July Asia Real Estate Market Outlook. For Investment Professionals only

Transcription

1 July 2018 Asia Real Estate Market Outlook For Investment Professionals only

2 Executive summary Attractive prospects for APAC real estate supported by improving structural and early economic upcycle drivers Most positive on logistics for higher total returns, but pockets of weakness for rental growth could arise in the near term While demand for office space remains robust, rental growth across most APAC markets is in late-cycle and expected to peak by 2019 Supportive macro fundamentals expected to continue to bolster prime retail markets in APAC 4.6% 10% 12% y-o-y APAC GDP growth expected for 2018 rental growth forecast for Singapore prime offices in 2018 p.a. total return expected for Seoul logistics between

3 Sustained economic growth for APAC in 2018 Economic growth is expected to keep pace across the five developed Asia Pacific (APAC) economies in 2018, as the global trade recovery continues to gather momentum albeit at a slower pace than Among the developed APAC markets, Hong Kong s GDP growth in 2018 is forecast to be the highest at 3.5%, followed by Singapore at 3.0% and South Korea at 2.8%. Australia is the only market expected to see output growth strengthen in 2018 compared to 2017, up from 2.3% to 2.7%, due to a recovery in non-mining investments and an increase in export volumes. Japan s economy is likely to grow by 1.4% in 2018 with sustained support from business investment. Inflation in Japan remains below the central bank s target of 2.0%, due primarily to weak wage growth. As such, the central bank has removed the timeframe for hitting its inflation target in April and remains committed to its zero-interest rate policy. Inflationary pressures for the other four developed markets also remain largely subdued. Monetary policy for South Korea is expected to stay accommodative. A quicker and bigger hike in US Fed rates than previously, however, could put pressure on the Bank of Korea to raise interest rates in order to contain capital outflows. In the medium term, global economic growth is expected to head towards a gradual normalisation. As this external momentum eases, economic growth amongst the five developed markets is Figure 1: Asia Pacific economic growth forecasts for (f) 5% 4% 3% 2% 1% 0% Australia Singapore South Korea Hong Kong Japan Asia Pacific Avg (f) 2019(f) 2020(f) 2021(f) 2022(f) Source: Oxford Economics, as of May likely to be more broad-based, driven by domestic demand, private investment and government spending. Key downside risks, however, still remain in the region, such as the US and China economic policies and environment. A quicker pace of raising rates in the US as well as a Chinese credit shock would have a negative impact on APAC s real estate market. There is also a risk of a US-China trade war escalating, but this needs to be considered against the possibility of a China-led Asia trade pact. Figure 2 and 3: Gradual increase in interest rates expected in all markets over the next five years Central bank target rates 10Y government bond yields 4.0% 3.5% 3.0% +125bp +75bp +89bp +150bp 4.0% 3.5% 3.0% 2.5% 2.5% 1.5% 1.5% 0.5% 0.0% -0.5% +3bp Australia Hong Kong Japan Singapore South Korea 0.5% 0.0% Australia Hong Kong Japan Singapore South Korea 10Y AVG 5Y AVG 2018(f) (f) AVG 10Y AVG 5Y AVG 2018(f) 2022(f) Source: M&G Real Estate Research based on data from Oxford Economics, as of Apr 2018.

4 Figure 4: Key risks and impact assessment for Asia Pacific Impact on real estate China credit shock Early US recession (2019) Peace in the Korean Peninsula SG foreign worker permit relaxed US-China Trade War Quicken pace of Fed Rate hike China-led Asia trade pact US policy error(s) Japan post-olympic recession Positive Negative 0% Probability of occurrence 100% Source: M&G Real Estate Research based on internal forecasts, as of May Asia Pacific Property Sectors Office Prime Singapore office rents are on average expected to outperform the rest of the region over the next five years due to a limited supply pipeline Retail With a recovery in tourist arrivals and boost in local consumption, prime Hong Kong retail rents should lead rental growth in the region Logistics A tight supply of logistics space in Hong Kong is expected to hold rents up, while the logistics market in Australia stands to benefit from population growth and increased consumer demand for e-commerce services Overall Yields across most markets and sectors are likely to bottom out by 2019, with some expansion expected thereafter due to rising interest rates. Rental growth may offset the negative impact to capital values Office: Technology boom, competition for talent to support prime rental growth The office markets in the key developed APAC cities should benefit from business growth in the medium term, particularly from technology, finance and business services. The ongoing boom in the technology sector is expected to continue in the near term and serve as a key occupier demand driver for most markets, backed by further expansion of more established tech firms, an increase in start-ups and opening of new regional headquarters by foreign firms. Persistent tight labour market conditions in the developed APAC markets is set to continue to drive competition for talent among corporates. As office location and building quality are key to attracting and retaining talent, prime office locations that are close to public transport infrastructure and multiple amenities, such as retail, gyms, parks, stand to benefit. As such prime rents in key APAC gateway cities, such as Hong Kong, Melbourne, Seoul and Sydney, are expected to grow, on average, in the range of around two to five per cent p.a. from 2018 to Relatively lower rents in the fringe submarkets of these cities are expected to attract more cost-conscious tenants and capture some rental upside too.

