Hong Kong SAR – Mid-Year Market Outlook – Capital Market (Colliers)
Despite the easing of Covid’s fifth wave in Hong Kong1, the US Fed increasing interest rates has hindered the investment market recovery and delayed investors’ decision-making in Q2. We expect sentiment will pick up in H2 2022 when investors gain more clarity on the rate hike, economic outlook and more relaxed social-distancing rules.
Supported by the strong demand and rental performance, industrial assets should remain the most preferred asset type, while co-living and residential developments are also attractive given solid housing demand. We expect to see funds and real estate firms, which accounted for 87% of the investment volume in Q2, to remain the key driver of the investment market for rest of 2022.
Hong Kong SAR – Mid-Year Market Outlook – Industrial (Colliers)
In H1 2022, despite the economic slowdown in Hong Kong, the market still witnessed solid demand from third-party logistics players (3PLs). This, coupled with tight vacancy, pushed rents up further by 1.1% QOQ in Q2 2022. We recommend landlords or investors consider partnerships with operators from fast-growing sectors like logistics, cold storage, self storage, or data centres by arranging long leases to secure stable rental income and higher yields.
Hong Kong SAR – Mid-Year Market Outlook – Office (Colliers)
In Q2 2022, the office market witnessed a pickup in momentum driven by rising leasing enquires and inspection activities, but commitment in leasing deals remained slow. The overall vacancy rate continued to climb up during the quarter, rising by 0.4 ppt to 11.2% in Q2 2022.
Favored by decentralization demand from cost-saving tenants, rents in Tsim Sha Tsui and Kowloon East slightly recovered (up 1.1% and 0.8% QOQ, respectively). We recommend occupiers to explore flight-to-quality moves as more available new stock comes online in H2 2022.
Major Asia Pacific property markets show gains as recovery builds momentum
Demand for office and industrial assets supports growth across key Asia Pacific markets
香港, 27 April 2022 – Leading diversified professional services and investment management firm Colliers (NASDAQ and TSX: CIGI) has today released its Asia Pacific Market Snapshot Q1 2022 report, which highlights how major Asia Pacific real estate markets continue to build on a recovery led by gains in the office and industrial segments and are looking forward to a pick-up in dealmaking across segments in the upcoming quarters.
In Australia, easing restrictions brought a return to work and travel, spurring deals worth over USD1 billion in Sydney and Melbourne’s office markets. China too saw demand surge for office space, including in business parks, with key cities witnessing the finalisation of deals worth a combined RMB11 billion (USD1.7 billion). In India, the residential market saw sales surpass pre-2020 levels while strong economic fundamentals triggered an influx of foreign capital. In Singapore, policy measures intended to cool the residential market spurred investments in commercial properties. Japan saw active investment led by REITs across multiple segments, including large office and logistics properties as well as industrial and hotel assets. The report, which examines the previous quarter’s performance of property markets in 16 Asia Pacific countries and territories, also provides forecasts for the current and upcoming quarters.
“In Q4 last year we saw a recovery taking root and, in the first quarter of 2022, that recovery really started to gather momentum across the region,” said John Howald, Executive Director and Head of International Capital, Capital Markets & Investment Services | Asia Pacific. “While the office and industrial segments have led the way so far in dealmaking activity, improving business sentiment and the growth-focused policies of governments throughout the region should come together to make demand more broad-based and spur transactions across segments.”
John Marasco, Managing Director, Capital Markets & Investment Services | Australia and New Zealand noted: “As travel resumes and people head back to the office in greater numbers, we’re seeing a significant increase in interest from both occupiers and investors for office assets. With institutional investors also looking to expand their portfolios, we expect deal volumes to ramp up rapidly as the year progresses. In New Zealand, high-quality commercial assets will attract the attention of investors, including those from overseas once border restrictions ease in the coming months.”
Demand grows in Australia and New Zealand as restrictions ease
Major Australian cities witnessed heightened demand from both occupiers and investors following the reopening of state and international borders, and the return of workers to offices. Colliers expects Sydney and Melbourne to both see substantial increases in deal volume over the year as companies look to encourage more employees back into the workplace and institutional investors seek to expand their portfolios. Demand is particularly apparent for Premium/Prime assets with greater interest emerging for higher quality assets, as well as ESG requirements and a high level of amenities in core locations. In Auckland, demand for retail and office space is being driven by investors looking ahead to the easing of restrictions once Omicron cases subside. Demand for high-quality commercial and industrial properties is also expected to strengthen later in the year when border restrictions could be relaxed, prompting overseas investors to return.
Major Chinese markets witness strong demand for office space
Foreign buyers accounted for almost two thirds of the total transaction value of RMB2.94 billion (USD462 million) in Beijing while occupiers stepped up leasing of large office spaces. In Shanghai, office and business park offices made up 60 percent of the overall transaction value of RMB5.98 billion (USD939 million). In the Pearl River Delta, Shenzhen recorded transactions worth RMB785 million (USD123 million) and Guangzhou recorded one transaction worth nearly RMB300 million (USD47 million). Colliers expects continued strong demand for office space in central business districts (CBD) and business parks across major cities, including Chengdu and Xi’an in the country’s west.
