Asia Pacific Property Cycle Monitor

Transcription

1 RREEF Real Estate Research June 2008 Asia Pacific Property Cycle Monitor Table of contents Economic Context...2 Office...4 Shopping Centres...10 Industrial...14 Appendix...18 Authors: Tan Yen Keng Koichiro Obu koichiro.obu@rreef.com Henry (Wei) Chin +44 (0) henry.chin@rreef.com Peter Hobbs +44 (0) peter.hobbs@rreef.com Introduction The global credit crisis continues to cast a long economic shadow over North America and Europe this year, but the Asia Pacific region remains reasonably well insulated from the fallout so far. Throughout much of the region, economic fundamentals have held up relatively well, with limited exposure to syndicated loans and public-debt finance. On the other hand, concerns about rising prices for food, raw materials, and fuel have stoked fears of inflationary pressures in central banks throughout the region. Within the region, property markets continue to show significant variations in maturity, performance, and movement through their real estate cycles. Within the office market, the aggressive expansion of financial and professional services firms in 2007 spurred demand in the core submarkets in many of Asia s major cities, but in 2008 this demand has moderated slightly from last year s frenetic pace. Meanwhile, high costs and limited availability in many CBDs has spurred supply in peripheral areas. Such is the case in both Hong Kong and Singapore where significant amounts of supply are in the pipeline for decentralized areas. In Hong Kong, the office market is expected to soften in the second half of this year, and new deliveries in Singapore within the next five years will usher in softer market conditions as well. In India s major cities, a similar pattern is underway, with satellite and suburban office districts set to supply most of the new space in Mumbai, New Delhi, Bangalore, and Chennai. Market conditions in China s major cities are more varied though. Beijing s currently weak fundamentals are well-positioned for recovery as robust demand continues to absorb an overhang of new construction. In Shanghai s Pudong and Puxi districts, however, a burst of new supply is expected to end the recent period of double-digit rental growth. Fundamentals in Guangzhou will also remain weak over the next few years amid ample new construction in new districts. In Japan, Grade A space in Central Tokyo continues to be extremely tight, although demand has softened slightly this year. Elsewhere in the Asia Pacific region, fundamentals appear well-positioned for growth in Seoul, Taipei, Sydney, and Melbourne. The Bangkok office market continues to be the region s laggard. Lured by vibrant economic and job growth, an expanding middle class population, and increasing volumes of retail sales and tourists, cross-border retailers flock to Asia s booming retail property markets. Of the key Asian shopping centre markets, Hong Kong and Shanghai are both positioned well for rental expansions over the next few years. In Bangkok, retail fundamentals face obstacles on both the demand and supply side of the market. The global economic downturn has led economists to revise GDP growth forecasts downward across the region an indication of concern for possible negative impacts on the region s industrial production, exports, and domestic consumption. Still, a moderately positive outlook prevails for the industrial and logistics market in the Asia Pacific region. This is based on a cautious expectation of relatively resilient regional economic growth, a broad manufacturing base, and a persistent shortage of high quality industrial buildings. The result should be solid rental growth across most Asian industrial markets over the next five years. Demand for distribution and logistics space is strong throughout Asia, with important hubs of activity centred on the region s largest container ports and airports in Hong Kong, Singapore, Shanghai, and Tokyo. IMPORTANT: PLEASE SEE CONFLICT DISCLOSURES IMMEDIATELY AT THE END OF THE TEXT OF THIS REPORT

2 RREEF Research 1

3 Property Cycle Monitor: Economic Context Strong economic fundamentals and limited exposure to syndicated loans underpin the relative stability of the Asia Pacific region Global economic growth will slow to 3.7% in 2008 from 4.8% in 2007 according to the latest Deutsche Bank forecast. 1 With a global credit crisis stifling growth this year in the US and much of Western Europe, Asia though not immune from this credit crisis has remained relatively shielded so far. Strong economic fundamentals in the region and limited exposure to syndicated loans have underpinned the region s relative stability. After a moderate deceleration this year, most Asia Pacific economies will pick up a modest amount of speed in Real GDP Growth (%) % e 2008 f 2009 f JP AU TW SK TH HK MY SG PH IN CN Source: Deutsche Bank Securities, Global Economic Perspectives, 19 May 2008; and Deutsche Bank, Asia Economics Monthly, 14 May Though inflationary pressures from rising commodity prices including fuel, food, and raw materials have threatened the region s economic stability for several months, those worries could ease by late Deutsche Bank economists expect Asia s mounting inflationary pressures to peak in mid-2008 before subsiding, albeit modestly, by year-end. 2 The boom continues, but real GDP growth in China and India will be nearly two points slower in 2008 Japan s modest expansion will slow in 2008 China s real GDP growth was revised upward to 11.9% for 2007, but moderating export growth in 2008 is likely to hold economic growth to 10.7% for the year. 3 Rising prices for rice, raw materials and wages will push China s consumer price inflation to peak at 7.2% for 2008 before subsiding to a sub-5% level in A heavy inflow of foreign capital prompted India to hike cash reserve ratios in 2007, and inflationary worries triggered the central bank to raise those ratios another 25bps to 8.25% as of April India s economy continues to expand at an unprecedented pace, but like China, it will shave nearly two points off of its real GDP growth rate in 2008, from 9.2% growth last year to 7.4% this year. Slower economic growth is a trade-off the central bank seems willing to accept given its aggressive attention to curbing inflation. Tugged by slow growth on the one hand and inflationary pressures on the other, Japan s central bank may play wait-and-see in the near term. If sluggish economic conditions persist, however, the central bank could be convinced to cut rates by the third quarter. We expect modest economic growth in Japan of just 1.1% for Deutsche Bank Securities, Global Economic Perspectives, 19 May 2008, p 2. 2 Deutsche Bank, Asia Economics Monthly, 14 May 2008, p.3. 3 The previous Deutsche Bank forecast for China s 2008 GDP growth was actually 10.0%, but this was recently revised upward to 10.7% to reflect additional construction expenditures associated with postquake rebuilding and emergency efforts in Sichuan province. RREEF Research 2

