluster at Inzai. This focus on larger deployments is predicated on the continued digital transformation of large local corporations, with major cloud services such as Google and Alibaba making recent inroads and additional supporting applications gaining wider availability. All this leads to continued positive growth throughout the local ecosystem.

COVID-19 Driving Growing Demand for Data

Despite the ongoing geopolitical uncertainties and COVID-19 outbreak, activity in the Hong Kong data center market has remained red hot. In one of the largest leasing transactions this year, US-based data center REIT Digital Realty announced in early July that it agreed to lease a newly completed purpose-built data center at 11 Kin Chueng Street in Kwai Chung as the operator’s second facility in the city.

COVID-19 Driving Growing Demand for Data

Despite the ongoing geopolitical uncertainties and COVID-19 outbreak, activity in the Hong Kong data center market has remained red hot. In one of the largest leasing transactions this year, US-based data center REIT Digital Realty announced in early July that it agreed to lease a newly completed purpose-built data center at 11 Kin Chueng Street in Kwai Chung as the operator’s second facility in the city.

The third wave of the virus outbreak in Hong Kong saw MNCs suspending their back-to-office plans and requesting their staff to work from home. It is anticipated that even in the aftermath of the pandemic that many companies will continue to allow some level of remote working, which will in turn accelerate the pace of digital transformation of businesses in all aspects and lead to a surge in demand for cloud usage. Hong Kong’s impending introduction of 5G will also drive more usage of data, which in turn, will translate into increased demand for rack spaces in the city. Reflective of this, a handful of PRC and international operators remain on the active lookout for suitable leasing or investment opportunities in the city.

Japan’s economy passed over the business peak around the fall of 2018, entering a clear recession due to the consumption tax rate hike in the October 2019 and exacerbated by the impact of the spread of COVID-19 since February 2020. However, with May 2020 as the bottom, Japan’s economy is now headed toward recovery.

Amid the impacts of the spread of COVID-19, the for-sale/transaction market for real estate in Japan has already peaked. However, the balance of power between sellers and buyers in transactions has not shifted notably as of present, and the functions of a sound real estate transaction market have been maintained.

Looking at Japan’s real estate rental market, with June 2020 as the bottom, the market conditions of hotels and retail properties are heading toward recovery after an abrupt setback due to countermeasures against the spread of COVID-19.

Colliers International, in its latest report titled “New Directions In Asia Pacific Logistics-Increasingly Varied Sector Requires Multiple Approaches” highlighted the positive outlook that lies ahead for Asia Pacific’s logistics market.

Across Asia Pacific, demand for logistics space has been supported by a long-run shift from physical to online retailing. COVID-19 has driven up e-commerce volumes sharply, while expansion in the cold chain sector and new infrastructure developments should boost demand further. Most investors and developers already see logistics warehouses as a core asset class.

While office rents continued to drop in the downbeat market, tenants seized the opportunity for better relocation options, resulting in high activity in the leasing market during the month. However, landlords further softened their approach and adopted a more realistic stance in negotiating leasing terms to secure tenants, so the majority of tenants tended to renew their leases. As a result, new take-up of Grade-A office space was at an exceptional low level during the month, particularly in the CBD area.

Amid the challenging economic environment, cost-competitiveness remains a pressing consideration for tenants. Going into 2021, we therefore expect to see a continuing decentralisation trend. We also foresee rising demand for co-working space, as more companies, especially small and medium-sized enterprises (SMEs), which have been heavily impacted by the coronavirus-induced recession to actively explore flexible leasing options.

Respondents to the Q2 Asia Pacific Commercial Property Monitor indicated that regional sentiment remained downbeat  in Q2. The RICS Commercial Property Sentiment Index*  (CPSI) fell from -31 in Q1 to -38 in Q2, the lowest reading since the Global Financial Crisis. As can be seen in Chart 1, the results from Asia Pacific are in line with those from the Americas (-38), Europe (-36) and the Middle East and Africa (-39).

Chart 2 shows China was the largest contributor to the downbeat sentiment in Asia Pacific. However, this is largely due to its large regional weighting in the index (China represents 48% of the Asia Pacific Index). The CPSI was firmly negative in every Asia Pacific country tracked by this survey. Chart 2 also shows a deterioration in conditions in Australia, India, Japan and elsewhere in APAC (including Hong Kong and Singapore).

The MSCI Global Annual Property Index weighs real estate investment returns across 25 countries. While MSCI’s national indexes for Japan and Korea are included in the MSCI Global Annual Property Index, our market data for seven other Asian countries – China, Hong Kong, Indonesia, Malaysia, Singapore, Taiwan and Thailand – are excluded from that index. In this report, all national market sizes are based on bottom-up, portfolio-specific estimates, and these are converted into US Dollars using the yearend currency conversion rate.

Cushman & Wakefield, in its latest report titled ‘The Rise and Rise of ASEAN’ highlighted the bright future that lies ahead for Southeast Asia. Some of the key perspectives include:

1. ASEAN’s economies and population hold tremendous potential for its growth as a manufacturing bloc in the region. 
2. The stock of industrial land across ASEAN remains very healthy, presenting opportunities for occupiers to take up space at competitive land rates. 
3. Once the region emerges from the ongoing COVID-19 crisis, it appears that Vietnam, Thailand, Philippines and Indonesia are set for a bright future through the rest of the 2020s. Developers active in these markets need to identify the stream of new corporate occupiers scoping out their markets.

Although Japan has managed to contain the COVID-19 outbreak relatively well thus far, the impacts of the global pandemic will certainly put a damper on Japan’s economy and by extension the broader real estate market. As of April 2020, the IMF has forecasted that Japan’s economy will contract by 4.8% in 2020. To make matters worse, the Tokyo Olympics – which are now slated for July 2021 – could face an outright cancellation. Notwithstanding the near-term impacts of COVID-19, Tokyo will continue to see significant investment into the early 2020s and beyond. Major development projects are already underway around the C5W in areas such as Toranomon and Shibuya. Along with these developments, Shinagawa Station will undergo massive redevelopment that will prime it, as well as the Shinagawa Ward just to the south, for a boom over the course of the decade.