5 Figure 5: Strongest and weakest rental growth, by market-sector Top 3 (2018) Bottom 3 (2018) Top 3 (2019) Bottom 3 (2019) Top 3 (2020) Bottom 3 (2020) Singapore Prime Office Sydney Prime Office Osaka Prime Office Perth Prime Office Osaka Prime Logistics Tokyo Prime Office Singapore Prime Office Hong Kong Prime Office Osaka Prime Office Tokyo Prime Office Osaka Prime Logistics Tokyo Grade B Office Brisbane Prime Office Singapore Prime Office Hong Kong Prime Office Tokyo Prime Office Tokyo Grade B Office Tokyo Regional Retail % -4% -2% 0% 2% 4% 6% 8% 10% 12% Note: Net effective rental growth is shown Source: M&G Real Estate Research based on internal forecasts, as of May The Singapore prime office market is expected to outperform the region in 2018 and continue to do so until This is in part due to a limited supply of Grade A office space in the Central Business District over the medium term and recovery of traditional larger occupiers such as financial institutions and oil & gas. Strengthening business investments into regional cities, such as Osaka and Brisbane, should help support demand for office space and rental growth. In particular, low vacancy levels in Osaka s office market and a tight future supply pipeline could further bolster rents. Brisbane s office market is displaying signs of recovery, as the Queensland economy transitions towards broader-based growth, diversifying away from construction and manufacturing and more towards healthcare. Vacancy is expected to decline over the next couple of years and net effective rents should register higher growth by Osaka logistics and Tokyo office, on the other hand, are expected to see rental growth dragged down by an influx of supply over the next three years. With the exception of Seoul and Brisbane, rental growth in the office markets is likely to be front-loaded with rents in most markets expected to peak by end of next year. After which, slower economic growth, higher interest rates, and labour constraints may dampen occupier demand for office space. In the medium term, impending supply in markets such as Tokyo and Melbourne is expected to further weigh on office rental growth. Figure 6: Asia Pacific office market net supply increase vs. existing stock 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0% Brisbane Melbourne Perth Sydney Hong Kong Osaka Tokyo Singapore Seoul 10Y Avg 5Y Avg (f) Avg (f) Avg Source: M&G Real Estate research based on data from PMA, as of Mar Retail: Supportive macro fundamentals for prime retail markets in APAC Stable population growth Key gateway cities, such as Tokyo, Hong Kong, Singapore and Sydney, are expected to continue recording steady population growth This population growth will provide the retail sector with a sustained domestic consumer base that requires goods and services 1 Oxford Economics Global Cities 2030, December Rising income and wealth levels The capital cities of the five developed APAC markets are expected to record continued income growth as global economic power continues to shift eastwards Tokyo, Osaka and Seoul are expected to become some of the largest global consumer cities in This underscores expectations for household wealth growth over the next decade, providing higher levels of disposable income to spend on goods and services