4 The Philippines, Singapore, and Malaysia will not dip below 5% growth in 2008 External conditions will impact Hong Kong and Taiwan Domestic demand bodes well for Thailand, but less so for South Korea As in the big economies of Japan, China, and India, economic growth is moderating throughout the rest of Asia as well. The ASEAN countries of the Philippines, Singapore, and Malaysia will still maintain GDP growth rates above 5% in 2008 and inflationary pressures will remain perhaps the biggest concern in all three countries. 4 Inflation is particularly a concern in the Philippines, where interest rate hikes are widely anticipated this summer. The relative strength of Singapore s economy is underpinned by strong domestic demand, but manufacturing exports remain at risk due to uncertain external demand conditions. Commodity exports are benefiting Malaysia, and new policy initiatives like corporate tax cuts, looser foreign investment requirements, and the abolition of capital gains on property, all appear to support future economic growth. Elsewhere though, growth rates in 2008 are likely to hang below that 5% benchmark. The slowdown in Hong Kong and Taiwan could be relatively sharp. As export markets weaken, growth rates in both countries could slip by nearly two points in Hong Kong s growth will slide to 4.5% in 2008 from 6.3% in 2007 while Taiwan will expand at 3.8% this year, down from 5.7% in This downturn, however, should be temporary, with both markets rebounding in In Thailand, South Korea, and Australia, GDP growth will also ease slightly. The landing in Thailand will perhaps be the softest. The country s domestic demand is already improving as businesses and consumers regain confidence. In South Korea, relatively weak domestic demand and employment growth will dampen economic performance. Australia s job growth and domestic demand remain in good shape, but the aggressive monetary tightening anticipated by the central bank this year will squeeze demand in the household sector and trim overall economic growth. 4 RREEF Research, Focus on South East Asia Rising to the pressure of capital, May RREEF Research 3

5 Property Cycle Monitor: Office The Asia Pacific region s office market hit peak growth in 2007 but is now decelerating Asia s list of investmentgrade cities is growing Asia s office markets topped off a vibrant growth cycle in Growth continues this year in most markets, but the momentum has slowed. Over the next few years, many of these markets will face slower demand and significant supply deliveries that will drag rental growth down. This slowdown will be most painful in Hong Kong and Singapore, with Guangzhou also feeling some of the pinch. Meanwhile, Seoul and Sydney have yet to hit their cyclical peaks. Inadequate levels of new supply will keep both markets expanding through the end of the decade. The expansion of financial, professional, and other services firms continues to be a major driver of office market demand in the Asia Pacific region despite recent uncertainty in the global financial markets. As this happens, many previously second-tier or otherwise obscure Asian cities are nudging their way onto more and more global lists. Many lesser known cities in China and India like Guangzhou, Shenzhen, Bangalore and Chennai have rapidly emerged from relative obscurity into serious contenders for global status in just the past few years. And within many of these cities themselves, another trend is emerging: peripheral submarkets are rising to challenge the existing status of central, or CBD, submarkets. Financial and professional services firms prefer to cluster closely in CBDs or prestigious core submarkets, and this has traditionally funnelled demand into the most supplyconstrained submarkets. But a growing list of firms in these cities MNCs, IT firms, newly listed domestic companies are willing to locate in developments outside the CBD. In Hong Kong, Mumbai, and Delhi, substantial new construction will soon be delivered, with almost all of it located in the less constrained peripheral areas. Hong Kong s peripheral districts face a wave of new supply from 2008 to 2012 Singapore s vibrant rental growth cycle will end with a significant boost to Grade A stock over the next five years The vacancy rate for prime space in Central Seoul is unlikely to break above 1% until 2011 Among the Mature Asian Markets, Hong Kong is under pressure, brought on mostly by a barrage of new supply. Hong Kong will add 250,000 sqm of office space in 2008, mostly in peripheral areas. This new stock includes ICC Phase 1 in West Kowloon, One Island East in Quarry Bay, and Landmark East in Kwun Tong, and it will be followed by another 570,000 sqm due for delivery between 2009 and As Morgan Stanley, Credit Suisse, and Deutsche Bank all relocate to decentralised areas over the next two years, their departure from Central will release nearly 50,000 sqm of prime office space and moderately loosen an otherwise tight vacancy rate in the submarket. Hong Kong s overall office vacancy rate dipped to a cyclical low of under 2% in 2007, but it is already on the rise again and will likely top out by 2010 at above 5%. Rents will remain flat this year, but falling in both 2009 and 2010, before recovering in Though slower global demand has cut into its rental momentum, Singapore s rents will still climb more than 10% this year enough to rank it first among Asia Pacific office markets in Rental growth will evaporate by 2009, however, as extensive new supply begins to come on line in various developments, including MBFC, Ocean Building, and Marina View. From 2010 to 2012, the market will add 570,000 sqm of new Grade A office space, boosting the existing Grade A stock by 25%. The vacancy rate, currently near 1%, will shoot up to 2005 s level by the time this wave of new stock is all brought on line. For now, the government is addressing the supply constraint issue by relocating non-core agencies out of the CBD to free up space. As Singapore s cycle winds down, Seoul s office market will be holding at peak performance for at least another year or two. The vacancy rate for prime space in Central Seoul fell below 1% in 2007, where it will remain until 2011 when nearly 600,000 sqm of new Grade A offices are due to complete. In the interim, limited space availability in Central Seoul has pushed many conglomerates such as Hyundai, KIA, and LG Electronics to pursue expansions in non-core submarkets. These unusually tight fundamentals will push rents in Central Seoul up by 10% in 2008 and By 2011, significant levels of RREEF Research 4

