- Strong occupier demand will continue to fuel a development boom, leading to higher vacancy and ease rent increases
- Highest rent growth expected in Sydney, Melbourne, Tokyo, Bengaluru, Pune and Hyderabad
- Investor interest and ample capital will continue to sustain an active investment market
Solid albeit moderating economic growth has underpinned strong demand gains in most of the 25 major cities in Asia Pacific over the last five years and this trend will continue through 2017, according to Cushman & Wakefield, in its annual forecast report titled “Asia Pacific: Staying the Course in a New World Order”.
Sigrid Zialcita, Managing Director, Research, Asia Pacific at Cushman & Wakefield said, “Asia Pacific is expected to maintain its respectable growth pace into 2017, with gross domestic product (GDP) expanding by 5-5.2% in the year. Collectively, prudent macroeconomic management will continue to underpin economic performance and this bodes well for commercial real estate. In 2017, we expect another year of continued strong occupier demand, healthy investor flows and high transaction volumes in Asia Pacific.”
Strong occupier demand will continue to fuel a development boom, leading to higher vacancy and ease rent increases
Given a relatively healthy economic landscape across the region, we anticipate job gains in office-using employment sectors to drive new office space requirements to record highs in the region. Top-performing markets continue to be those with broad-based growth across industries and sectors such as Shanghai, Beijing and Tokyo; as well as information technology/business process outsourcing (IT-BPO) hubs of Bengaluru, Manila and Hyderabad. Furthermore, positive developments in the banking, financial services and insurance (BFSI); technology, media and telecommunications (TMT); and other professional and business services sectors will underpin the demand strength.
The surging demand for office space has been fuelling a development boom, with office completions expected to reach new highs through 2017. New supply in core markets next year is expected to total an average of 50 million sf, of which 70-80% will come from Beijing and Shanghai in China. As a result, even with still relatively high absorption rates, vacancies in both markets will rise by two to three percentage points to 9-10% for Beijing and 14-15% for Shanghai through 2017. Similarly, the completion of several projects in the CBD in Singapore, including the 1.9 million sf Marina One development, will cause vacancies in this area to climb to a seven-year high of 8-9% but this is likely to be temporary as top-grade office space continues to benefit from a flight-to-quality trend.
“Rising new supply will cause vacancies to edge up. However, rents will continue to hover at record highs in 15 markets, which could pose a strain for occupiers seeking to reduce costs in a slower growth and fast-changing environment. Nonetheless, occupiers will have increasing leverage as more than half of the markets will see vacancies rise to over 14% in 2017,” explained Ms. Zialcita.
Highest rent growth expected in Sydney, Melbourne, Tokyo, Bengaluru, Pune and Hyderabad
Against a backdrop of rising vacancies, rents are expected to be largely flat or increase modestly in core markets through 2017. However, rents are expected to grow the fastest in Sydney and Melbourne in 2017, at 10-11% and 8-9%, respectively, as tight market conditions will increasingly favor landlords. We have already seen substantial rent increases of nearly 20% and 8% in these two markets respectively in 2016. In Tokyo, rents will continue to edge up to their eight-year highs in 2017 but the new supply coming on in 2018 could hold back the rent gains seen in the last five years. India’s leading technology hubs, Bengaluru, Pune and Hyderabad will also witness the highest rent growth among emerging markets next year – at 17%, 10% and 6% respectively, due to strong take-up in the IT/Information Technology enabled Services (ITeS) sector.
“Landlords will have the upper hand in markets with single-digit vacancies and above-average rent growth. Sydney, Melbourne, Tokyo, Bengaluru, Pune, Hyderabad, Chennai and Bangkok will witness the highest rent growth next year,” noted Ms. Zialcita.
Investor interest and ample capital will continue to sustain an active investment market
Preliminary estimates indicate that real estate transaction volumes in 2016 have surpassed 2015’s levels. Office investments hit a record high in Singapore, Hong Kong and Seoul this year, bolstered by some big ticket transactions. However, there was a pullback in Australia and Japan given the continued rise in office values and the ongoing shortage of stock.
2017 will continue to draw investor interest and ample capital, which will sustain steady investments in the region. It will be a record year for India on the back of two ongoing high-profile foreign-funded private equity real estate transactions valued at nearly US$3.0 billion.
Foreign investments will remain a strong pillar in driving transaction volumes in the region, with China taking center-stage. In 2016, China accounted for 25% of foreign investments in the region’s commercial real estate, up from 13% in 2015. Its investments will be sustained in 2017 given its large capital base and the general lack of domestic investible income-producing assets. In addition, more sovereign foreign funds from oil-producing countries will look to increase their exposure to real estate to diversify their reserves. In 2016, capital from the Middle East made up close to 10% of total foreign investments in Asia Pacific, largely due to Qatar Investment Authority’s purchase of Asia Square Tower 1 in Singapore for a record USD2.45 billion.
Cross-border activity will continue to drive a sizeable share of transactions in Asia Pacific.
“In summary, despite the ongoing changes and uncertainties in the political and economic environment on the global front, Asia Pacific economies will continue to have a solid growth outlook. Most core markets in the region are viewed as safe havens and will remain popular destinations. However, with yields in most core markets already pass their ten-year lows, investors will be compelled to take a longer view with their investments. As such, markets such as Singapore, at a cyclical low, are perceived as good investment targets. This will also fuel higher risk investments into the emerging markets. We expect markets in India and in Southeast Asia, led by the Philippines and Vietnam, to benefit from strong foreign interest,” said Ms. Zialcita.
For further information, please contact:
Managing Director, Research, Asia Pacific
+65 6232 0875
Foo Chek Yee
Head of Communications, Asia Pacific
+65 6232 0802