6 Higher tourist arrivals Expected higher tourist arrivals in the region is likely to provide support for prime retail markets. The World Tourism Organisation (UNWTO) forecasts tourist arrivals in APAC to increase by 331 million in 2016 to reach 535 million in 2030, equating to nearly 5% annual growth Demand for prime retail space is thus likely to stem mainly from foreign brands seeking to raise their profile in the region with both locals and tourists and capture potential higher value discretionary purchases outside of their domestic markets. Among the developed markets, Hong Kong s retail market is expected to see the strongest rental growth at around three per cent p.a. over the next three years, as it continues to attract a high volume of tourists, particularly from China. Hong Kong was the most visited city globally in Near-term challenges for the APAC retail market centre primarily around weak domestic consumption. In Australia, this is driven by slow wage growth, tighter credit conditions, a housing market slowdown and an increase in inflation. Retailers may delay physical store expansion plans to invest further into omni-channel solutions. In Japan, the impending consumption tax hike in October 2019 is likely to lead to a slight downturn in the retail market in Figure 7: Population of key APAC cities (m) Sydney Melbourne Singapore Hong Kong Seoul Tokyo Prefecture (f) Source: M&G Real Estate, Oxford Economics, as of Mar Figure 8: CAGR for store-based retailing 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% Australia South Korea Hong Kong Japan Singapore 5 yr CAGR ( ) 5 yr CAGR ( ) Source: M&G Real Estate, Euromonitor, as of Jun Logistics: Overall rental growth expected to be stable, but pockets of weakness may emerge Logistics take-up is expected to remain robust as e-commerce continues to grow in the region. Evidencing this, parcel delivery is one of the fastest growing segments of the logistics industry, according to Colliers International. Australia and Seoul are expected to be the best performing APAC logistics markets with average total returns of between 8% to 12% p.a. over the next three years, according to our analysis. A sustained population growth in the former would boost demand for logistics, as consumption grows from a low base. Seoul s logistics market is expected to see further cap rate compression over 2018 and 2019, as the market-sector attracts more institutional investors. The lack of available development land for new modern logistics facilities in Hong Kong should provide support for higher rental growth. With new supply expected to taper from 2018 onwards, Singapore s logistics market is likely to recover by year-end and grow on average by around 1.6% p.a. over the next three years. Tight supply and rising construction costs in some markets are also likely to support rental growth, such as the Tokyo Bay area. There are, however, some potential limitations to the upsides for the logistics market in the next three to five years. In response to rising demand, there has been more speculative development, particularly in markets where land is more readily available. Osaka exemplifies a market where new supply is currently outpacing demand, which is expected to continue until Logistics rents in Osaka are therefore not expected to turnaround until Amongst logistics providers, there is a growing shift from business to consumer delivery to capture e-commerce growth. High competition in this segment places pressure on occupiers to keep costs lean due to the difficulty in passing costs on to consumers. Furthermore, persistent low unemployment levels could dampen expansion plans in key APAC cities, as logistics business is currently labour intensive and there is a shortage in appropriately skilled manpower. As such, rental growth should perform in line with inflation for most markets. 2 Euromonitor International Top 100 City Destinations, November 2017.