6 new supply will depress rental growth to some degree, but RREEF Research does expect this to destabilise the market s fundamentals since these new high-quality buildings will fill an underserved demand niche which the Grade A market should be able to absorb. Pent-up demand for Grade A space drives the Central Tokyo market even during relatively slow economic times. Tight availability in Sydney will keep the vacancy rate falling for another two years Fundamentals vary significantly across China s major cities CBDs of India s major cities remain supply constrained, but construction in decentralised areas is ample Years of limited construction have contributed to tightening office markets in Japan s major cities. Prospective office tenants face an overall vacancy rate near 3% in Central Tokyo. With only a limited amount of Grade A space available, the true vacancy rate for prime space can run even lower. Several new developments in Central Tokyo, including the Shin Marunouchi Building, Tokyo Midtown, and Grand Tokyo North and South Towers, all entered the market with full occupancy in 2007, underscoring the enormous degree of pent-up demand for prime space. In the three largest regional cities Yokohama, Osaka, and Nagoya market dynamics are forecast to remain stable through the end of the decade. Rental growth peaked near 21% in Tokyo in 2007 but a moderate stream of new supply and weaker near-term demand conditions will pull the growth rate back into the 1%- 5% range for the remainder of the decade. 5 Rents will edge up modestly over the forecast in Yokohama, Osaka, and Nagoya as well, but generally with less vigour than Tokyo. A robust economic expansion in Australia in 2007 boosted office demand in the CBDs of both Sydney and Melbourne and pushed vacancy rates toward cyclical lows. New supply deliveries in 2008 and 2009 will bring Melbourne s vacancy rate up, but in Sydney, limited near-term additions to supply should keep the vacancy rate falling for another two years. Rental growth in both cities should maintain positive, but decelerating, momentum through the end of the decade. Rents in both cities are likely to rise by another 10% this year, gradually easing back to about 5% annually by Most of the Emerging Asian Markets are well into the growth phase of their cycles, but China s leading cities face somewhat different degrees of cyclical activity. Beijing is experiencing a significant wave of new supply, the bulk of which is being added in the CBD and Financial Street submarkets. Yet even with this boost to inventory, solid demand from domestic and international firms has kept rental growth from turning negative. After 2008, the supply pipeline will begin to wane, allowing rents to regain momentum. In Shanghai, a dearth of new supply pushed rents up by double-digit rates in both the Pudong and Puxi submarkets in 2007 and kept vacancies at a tight 2%. Despite strong demand for prime office space from MNCs, professional services, and financial services, rental growth in both submarkets will quickly diminish as new deliveries of 2.5 million sqm in Pudong and 1.1 million sqm in Puxi will hit the market between 2008 and Fundamentals in Guangzhou are currently somewhat weaker than in Beijing or Shanghai. A substantial pipeline of projects will deliver over the next two years as momentum for prime office space shifts from the older submarket of Dongshan to the newer areas of Tianhe and Zhujiang New Town. Guangzhou s vacancy rate should hold in the 20%-25% range over the forecast. Rents will fall in the short term, but should regain upward momentum by Swift economic growth has spurred a fierce demand for the limited stock of high-quality office space in the core areas of India s major cities. This demand drove office rents up more than 30% in Mumbai in 2007 and more than 50% in Delhi and Bangalore. A significant construction pipeline in SBDs and decentralised areas, however, will hold rental growth in these cities to under 10% in 2008 and will put further pressure on rents over the next few years. In Mumbai, the construction is spread across several peripheral districts including SBD Central, SBD North, and suburbs like the emerging Navi Mumbai. In Delhi, the submarkets with the fullest supply pipelines area Gurgaon, Noida, and SBD, and in Bangalore and Chennai, the construction is mostly SBD. The CBDs of all four cities will continue to remain constrained, forcing more demand to decentralised areas. In other parts of Emerging Asia, Taipei and Manila both offer relatively good opportunities for near-term rental growth. Taipei s centrally located and supply-constrained Xin-Yi 5 RREEF Research, Japan Quarterly 2Q Research Topic: Making sense of the rental market, June RREEF Research 5

7 district is a highly favoured location with a large share of the city s Grade A stock. Only a moderate amount of new supply is expected over the next few years (much of it already pre-leased), and this should help boost Taipei s rents by 14% this year plus another 6%- 8% annually over the next three years. Demand in Manila is driven largely by BPO tenants. Despite new construction deliveries this year, supply and demand fundamentals remain relatively well-balanced, and this should keep rents growing at about 6% annually through The real competition in the Manila office market is between the Makati CBD and the more cost-competitive decentralised areas, all of which target cost-sensitive BPO tenants. The outlook for Kuala Lumpur s office market is cautiously upbeat. Several megainfrastructure projects were deferred when Malaysia s ruling political party lost its two-thirds majority in the March parliamentary election, but on the upside, the country s lively political transition should bring positive reforms over the medium and longer term. At least three major themes underscore Malaysia s increasingly positive market environment. First, domestic consumption has proven surprisingly resilient against a backdrop of political volatility. Second, Malaysia s capital management revolution continues unimpeded. And third, saving rates in Malaysia are some of the highest in the region, providing ample capital for domestic and (increasingly) offshore investment, too. 6 Kuala Lumpur benefits from strong, broad-based demand across a wide range of sectors, but this will be offset by an anticipated stream of supply through 2012 in both the CBD and decentralised areas. The result will be a relatively stable market with modest to moderate growth prospects further supported by a wide yield spread and the emergence of a REIT market. Fundamentals in Bangkok are less compelling. The office market will be burdened by a persistent double-digit vacancy rate over the next five years. Office rents will decline again this year as the market struggles to stabilise. Demand remains weak this year, but will gradually recover, allowing rents to rise at 1%-2% annually from 2009 onward. 6 Deutsche Bank. Malaysia Country Book Positive changes underway, but patience required, May 2008 RREEF Research 6

