Thought Leadership

Key Trends

• Retail sales growth slows
• Inflation and recessionary fears weigh on consumption
• Leasing activity shows slight recovery
• Luxury brands turn more active
• Zero-covid impacts mainland China demand
• Retailers set to remain cautious

This report was originally published in https://www.cbre.com/insights/figures/asia-pacific-retail-trends-q3-2022

Key Trends

• Slower economic growth and inflationary pressure weigh on leasing activity
• Mainland China see mild recovery but other markets flat or weaker
• Finance, tech and coworking remain major demand drivers
• Rising construction and fit-out costs cause delays to new supply
• Flight to quality relocation still most popular strategy
• Occupiers set to remain cost cautious as economic worries mount

This report was originally published in https://www.cbre.com/insights/figures/asia-pacific-office-trends-q3-2022

• The Asia Pacific flexible office space market continued to display cautious growth in 2022, with the total volume of flexible office space in the region reaching 76 million sq. ft. as of September, an increase of 6% y-o-y on 2021 and 15% on pre-pandemic levels.
• As of September, flexible office space accounted for about 4% of total office stock and 3% of total Grade A office stock in Asia Pacific. In the Grade A segment, India and Singapore reported the highest penetration of flexible office space, while most North Asian markets are just below 2%.
• Tech firms and business services companies remain the top corporate users of flexible office space. Interest is also growing among financial, life science and consumer product firms.
• Trends that will continue to shape the flexible office landscape in 2023 include:

1. Flexible space operators offering on-demand memberships to cater to more dispersed workforces resulting from the widespread adoption of hybrid work
2. Growing occupier demand for customised enterprise and turnkey solutions to mitigate rising fit out costs and CapEx constraints
3. The use of asset-light strategies as flexible space operators form partnership with landlords using management contracts

This report was originally published in https://www.cbre.com/insights/briefs/h2-2022-asia-pacific-flexible-office-market-deliberate-growth-continues

Almost three years after the onset of the global pandemic, the retail industry has been through one the biggest stress tests imaginable, but best-in-class real estate has remained robust – and even emerged stronger in some markets.

Cushman & Wakefield’s flagship Main Streets Across the World report tracks the top retail districts across 92 cities and ranks the most expensive by prime rental value. An annual report until 2019, this year’s report is the first since then, allowing insight into comparative performance pre- and post-pandemic.

Rent Growth Highlights

• Rents across global prime retail destinations declined by 13% on average during the depth of the pandemic but have rebounded to just 6% below pre-pandemic levels.
• The Americas, thanks largely the to the U.S., was the most resilient region – on average rents now sit at a 15% premium to pre-pandemic levels.
• In Asia Pacific rents fell on average by 17%, impacted by international border closures, which curbed tourism in prime locations.

Global Rankings

• New York’s Upper Fifth Avenue moves up one spot to number one, now ranks as the most expensive retail destination in the world.
• Hong Kong has slipped to second place, with Tsim Sha Tsui overtaking Causeway Bay as the most expensive precinct in the city-state.
• Via Montenapoleone in Milan has jumped two positions to achieve third place, followed by London’s New Bond Street and The Avenues des Champs Elysees in Paris rounding out the top five.

This quarter, the Knight Frank Data Centre report focuses on the growth markets of Asia Pacific. Market analysis includes Osaka, Melbourne, Jakarta, Manila, Hanoi, Taipei, and Indian cities Hyderabad, New Delhi and Chennai.

The growth trajectory of data centre supply noted in the principal global data centre markets in previous quarters is now being mirrored in secondary cities across the region. Underpinned by strong demand fundamentals and a trend towards greater localisation of data centre facilities, total supply (live, under construction, and committed capacity) in the reported APAC markets has grown from just under 700MW five years ago to over 3,000MW today. For the first three quarters of 2022 alone, around 600MW of new capacity has been added.

Melbourne, Jakarta and Osaka now each have over half a gigawatt of aggregate IT Supply. At 593MW of registered IT supply, Melbourne is seeing renewed interest from local and regional operators such as NextDC, AirTrunk, Vantage and Stack Infrastructure, which will add close to 450MW to existing live supply. Microsoft is also known to be planning a facility here. Jakarta has seen significant announcements and planned capacity, several times the existing supply, from both hyperscale cloud service providers like Amazon and Microsoft, as well as a variety of local and international operators. Osaka continues to develop as an alternative data centre market in Japan complementing the more established Tokyo region.

The major cities of Hyderabad, New Delhi and Chennai are also registering rapid growth, with between 300MW to 400MW of IT capacity each. About two-thirds of this supply was added in the past couple of years, with around 50% of total supply planned or committed capacity. The increased investment in the data centre sector in recent years is party driven by government policy, including easier access to credit and other incentives to boost data centre investment. Active players in the market include local firms such as CtrlS, Sify Technologies, Nxtra by Airtel and Web Werks, joint ventures such as AdaniConnex and BAM Digital Realty, as well as cloud service providers.