Hong Kong investors turn to hotels, industrial assets
Investment activity in Hong Kong dropped 46 percent QOQ and 6 percent YOY to HKD11.2 billion (USD1.4 billion) in Q1, after investor sentiment was hurt by a surge in Omicron cases, global geopolitical tensions and stock market volatility. At the same time, investors turned to hotel assets due to their potential to generate steady revenue as co-living or quarantine facilities. As restrictions are relaxed and macro headwinds ease, Colliers expects transaction volumes to recover in H2. Hotels will continue to attract institutional investors and industrial properties, including data centres and cold-storage facilities, and will regain the spotlight while local investors will likely continue to be focused on retail assets.
Foreign capital flows back into Singapore
Private funds and family offices snapped up prime locations as demand shifted into the commercial sector in response to government measures introduced in December 2021 to rein in the residential sector. Commercial sales drove transaction volumes, which grew 34.4 percent QOQ to SGD10.6 billion (USD7.8 billion) in Q1, boosted by the sale of the mixed-use Tanglin Shopping Centre to Indonesia’s Royal Golden Eagle for SGD868 million (USD645.6 million) in February. As borders reopen, corporate M&A and cross-border activity will fuel capital growth, and demand will increase for retail and hospitality assets. However, prices and volumes will be capped by rising interest rates and geopolitical tensions.
Fewer deals but higher volumes in Seoul office market
Deal volumes in Seoul’s office market stood at a robust KRW4.5 trillion (USD3.6 billion) following the successful closure of a few deals involving large, premium properties. Rising interest rates and dwindling supply could suppress transaction numbers going forward, but mega deals in the works involving prime assets, such as the Brookfield-owned IFC in Yeouido Business District valued at approximately KRW4 trillion (USD3.2 billion), could keep total volumes high. Office prices will continue to trend upward, mainly in the Gangnam area popular with technology companies.
Japanese REITs drive investment across multiple sectors
Japan’s real estate market saw a number of investments in the office, residential and logistics sectors, driven by strong interest from Japanese REITs (J-REITs). Investments also flowed into the hotel and retail sectors, which stand poised for a sustained recovery in line with an overall improvement in the economic outlook as the country seeks to leave Covid-19 concerns behind. Colliers expects to see an increase in cross-border transactions following the easing of restrictions on business travel to Japan. J-REITs will continue to invest in the office and logistics sectors, and interest from foreign investors is already ramping up – as demonstrated by GIC’s purchase of Seibu Group’s hotels and ancillaries for JPY150 billion (USD1.2 billion) and KKR’s plans to acquire all outstanding shares of Mitsubishi Corporation-UBS Realty for JPY230 billion (USD1.9 billion).
Download the Asia Market Snapshot Q1 2022 report 这里
A megatrend that emerged from the last decade and continues to gain momentum is the pivot by investors to non-traditional forms of real estate. The onset of the pandemic has notably accelerated the focus on new economy assets, including those that provide vital infrastructure to the digital economy, such as data centers and logistics. Another powerful trend is the move towards ESG initiatives.
APREA took the opportunity to convene a panel of experts during the association’s annual Asia Pacific Market Outlook 2022 conference to explore how investors are leveraging on these shifts in their investments.
The World is Data Hungry
The increased digitalization of the global economy, driven by the rapid adoption of technologies such as cloud computing and data analytics, has increased the importance of data where it can be considered the lifeblood of the modern global economy. According to Equinix, Asia Pacific could generate up to 6,000 terabits of data per second by the middle of the decade. This will continue to drive demand for the vital pieces of infrastructure that facilitates this – data centers.
All three panelists agreed that data centers will continue to be built across the region. Patrick Boocock, Chief Executive Officer, Private Equity Alternative Assets, Real Assets at CapitaLand Investment, said “We purchased a portfolio of data centers in Europe and China, and we are currently developing two data centers in Korea. We have people looking at assets in every market as part of growing a broader data center platform as we see increasing demand for data in both developed markets and developing markets.” However, Ivy Min, Account Director, Alternative Investments at SS& C Intralinks, who moderated the discussion noted that investments have so far mainly been concentrated in the developed markets.
One reason for this is that, given the higher risks a developer would have to assume in growth markets, it is easier to build scale in the developed markets, said Tak Murata, Co-head of Asia Pacific Private Investing, Head of Asia Pacific Real Estate at Goldman Sachs Asset Management.
Another reason is that there remain significant opportunities in developed markets where supply continue to lag demand. Greater Tokyo, for example, is the world’s second-largest data center market after North Virginia, he added. Ambika Goel, a Managing Director in Blackstone’s Real Estate Group, agreed as she noted that even in Japan, the per capita supply of data centers is 60% below comparable cities.