8 Office Market Cycle Emerging Markets Forecast Years YE07 YE08 YE09 YE10 YE11 YE12 GRW PGW GRW GRW GRW PGW REC CON REC GDP Growth* 9.8% % Vacant 8.0% Rent Momentum Increase+ 8.7% 8.3% 7.9% 9.8% 9.5% 9.0% Increase Increase Increase 7.3% 8.1% Stable 7.1% 8.3% Increase Mature Markets Forecast Years YE07 YE08 YE09 YE10 YE11 YE12 GRW PGW PGW PGW GRW GRW REC CON REC GDP Growth* 3.0% % Vacant 3.3% Rent Momentum Increase+ 2.4% 2.6% 2.4% 2.5% 2.4% 4.0% 4.6% 4.9% 5.1% 4.6% Increase Stable Stable Increase Increase * Weighted by the size of GDP at the national level in US dollar Key: REC = Recovery GRW = Growth PGW = Post Growth CON = Contraction Source: RREEF Research, Deutsche Bank Research, and Global Insight Office Sector Outlook Drivers Sustained economic growth throughout the region continues to spur office demand in most major cities of Mature and Emerging Asia. Financial and professional services firms continue to expand in Asia, creating demand for high-grade office space. A structural shortage of quality stock (following years of limited construction) in Mature markets, and a large investible stock with sale-and-leaseback, securitisation, and institutionalisation opportunities. Constraints High levels of new construction will squeeze rental growth throughout the region, with particularly dramatic reversals of fortune in Hong Kong and Singapore, and some softening in Shanghai. High costs and limited availability of Grade A space in many core submarkets increasingly pushes demand to decentralised areas. The pace of economic growth in Asia is susceptible to broader macro economic factors, including inflationary pressure on food and energy prices, a rebalancing of currency exchange rates, and subdued external demand for Asian exports. RREEF Research 7

9 Implications: Timing of changes Wide variation is anticipated for rental cycles across the region, from sharp downturn (Hong Kong, Singapore), to robust sustained growth (Seoul, Taipei) to steady recovery (Beijing). Recovery in Bangkok dependent on a sustained renewal of business confidence. Asia Office Market Performance Out-Perform Average Under-Perform Seoul Beiijing Bangkok Taipei Shanghai (Pudong & Puxi) Guangzhou Manila Tokyo Hong Kong Kuala Lumpur Yokohama Singapore Sydney Nagoya Osaka Mumbai New Delhi Bangalore Chennai Melbourne Source: RREEF Research RREEF Research 8

10 Forecast YE Emerging Markets Stage Growth Growth Growth Growth Post Growth Recovery Rent Momentum Increase+ Increase Increase Increase Stable Increase Beijing Stage Post Growth Post Growth Post Growth Recovery Recovery Growth Rent Momentum Stable Stable Stable Increase Increase Increase Shanghai (Pudong) Stage Growth Growth Growth Post Growth Post Growth Post Growth Rent Momentum Increase+ Increase Increase Increase Stable Stable Shanghai (Puxi) Stage Growth Growth Growth Post Growth Post Growth Post Growth Rent Momentum Increase+ Increase Increase Increase Stable Increase Guangzhou Stage Contraction Contraction Contraction Contraction Recovery Recovery Rent Momentum Stable Decrease Decrease Decrease Stable Increase Mumbai Stage Growth Growth Growth Growth Post Growth Post Growth Rent Momentum Increase+ Increase Increase Increase Stable Stable New Delhi Stage Growth Growth Growth Post Growth Post Growth Post Growth Rent Momentum Increase+ Increase Increase Stable Stable Stable Bangalore Stage Growth Growth Growth Growth Growth Growth Rent Momentum Increase+ Increase+ Increase Increase Increase Increase Chennai Stage Growth Growth Growth Growth Growth Growth Rent Momentum Increase+ Increase+ Increase+ Increase Increase Increase Kuala Lumpur Stage Growth Growth Growth Growth Post Growth Post Growth Rent Momentum Increase Increase Increase Increase Stable Stable Bangkok Stage Contraction Contraction Recovery Recovery Growth Growth Rent Momentum Stable Decrease Stable Stable Stable Stable Manila Stage Growth Growth Growth Growth Growth Growth Rent Momentum Increase+ Increase Increase Increase Increase Increase Taipei Stage Growth Growth Growth Growth Growth Growth Rent Momentum Increase+ Increase+ Increase+ Increase Increase Increase Mature Markets Stage Growth Post Growth Post Growth Recovery Growth Growth Rent Momentum Increase+ Increase Stable Stable Increase Increase Hong Kong Stage Growth Post Growth Contraction Contraction Recovery Growth Rent Momentum Increase+ Stable Decrease+ Decrease+ Increase Increase Seoul Stage Growth Growth Growth Growth Growth Growth Rent Momentum Increase Increase+ Increase+ Increase Increase Increase Tokyo Stage Growth Growth Post Growth Recovery Growth Growth Rent Momentum Increase+ Increase Stable Increase Increase Increase Yokohama Stage Recovery Recovery Recovery Recovery Recovery Recovery Rent Momentum Increase Stable Stable Stable Stable Stable Nagoya Stage Recovery Recovery Recovery Recovery Recovery Recovery Rent Momentum Stable Stable Stable Stable Stable Stable Osaka Stage Recovery Recovery Recovery Recovery Recovery Recovery Rent Momentum Stable Stable Stable Stable Increase Increase Singapore Stage Growth Growth Post Growth Contraction Contraction Recovery Rent Momentum Increase+ Increase+ Stable Decrease+ Decrease+ Stable Sydney Stage Growth Growth Growth Growth Post Growth Post Growth Rent Momentum Increase+ Increase+ Increase+ Increase+ Increase Increase Melbourne Stage Growth Growth Post Growth Growth Growth Growth Rent Momentum Increase+ Increase+ Increase Increase Increase Increase Source: RREEF Research RREEF Research 9