7 Figure 9: Logistics total returns (f) 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% Seoul Sydney Melbourne Tokyo Osaka Singapore Hong Kong Effective Income Return ( , p.a.) Capital Return ( , p.a.) Leasehold Depeciation Source: M&G Real Estate, as of May Figure 10: Asia Pacific commercial real estate transactions $30 $25 $20 $15 $10 $5 $ South Korea Singapore Japan Hong Kong Australia 10Y Quarterly Avg ( ) 5Y Quarterly Avg ( ) Note: Investment volumes are on a four-quarter rolling basis. Source: M&G Real Estate Research based on data from RCA, as of Apr Growing interest in core assets likely to buoy investment market over the long run Liquidity in the market is expected to remain elevated and 2018 should be another strong year for commercial real estate transactions, with record transaction volumes already seen in the first quarter of this year. 3 This is despite restrictions on Chinese capital outflows, as Chinese investors have traditionally been one of the largest sources of cross-border real estate investments. While real estate investors remain motivated by stable income streams and diversification from other assets, high property prices and historical low yields in the region are creating caution amongst investors. This is further heightened by expectations of rising interest rates. Investment activity in the near term is thus likely to be more centred on markets and sectors where higher yields can still be found, such as Australia and South Korea. The latter is expected to see more investment interest in the medium term, as geopolitical tensions in the Korean peninsula subside and investors confidence improves. The industrial sector should continue to draw investors seeking to tap into the positive structural drivers across Asia Pacific markets. Over the longer term, increased institutional interest in Asia real estate for accessing core assets should continue to support investment and increase liquidity in the region. The market may also attract a more diverse base of institutional investors looking to APAC real estate for its stable income over the long term, rather than solely for its capital value growth. Stability and defensiveness of income become increasingly important We forecast Asia Pacific to deliver a total return of around 9% in 2018, driven by expected yield compression in Australia and South Korea alongside stable rental growth in the five developed markets across most sectors. Factoring in five to 10 bps of cap rate (yield) expansion on the back of interest rates in the region rising from 2019 could mean flat-to-negative capital values growth for select market-sectors over the near term. This places increasing importance on the stability and defensiveness of income from property, which can be strengthened using effectively applied active asset management. Due to expected widening of cap rates across the market-sectors, total returns for APAC real estate are likely to dip from 2019 onwards. Among the sectors, logistics should provide the highest returns of around 7% p.a. over the medium term, as higher yields compared to the other sectors provides a wider buffer against rising interest rates. Given the relatively low returns, we remain more cautious on Tokyo and Hong Kong office and retail, as yields have compressed to significantly low levels of around 3% the lowest in the region. Figure 11: Asia Pacific total returns for major marketsectors (f) 14% 12% 10% 8% 6% 4% 2% 0% Office Retail Industrial Residential Asia Pacific Source: M&G Real Estate, as of May RCA, May 2018.

8 Contact Jonathan Hsu Director, Head of Research, Asia Eunice Khoo Senior Associate, Property Research Asia Richard Gwilliam Head of Property Research +44 (0) Ryan Ho Manager, Investment & Product Stefan Cornelissen Director of Institutional Business Benelux, Nordics and Switzerland +31 (0) Lucy Williams Director, Institutional Business UK and Europe, Real Estate +44 (0) For Investment Professionals only. For Investment Professionals only. This document is for investment professionals only and should not be passed to anyone else as further distribution might be restricted or illegal in certain jurisdictions. The distribution of this document does not constitute an offer or solicitation. Past performance is not a guide to future performance. The value of investments can fall as well as rise. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and you should ensure you understand the risk profile of the products or services you plan to purchase. This document is issued by M&G Investment Management Limited (except if noted otherwise below). The services and products provided by M&G Investment Management Limited are available only to investors who come within the category of the Professional Client as defined in the Financial Conduct Authority s Handbook. They are not available to individual investors, who should not rely on this communication. Information given in this document has been obtained from, or based upon, sources believed by us to be reliable and accurate although M&G does not accept liability for the accuracy of the contents. M&G does not offer investment advice or make recommendations regarding investments. Opinions are subject to change without notice. Notice to recipients in Australia: M&G Investment Management Limited does not hold an Australian financial services licence and is exempt from the requirement to hold one for the financial services it provides. M&G Investment Management Limited is regulated by the Financial Conduct Authority under the laws of the UK which differ from Australian laws. Notice to recipients in Hong Kong: The contents of this document have not been reviewed by any regulatory authority in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. Notice to recipients in Singapore: This document is issued by M&G Real Estate Asia Pte Ltd. This document may not be circulated or distributed, whether directly or indirectly, to persons in Singapore other than (i) an institutional investor pursuant to Section 304 of the Securities and Futures Act, Chapter 289 of Singapore (the SFA ) or (ii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA. M&G Investments and M&G Real Estate are business names of M&G Investment Management Limited and are used by other companies within the Prudential Group. M&G Investment Management Limited is registered in England and Wales under numbers with its registered office at Laurence Pountney Hill, London EC4R 0HH. M&G Investment Management Limited is authorised and regulated by the Financial Conduct Authority. M&G Real Estate Limited is registered in England and Wales under number with its registered office at Laurence Pountney Hill, London EC4R 0HH. M&G Real Estate Limited forms part of the M&G Group of companies. M&G Investment Management Limited and M&G Real Estate Limited are indirect subsidiaries of Prudential plc of the United Kingdom. Prudential plc and its affiliated companies constitute one of the world s leading financial services groups and is not affiliated in any manner with Prudential Financial, Inc, a company whose principal place of business is in the United States of America. JUN 18 / W290608