In Southeast Asia, Taipei, Manila and Hanoi continue to see growing interest from hyperscale CSPs and data centre investors. AWS announced local zones in both Manila and Hanoi this year and is in the process of rolling them out, while the global firm also launched its local zone in Taipei in October 2022. Current key players in these markets mainly comprise the local telcos, with a handful of regional joint ventures such as STT-Globe in the Philippines and NTT-VNPT in Vietnam.

Overall, the expansion of data centre activity into the growth markets across the APAC region remain on a strong footing, reflecting the continued resilience of demand across each geography.

This report was originally published in https://app.dcbyte.com/knight-frank-data-centres-report/Q3-2022/

In this article, we explore an emerging sub-set of infrastructure which is garnering increasing amounts of interest from global private equity and pension funds – Educational Infrastructure or ‘EduInfra’. EduInfra refers to the infrastructure, building and land used to deliver social services like education.

EduInfra is attractive to international annuity investors looking for stabilized yield plays. The sector has an edge over other similar asset classes due to its non-GDP linked and rather recession proof character with significant potential for capital appreciation. It offers a promising 10 – 11% entry cap rate with rental escalations in the region of 3 – 5%. While the market boasts of significant depth, potential has not been unleashed as operators are only slowly moving towards asset light models.  EduInfra’s classification as infrastructure allows for tax optimal exit through InvITs which can also serve as a growth platform attracting institutional investors.

This was originally published in https://resolutpartners.com/2022/11/15/eduinfra-emergence-of-a-new-asset-class/

Office: Macroeconomic headwinds and inflationary pressure weighed on office leasing activity in Q3 2022, pulling down net absorption by 11% q-o-q to 10.1 million sq. ft. NFA. Finance remained the main engine of leasing demand, with activity also seen from tech and co-working platforms. Rents increased by 0.4% q-o-q and 1.1% y-t-d.

Retail: Retail sales growth slowed as global recessionary fears continued to cloud consumer confidence. However, vacancy declined across the region along with the further easing of pandemic-related restrictions. Rents fell 1.8% y-o-y but posted a quarterly gain of 0.3% q-o-q.

Logistics: Leasing activity eased across Asia in Q3 2022, with markets including mainland China, Korea and India recording weaker demand. Leasing volume in the Pacific was weak compared with the same period of last year, owing to a further drop in availability. Rents grew by 1.4% in Q3 2022, a slightly slower rate than in the previous two quarters.

Investment: High interest rates continued to impair investment in major Asia Pacific markets, driving down commercial real estate investment volume by 20% y-o-y to US$27.3 billion. Acquisitions were driven by real estate funds, property companies, REITs, and institutional groups. Cross-border investment fell 1.0% y-o-y to US$8.0 billion.

This report was originally published in https://www.cbre.com/insights/figures/asia-pacific-figures-q3-2022

E-commerce has grown rapidly over the past five years, with expansion accelerating since the pandemic. Despite e-commerce penetration moderating from pandemic highs after restrictions were lifted, CBRE expects future growth in Asia Pacific to continue to outpace the rest of the world. Of the six key e-commerce drivers identified by CBRE, Asia Pacific possesses a distinct advantage in three: Urban population growth, adoption of digital wallets and a vibrant e-commerce ecosystem.

As the retail industry continues to evolve toward omnichannel, so too will the role and functions of physical stores. Retailers and landlords need to re-invent themselves to prepare for the evolution of retail and the rise of omnichannel.

The growth of e-commerce is also driving robust industrial & logistics property demand, although the supply pipeline is unlikely to meet future demand. Logistics occupiers are advised to explore build-to-suit developments and invest in the latest warehouse technologies. 

Key highlights from this report include:

• CBRE forecasts Asia Pacific’s e-commerce penetration rate to grow to 35% by 2026. However, e-commerce penetration will vary across different product categories.
• Korea, mainland China, Indonesia, Australia and Taiwan are expected to be the five most penetrated e-commerce markets in Asia Pacific by 2026.
• While physical stores will remain essential, the rise of omnichannel is prompting many traditional brick-and-mortar retailers to consider new formats and locations.
• Over the next five years, 100 to 130 million sq. m. of additional dedicated
• e-commerce logistics space will be required to support the growth of online sales in Asia Pacific.

This report was originally published in https://www.cbre.com/insights/reports/Asia-Pacific-Report-Omnichannel-Retail-and-its-Impact-on-Asia-Pacific-Real-Estate-October-2022

As the global economy continues to chart a path in the post-pandemic world, real estate investment has a new favourite buzzword – new economy assets. While the term arose with the advent of digital and internet technologies, amid surging inflation and rising interest rates, new economy assets have taken on a whole lot of significance.

So, what is so new about the new economy? A key dynamic is the integration of digital technologies that is overhauling old economy services and products, spurred innovative distribution channels and sparked new, high-growth industries that are plugged into the tech and science megatrends. Increasingly, digital transformation is shaping the way we live, work and play and the real estate sectors underpinning this megatrend is set for a multi-year upcycle.