11 Property Cycle Monitor: Shopping Centres Asia Pacific shopping centres appear well-positioned for growth in 2008 and beyond Hong Kong s shopping centre market is boosted by a wide range of supply and demand factors Near 1% vacancy levels keep Singapore s rents growing steadily Asia s retail property markets benefit from a convergence of positive factors. Jobs, incomes, the middle class population, retail sales, and tourism are all on the upswing, and thus capture the interest of cross-border retailers. Booming retail sales in 2007 pushed rents up by double-digit levels in Hong Kong, Shanghai, Delhi, Mumbai, and Kuala Lumpur. With the exception of Bangkok and Beijing, the outlook for rental growth in 2008 looks positive, and the Asia Pacific region as a whole appears well-positioned for growth over the forecast period. The retail outlook for Mature Asian Markets in 2008 and beyond is quite positive. The vacancy rate for prime space in well-located areas hovers below 4% in Hong Kong. The lack of prime retail space in major shopping districts has prompted some office owners to convert floors of office building to retail uses. A rising volume of tourists from the Chinese mainland give Hong Kong s shopping centre market an added boost, as do other long-haul travellers to China who often pass through Hong Kong each way. Upscale cross-border retailers, often testing the waters in Hong Kong before entering China, provide the market with the cutting-edge retail prestige of first-mover advantage. The overall effect will be another year of double-digit rental growth in 2008, easing back to 5% annual growth through Other mature Asian retail markets are firmly entrenched in their growth cycles as well. Amid a broad construction boom, Singapore s robust economy supports a generally positive retail market. Improving consumer confidence has produced sustained retail sales growth. Two new malls in the Orchard Road area will join the island s existing stock of dated retail space in 2008, which could spur structural change in the market. Extensive pre-leasing of this space will keep Singapore s retail vacancy rate holding steady in the 1% range. New integrated resort/casino developments will follow later in the decade as part of a coordinated plan to draw more international tourists to the island. Expect rental growth to average a steady 3% pa through Solid fundamentals underpin the retail markets in the major cities of Australia. Retail rents in Sydney and Melbourne will grow steadily at about 4.0% pa over the forecast period. Stagnant incomes and retail sales provide little demandside spark to Tokyo s retail market Tokyo s rental growth forecast is positive, but modest. 7 Stagnant incomes and consumer spending offer little opportunity to boost domestic retail sales. At the same time, the retail stock has been expanded, and this has spurred competitive reactions among owners to fill the space. Although suburban shopping centre rents will languish in the short term, there could be longer term benefits from a regulatory cap on new retail developments that went into effect in late This new cap will limit suburban shopping centres in Japan to 10,000 sqm. Tokyo s retail rents should hold relatively flat in the short term and rise toward 2% pa by Rental growth for shopping centres in South Korea tends to be structured more on turnover than on the actual base rent (which generally tracks CPI). Hence, over the period, we project base retail rents to grow at around 3% pa in the prime shopping centres in Seoul roughly in line with CPI projections. Newly attained affluence spurs retail demand in the major cities of China Rising levels of affluence in Emerging Asian Markets drive retail sales growth, especially in China. Retail rents in Shanghai expanded by 15% in 2007 but the pace will slow to half that rate this year. Shanghai will still rank among Asia s growth leaders in rental growth, at least in the near term. The city has emerged as a must-enter market for many international retail chains, and demand created by this foreign influx often exceeds supply. Cross- 7 RREEF Research, Japan Quarterly 2Q Research Topic: Making sense of the rental market, June RREEF Research 10

12 border retailers have flocked to Beijing as well, but the rush to establish a presence in advance of the 2008 Olympics may have destabilised fundamentals. Rents will fall by year-end 2008 and then take a few years to recover fully. and India Solid retail fundamentals can be found in Kuala Lumpur and Taipei Bangkok s retail market still faces serious obstacles Rapid increases in jobs and incomes are spurring the retail market in urban India as well. Retail rents shot up at double-digit rates in 2007 in Mumbai and Delhi and should post gains again in 2008, albeit at single-digit rates. Threatening this phenomenal growth, however, is a pipeline bursting with new construction. Delhi will add more than 500,000 sqm in 2008 and Mumbai will add more than 750,000 enough space to hold average rental growth below 5% pa over the next five years. Elsewhere in Asia, Kuala Lumpur and Taipei are experiencing solid fundamentals. Tourism from the Middle East and steady wage growth underpin Malaysia s retail sales. Cross-border retailers continue to open new outlets in Kuala Lumpur, spurring a consistent demand for quality spaces, especially in the prime retail malls which are almost fully occupied. Fundamentals are in good shape, with modest levels of new supply expected and robust demand that should produce rental gains of around 3%-4% pa from 2008 through The outlook for the shopping centre market in Taipei is even more upbeat. Starting in the latter half of 2008, Taiwan s newly elected government plans to begin opening the country on weekends to a limited number of tourists from five mainland Chinese cities. The move should give an extra boost Taiwan retail markets. Taipei s retail rents rose 6% in 2007 and could outpace that rate this year, before gradually decelerating to a 5% pa pace by Of the cities in emerging Asia, Bangkok s current retail fundamentals struggle most to overcome a series of obstacles. Several new projects due for completion will boost Bangkok s retail stock and drive rents down again in A weak recovery should follow with rental growth averaging 2% pa from 2009 onward. Retail Market Cycle Emerging Markets Forecast Years YE07 YE08 YE09 YE10 YE11 YE12 GRW PGW GRW GRW GRW GRW GRW REC CON GDP Growth* GDP Per Capita * Rent Momentum Mature Markets 9.8% 5,420 Increase+ 8.7% 8.3% 7.9% 7.3% 7.1% 6,045 6,683 7,434 8,168 8,910 Increase Increase Increase Increase Increase Forecast Years YE07 YE08 YE09 YE10 YE11 YE12 GRW PGW GRW GRW GRW GRW GRW REC CON GDP Growth* GDP Per Capita * Rent Momentum 3.0% 32,364 Increase+ 2.4% 2.6% 2.4% 2.5% 2.4% 36,171 38,927 41,516 43,771 46,115 Increase Stable Increase Increase Increase * Weighted by the size of GDP at the national level in US dollar Key: REC = Recovery GRW = Growth PGW = Post Growth CON = Contraction Source: RREEF Research, Deutsche Bank Research, and Global Insight RREEF Research 11