Prospects in the emerging markets are also promising as there remains significant capacity headroom. Ambika noted that in India, there are about 500 megawatts of deployed data center capacity which is similar to the city of Las Vegas.
“It’s a function of underlying demand and in developing markets where you have a rising middle classes, everyone’s got a mobile phone and potentially a tablet, of course, the need for data centers is going to increase,” Patrick agreed.
More Structured Approach to ESG Agenda
With investors ploughing increasingly more funds into ESG-compliant investments, it is only right that they get what they are paying for. And it is not just about the environment. According to Bain & Co, the measurable impact of ESG will evolve to have a similar level of importance to financial return and risk. However, differing standards and regulations continue to present challenges
Ambika reveals that Blackstone has a structured approach to upholding transparency to investors and stakeholders. The firm, for example, has partnered with Schneider Electric to track its utility spend and carbon footprint, which is “definitely industry-leading”.
Patrick agreed as he noted that the view of investors is critical of what managers are doing to quantify, understand and address ESG issues on their assets. Now there’s far more discipline going into understanding and analyzing ESG implications on real assets, whether its infrastructure or real estate.
“Going forward, we are going to start seeing lots more robust Capex plans for the future to reduce the carbon footprint on the built environment,” he said.
Tak reminded that whilst the Environment component is important, the Social and Governance aspects also need to be addressed. These considerations are necessary to evoke change as the ESG the footprint of a company could reverberate beyond its corporate walls and extends across a company’s value chain as well as its various stakeholders.
“The impact that real estate properties have on the community is something that we think about and measure and try to implement,” he said. . Net Zero a Major Investment Driver
As evidence mounts globally on the effects of climate change, investors in recent years are voluntarily embracing targets to reach net-zero emissions on their assets. Ivy noted that this could introduce investment opportunities for asset managers.
“We’re entering an interesting time across real estate and infrastructure. The world is committed to transitioning to net zero. Assets that are not part of the transition face the risk of obsolescence. CapitaLand Investment is looking at opportunities in renewables and continuing to feed and increase the use of renewable energy from our projects into our logistics and business parks,” Patrick said.
Ambika observed that in the US, occupiers are making the move into more multi-tenanted data centers to focus on access to renewables. She revealed that Blackstone’s data center platform in the US is looking to procure 100% of its power from renewable sources and looking to get green\ certification for 90% of the QTS portfolio, which the firm acquired last year.
All three panelists agreed that massive amounts of investments will be needed to transition the global economy to net zero, with close to US$10 trillion in the next decade; Ambika estimated that close to US$100 trillion is needed to power this to the middle of the century.
However, Tak opined that importantly is where such massive spending will be channeled into. He believes that some of these have to be made in more cutting-edge technologies to put the world through an energy shift, such as hydrogen fuels, to reverse climate change. That means taking more risks on projects. However, he is hopeful that the wave of investments could make such developments more viable.
“That’s another opportunity, where capital that is less financially driven could bring interesting ways to backstop some of these technologies and get it going. It’ll be interesting for us as alternative managers to put these together to bring the next energy shift to the world,” he said
Alternatives – A Good Hedge
Even as the world continues to forge a path toward endemic living and risks from the pandemic subsides, 2022 has opened with renewed threats, first from inflationary pressures and most recently, the Russian incursion into Ukraine. This weakens the economic recovery from the pandemic and heightens stagflation risks.
“This is just going to continually boost some of the current trends,” said Ambika, as she pointed out that the merits of investing in alternatives will be reinforced. She cited that just as what had occurred during the pandemic, the case for supply chain resilience will gain further traction.
“What’s happening globally is that we have to think about having more supply chain shocks in the future; Covid has seen that and I think the situation over Ukraine is another reminder,” she elaborated.
She revealed that Blackstone has committed over US$54 billion of equity to thematic investments, with about 70% of its portfolio in logistics, residential, and life sciences. Aside from these, Blackstone is also betting on the content creation industry. Last year, the firm acquired the Eclipse (formerly known as the Sandcrawler) building in Singapore, which counts Disney and Lucasfilm as tenants.
“This is where growth is far outpacing inflation and we think inflation is something to keep an eye on and we’re watching that as we make our investments,” she pointed out.
Tak agreed as he believes oil price volatility also heightens the case for and accelerates the move to renewables even further. Real estate will also continue to shine in the current environment given new economic trends and the abundance of capital.
“Real estate in terms of an inflation environment is a very interesting asset class; it gives you a bit more equity-like return but still maintains some fixed income-like nature as well,” he elaborated.
The Market Outlook for 2022 looks at Hong Kong’s core sectors (office, industrial, retail, investment) and has forecast a measured yet steady market stabilisation in year of continued recovery, renewal and reset. The research explains we expect a moderate start to the year, with momentum gathering pace from the second quarter onwards. Prices and rents have reset to a more attractive level, and we see now as a good time for investors and occupiers to drive their real estate strategies to capitalise on growth opportunities.