Riding the digital wave

The evolution of industry with the rise of new technologies is certainly not new. Throughout history, innovation has hastened creative destruction and redefined the global economy, with mobile technologies and the rise of e-commerce at the centre of the digital age. While the shift was under way before the pandemic, the impact of social distancing has been significant. The need to stay connected during the outbreak fast-tracked digital adoption. Across industries, companies were compelled to employ communication and mobile technologies and pivot to tech-enabled services.

The transition has prompted the rise of asset classes that are more geared to the requirements of the digital landscape. From cell towers and data centres to logistics hubs that make online living possible, the saying that real estate houses the economy also holds true in the new digital era. It is simple yet compelling link: megatrends need real estate and the bigger the tech, the more infrastructure required. The impact of digital disruption, magnified, will continue reverberating beyond the pandemic and drive structurally higher levels of technology investment.

Asia Pacific remains well positioned to ride the digital wave. Already by far the largest market for retail e-commerce, the region, home to more than half of the world’s population has over 60% born after 1990 – digital natives that will drive the adoption of digital technologies. According to a survey by McKinsey, this was fast forwarded by four years by consumers in the Asia Pacific while those for businesses leapt by 10 during the pandemic, the highest globally.

A spectrum of investment opportunities

This has cast several alternative sectors in a new light, awaking investors to the potential that such assets hold. Healthcare and Life Sciences became prominent in the wake of the health crisis while demand for streaming content have attracted funds to develop film production studios. Still, although a major headline, new economy real estate is not just about technology. Primarily, it is about capturing the underlying trends that are now rippling across Asia Pacific and globally.

A case in point is the region’s living sector, which is at the forefront of such shifts. Rapid urbanization, ageing demographics and remote working are propelling the nascent living sectors – from Multifamily to Co-living and Assisted Living – into the mainstream and attracting massive institutional funds. As more people gravitate to cities, the need for the required infrastructure buildup has also created a spectrum of long-term investment opportunities. In a low-growth, inflationary environment that we are now saddled with in this new normal, Infrastructure is an ideal countercyclical given its potential to provide high, stable and inflation-linked returns.

The resilience of such sectors is visibly demonstrated in listed real estate. Healthcare, Industrial and Residential REITs, as tracked by the GPR/APREA REIT Composite, have sustained positive annualized returns over a three-year period while those in Office, Hospitality and Retail are in the red. Notably, Industrial REITs’ market capitalization have risen over 50% during the pandemic, and despite the recent correction, remain more than 30% higher than its pre-pandemic peak.

Rebalancing and future-proofing

This new real estate world order have also wrought changes to investment strategies. An important feature in the new economy is the emergence of digital leaders and the inter-dependence of value chains, which create significant network effects. That means achieving scale rapidly is critical for investors to capture a large portion of market share in a sector.

To access the opportunities thrown up in the new landscape, investors need speed with execution. This means a need to build heft rapidly. Across the region, real estate players have restructured and pursuing M&As to expand and remain relevant, with integrated asset and fund management arms that has created an end-to-end platform to develop and incubate real estate developments through to its injection into a public vehicle. REITs with stabilized portfolios of new economy assets in developed markets are now being targeted in mega deals.

The current economic environment is creating an urgent need for investors to rebalance and future proof their portfolios. New economy sectors sit at the crossroads of major demographic and economic shifts as well as technological trends, which are occurring in the region and visibly underserved by traditional real estate classes. Layering in climate change concerns adds a further dimension to the idea of new economy assets, expanding possibilities.

In a rising rate environment and surging inflationary pressures, identifying sectors that are structurally undersupplied with the right long term demand fundamentals which generates positive rental reversions will be crucial in sustaining real returns. On all counts, new economy real estate is a powerful thematic that checks these boxes. These compelling fundamentals, taking place in a region that could eventually host more than half of the world’s megacities, promises a massive investment opportunity in the very assets that will be critical in securing its future.

Sigrid Zialcita

CEO
Asia Pacific Real Assets Association

Sigrid Zialcita

CEO
Asia Pacific Real Assets Association

Sigrid is the Chief Executive Officer of Asia Pacific Real Assets Association (APREA). Based in Singapore, she is responsible for overseeing the strategic direction, initiatives and operations of the association across Asia Pacific. Under her leadership, APREA repositioned to an industry trade group focusing on real estate and infrastructure.

Prior to APREA, she served as Managing Director of Asia Pacific Research and Advisory Services of Cushman & Wakefield (C&W) from 2010 through 2018, where she was responsible for research, thought leadership, strategy formulation and client management.

A recognized expert in global economic, public policy and real estate issues, Sigrid is a frequent speaker at industry events. Her commentary on commercial and residential real estate markets is also regularly featured in a wide array of global publications, including the Wall Street Journal, Financial Times, Bloomberg, New York Times and Reuters. Additionally, she has made several television appearances on financial networks and radio such as CNBC, Bloomberg, CNN, National Public Radio and Channel News Asia.

The Asia Pacific logistics & industrial market continues to perform strongly, underpinned by strong fundamentals – though there is emerging evidence that growth is switching from the investment market to the occupier market.

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