13 Retail Sector Outlook Drivers Strong demand drives retail markets in Hong Kong, China, and India. Middle-class population rapidly expanding in Emerging Asia. Cross-border retailer interest across many markets, especially Hong Kong, China, and India. Intra-regional tourism developing: Shoppers from China boost Hong Kong s retail sales. Resort/casino tourism expected to boost Singapore by end of decade. Kuala Lumpur is trying to promote itself as the major shopping destination for Middle East tourists. Constraints Rising inflation and falling equity prices could erode purchasing power and real retail sales growth. Income growth and retail demand lagging in Japan Implications: Timing of changes The Mature Asian Markets are well-positioned in their growth phases through the rest of the decade. With the exception of Bangkok, retail demand looks positive across most Asian markets in the near term. On the supply side, a construction spike in Beijing this year is set to throw fundamentals out of balance for the remainder of the decade. Asia Retail Market Performance Out-Perform Average Under-Perform Shanghai Seoul Beijing Hong Kong Tokyo Bangkok Singapore Sydney Mumbai Melbourne Kuala Lumpur New Delhi Taipei Source: RREEF Research RREEF Research 12

14 Forecast YE Emerging Markets Stage Growth Growth Growth Growth Growth Growth Rent Momentum Increase+ Increase Increase Increase Increase Increase Beijing Stage Growth Contraction Recovery Recovery Recovery Recovery Rent Momentum Increase+ Decrease+ Stable Stable Increase Stable Shanghai Stage Growth Growth Growth Growth Growth Growth Rent Momentum Increase+ Increase+ Increase+ Increase Increase Increase+ Mumbai Stage Growth Growth Growth Growth Growth Post Growth Rent Momentum Increase+ Increase+ Increase+ Increase Increase Increase New Delhi Stage Growth Growth Growth Growth Growth Post Growth Rent Momentum Increase+ Increase+ Increase+ Increase Increase Increase Kuala Lumpur Stage Growth Growth Growth Growth Growth Growth Rent Momentum Increase+ Increase Increase Increase Increase Increase Bangkok Stage Contraction Contraction Recovery Recovery Recovery Recovery Rent Momentum Decrease+ Decrease+ Stable Stable Stable Stable Taipei Stage Growth Growth Growth Growth Growth Growth Rent Momentum Increase+ Increase+ Increase+ Increase+ Increase+ Increase+ Mature Markets Stage Growth Growth Growth Growth Growth Growth Rent Momentum Increase Increase Stable Increase Increase Increase Hong Kong Stage Growth Growth Growth Growth Growth Growth Rent Momentum Increase+ Increase+ Increase+ Increase+ Increase+ Increase+ Seoul Stage Growth Growth Growth Growth Growth Growth Rent Momentum Increase Increase Increase Increase Increase Increase Tokyo Stage Recovery Recovery Recovery Growth Growth Growth Rent Momentum Stable Stable Stable Stable Stable Stable Singapore Stage Growth Growth Growth Growth Growth Growth Rent Momentum Increase Increase Increase Increase Increase Increase Sydney Stage Growth Growth Growth Growth Growth Growth Rent Momentum Increase Increase Increase Increase Increase Increase Melbourne Stage Growth Growth Growth Growth Growth Growth Rent Momentum Increase Increase Increase Increase Increase Increase Source: RREEF Research RREEF Research 13

15 Property Cycle Monitor: Industrial Lack of investment grade industrial buildings constrains many Asian markets Spill-over from Singapore s office market has helped push industrial rents up at double-digit rates Hong Kong s stellar fundamentals encourage greater cost competition from within the Pearl River Delta Significant structural changes are underway in Japan s industrial market Slowing global growth in 2008 will drag on the Asia Pacific region. Industrial production grew 8% within the region in 2007 but will slip to 7% this year. As a result, the outlook for the Asian warehouse and logistics market still remains quite positive. The region s broad manufacturing base, its growing domestic consumption, and its vigorous export activity help boost industrial demand while a relative shortage of good quality supply provides a constraining effect. The result is a positive outlook for rental growth in the short and medium term across most of the region s industrial property markets. Demand for distribution and logistics is strong throughout Asia with important warehouse and logistic hubs centred on the region s largest container hubs and airports in Singapore, Shanghai, Hong Kong, and Tokyo. The Mature Asian Markets are all well placed within the growth phase of the current industrial property market cycle. Singapore s industrial property market is booming (especially business parks). Rents grew at double-digit levels in 2006 and 2007 and this pace should continue through 2008 before tapering back into single digits. New supply is limited, as the government controls the release of new land parcels for industrial development. The lack of available office space in Singapore has also created a spill-over effect as some companies have turned to business-park properties as an alternative for back office space. This has further tightened the overall industrial market. However, when the large new office supply comes on stream beginning in 2010, the spill-over demand from office occupiers will diminish. While it poses no immediate competitive threat to Singapore, Malaysia s long-term plan to develop the Iskandar Development Region in Johor (across the Strait) will be a project with structural implications for Singapore, and its progress should be monitored over the long-term. Hong Kong s current industrial fundamentals are in great shape. As one of the world s major ports and a re-export gateway for China s rapidly expanding economy, demand for industrial space from major retailers and logistics providers holds steady despite Hong Kong s high costs. New industrial supply has been limited, with a large portion of investment grade property controlled by a handful of owners. Over the next five years, rental increases should average from 3%-4% pa. Over the longer term, maturing mainland locations like Shenzhen and Guangzhou could pose serious competitive challenges to Hong Kong s industrial market. The Japanese industrial market is undergoing significant structural change. The outsourcing of distribution functions to third parties has gained popularity. Foreign developers now deliver increasingly popular multi-tenant facilities as large as 100,000 sqm, leaving many older industrial properties obsolete. Despite pent-up demand for modern and efficient facilities with large floor plates, rental gains remain marginal. Industrial production in Japan will grow at an average of just 1% pa over the next five years, and Tokyo s industrial rents are forecast to rise by 1%-2% pa through The advantages of Australia s industrial market are many: an abundance of blue chip tenants, leases with long terms and regular reviews, high quality stock, relatively good fundamentals, excellent transport infrastructure, booming export demand for commodities, and generally good economic conditions. A larger supply pipeline in Sydney will hold rental growth to about 3% pa through In Melbourne, the country s primary container port, rents will rise about 9% in 2008 but will taper back in line with Sydney at 3% in the following years. RREEF Research 14

16 Among Emerging Asian industrial markets, the fastest rental growth will be in China Among the Emerging Asian Markets, industrial centre performance over the next five years can be loosely classified as China and not China. Rising levels of consumption and industrial production point toward an inevitable and insatiable long-term demand for logistics and distribution facilities. Such investments are further supported by China s commitment to upgrade and expand its transportation infrastructure to a state-of-the-art status. Shanghai s industrial property market is one of the country s most robust. Rental growth is forecast to rise at an average 8% pa through Strict government control of industrial land, a fast-expanding tenant market, surging international trade, and its status as the distribution hub of the Yangtze River Delta have all converged to make Shanghai s industrial property market one of Asia s most dynamic. In Beijing the national administrative capital industrial rents are about half that of Shanghai. Beijing s rental growth will average 5%-6% pa during the next five years well ahead of most other Emerging Asian cities, though still short of Shanghai s forecast. Beyond China, other industrial centres in Emerging Asia that are currently in their growth cycles are Kuala Lumpur and Taipei. Industrial production in both of these export-oriented countries is expected to average 5%-6% pa growth over the next five years, with industrial rents growing at an average of 2%-3% pa. Bangkok s industrial market, which still teeters in a recovery mode, is the region s most fragile. Rental growth will be flat in 2008, but as fundamentals recover, rents should gradually begin to rise, with annual increases reaching 3% by Industrial Market Cycle Emerging Markets Forecast Years YE07 YE08 YE09 YE10 YE11 YE12 GRW PGW GRW GRW GRW GRW GRW REC CON GDP Growth* Industrial Production Growth * Rent Momentum Mature Markets 9.8% 8.7% 8.3% 7.9% 7.3% 7.1% 13.9% Increase+ 11.4% Increase+ 10.0% Increase 9.7% Increase 8.5% Increase 8.3% Increase Forecast Years YE07 YE08 YE09 YE10 YE11 YE12 GRW PGW GRW GRW GRW GRW GRW REC CON GDP Growth* Industrial Production Growth * Rent Momentum 3.0% 2.4% 2.6% 2.4% 2.5% 2.4% 3.8% 3.4% 2.1% 2.1% 1.9% 1.8% Increase+ Increase+ Increase Stable Stable Stable * Weighted by the size of GDP at the national level in US dollar Key: REC = Recovery GRW = Growth PGW = Post Growth CON = Contraction Source: RREEF Research, Deutsche Bank Research, and Global Insight RREEF Research 15

17 Industrial Sector Outlook Drivers Double-digit industrial production growth in China boosts major logistics markets, including Shanghai, Beijing, and Hong Kong. Limited supplies of industrial land whether government controlled (Shanghai, Beijing, Singapore, Hong Kong) or more market oriented land constraints (Tokyo) underpin rental growth in major markets. Lack of good quality warehouse and logistics properties will push rental values upwards in many cities. Constraints Sensitivity to an economic slowdown in Europe or North America could diminish rental growth across the region s export-oriented economies. Implications: Timing of changes Severe operational constraints and high costs in major logistics markets like Hong Kong and Singapore could force activity to secondary locations in the longer term. Asian industrial properties are in a solid growth phase that is expected to hold firm across the majority of major markets until at least Asia Industrial Market Performance Out-Perform Average Under-Perform Beijing Hong Kong Bangkok Shanghai Kuala Lumpur Sydney Taipei Melbourne Seoul Tokyo Singapore Source: RREEF Research RREEF Research 16

18 Forecast YE Emerging Markets Stage Growth Growth Growth Growth Growth Growth Rent Momentum Increase+ Increase+ Increase Increase Increase Increase Beijing Stage Growth Growth Growth Growth Growth Growth Rent Momentum Increase+ Increase+ Increase+ Increase+ Increase Increase Shanghai Stage Growth Growth Growth Growth Growth Growth Rent Momentum Increase+ Increase+ Increase+ Increase+ Increase+ Increase+ Kuala Lumpur Stage Growth Growth Growth Growth Growth Growth Rent Momentum Increase Stable Stable Stable Stable Stable Bangkok Stage Post Growth Contraction Recovery Recovery Growth Growth Rent Momentum Decrease Decrease Stable Stable Increase Increase Taipei Stage Growth Growth Growth Growth Growth Post Growth Rent Momentum Stable Increase Increase Increase Stable Stable Mature Markets Stage Growth Growth Growth Growth Growth Growth Rent Momentum Increase+ Increase+ Increase Stable Stable Stable Hong Kong Stage Growth Growth Growth Growth Growth Growth Rent Momentum Stable Increase Increase Increase Increase Increase Seoul Stage Growth Growth Growth Growth Growth Growth Rent Momentum Stable Stable Stable Stable Stable Stable Tokyo Stage Growth Growth Growth Growth Growth Growth Rent Momentum Stable Stable Stable Stable Stable Stable Singapore Stage Growth Growth Growth Post Growth Post Growth Post Growth Rent Momentum Increase+ Increase+ Increase Stable Decrease Decrease Sydney Stage Growth Growth Growth Growth Growth Growth Rent Momentum Increase Increase Increase Increase Increase Increase Melbourne Stage Growth Growth Growth Growth Growth Growth Rent Momentum Increase+ Increase+ Increase Increase Increase Increase Source: RREEF Research RREEF Research 17

19 Appendix Existence of property cycles facilitates forecasting but. data limitations and market immaturity reduces reliance on econometric techniques The existence of property cycles provides an opportunity to forecast performance based on fundamental demand and supply drivers. As with other regions, our forecasting process in Asia Pacific is based on a thorough top-down and bottom-up approach. However, data limitations and the immaturity of many markets means less reliance can be placed on econometric techniques than in the more mature markets of the US and Europe. In addition to the limited amount of consistent, reliable market information and the low level of market maturity, the fundamental structural changes occurring in many markets also limit the relevance of econometric techniques. For these reasons, our top-down approach is based on a combination of quantitative and qualitative assessments to provide an initial projection of demand and supply drivers, vacancies and rents. These top-down forecasts are discussed in detail with our local experts and advisors to arrive at a well-grounded real world view of market prospects. Such a real world, rather than a purely econometric approach, is entirely appropriate for these opaque and less mature markets. The systematic analysis of the fundamental drivers of performance for such markets produces a series of forecasts which are helpful in understanding broad trends in relative performance. Individual forecasts for 21 cities for the office sector, 13 cities for the retail and 11 cities for the industrial sectors Two distinct cycles in Asia- Pacific across mature and emerging markets The analysis reveals that different cycles pervade across geographies in terms of degree and timing. These reflect the economic fundamentals driving demand and specific supply characteristics at the local level. This Asia Pacific Property Cycle Monitor includes forecasts for 21 cities across 11 countries in the region in the office property sector, 13 cities for the retail and 11 cities for the industrial sectors. These markets are classified according to their respective stages in the cycle and their prospects over the coming four years. In our European Property Cycle Monitor, geographic location is the main criteria used in distinguishing broad trends in market performance, with significant differences being experienced in Western and Central/Eastern Europe. In Asia-Pacific, this approach is less suitable given the wider range in levels of market maturity across the region. As a consequence, we distinguish broad trends in performance according to the level of market maturity rather than geography. On this basis, the Mature Asian Markets group covers Australia, Hong Kong, Singapore, South Korea and Japan. It is clear that South Korea and Japan fall well short of the other markets in terms of their maturity, but recent changes in both markets and improvements in the institutional environment mean they are more similar to the Mature markets than the Emerging ones across the rest of the region. In contrast, China, India, Malaysia, Taiwan and Thailand are clearly emerging markets and their behaviour, as well as the confidence that can be placed on any forecasts, need to be distinguished from the Mature group. Given the different levels of economic maturity in Asia Pacific, two distinct market cycles are apparent. A separate cycle and overview is presented for mature and for emerging markets, together with an economic overview of the current and future prospects for each market. RREEF Research 18

20 Classifying the markets Each property sector has a clearly identifiable cycle with four main phases: Recovery, Growth, Post Growth and Contraction (see Exhibit 1). The office market has the greatest volatility of the three main commercial sectors. The retail and industrial sectors are less volatile due to the relatively high levels of owner-occupation with less investment activity and limited modern supply, particularly in the industrial sector. Exhibit 1 Property Market cycle Source: RREEF Research Property market cycle Stages General conditions 1) Recovery High but declining vacancy rates stable to rising rents 2) Growth Low and declining vacancy rates rising rents supportive of construction 3) Post Growth Low but increasing vacancy rates rising/flattening rents 4) Contraction High or increasing vacancy rates falling rents The position in the property market cycle is based on a combination of factors including the vacancy rate relative to the individual market s historical average, change in vacancy rate and rate of rental growth. It is important to recognize that our analysis is based on movements in headline prime rents as data limitations prevent the systematic comparison of effective rents across markets. In general terms, effective rents will lead the recovery of headline rents, as a reduction in incentives tends to occur a number of months ahead of any movement in headline rents. Rent Momentum In addition to its stage in the cycle, a rent momentum category is assigned to each of the markets for every year of the forecast period. This rent momentum, which helps establish the rate of growth at different stages of recovery, is based on the typology displayed in Exhibit 2. It is intended to show the general momentum behind potential changes in rent, not an absolute variation in rates. RREEF Research 19