Asia-Pacific markets, both core and emerging, are offering investors attractive opportunities and good value at the current pricing in prime office, retail and industrial markets, according to the DTZ Fair Value Index for the second quarter (2Q) of 2012.
The index rose to 68 from the score of 60 in the previous quarter.
The index offers investors insight into the relative attractiveness of current pricing in prime office, retail and industrial markets across the Asia-Pacific, classifying markets as Hot, Warm or Cold. The latest update shows 51 of the 61 markets in the index rated as either Hot or Warm, with the number of Hot markets increasing from 24 to 32 in 2Q.
Despite lower GDP growth forecasts resulting in lower bond yields, prime property yields remain stable across the region, which is reflected in solid income returns, said DTZ in a press release.
The strongest performing markets are Australia followed by China. Demand had held up well in markets such as Singapore, Jakarta and Tokyo.
The attractiveness of Australia, especially for equity-rich investors in search for low risk, income-generating assets was reflected in the surge in activity in 2Q with total commercial volumes up 80% from the previous quarter. About 37% was from foreign capital inflows as Asian investors continue to dominate.
Driven by strong rental growth, China and India continue to offer investors good value.
Although India charts higher yields, several key cities have seen subdued occupancy rates.
The second quarter of 2012 also saw the addition of two new markets from China — Hangzhou and Nanjing — emerging as key backoffice locations. This is due to the proximity of the cities to Shanghai, making it attractive to both domestic and international businesses.
The cities also enjoy strong government support.
However, DTZ considered several Asia-Pacific markets to be overpriced including major financial centres such as Beijing offices, Jakarta offices, Sydney retail, Brisbane industrial, Singapore retail and Kuala Lumpur retail.
Underperforming markets are: Guangzhou offices (caused by oversupply concerns and high vacancy rates), Tianjin offices (forecast lower rental growth), and Shenzhen offices
(overspeculated). Meanwhile, Hong Kong and Singapore have charted negative rental growth caused by global economic uncertainties.
Jakarta offices came in second only to Beijing at the top of the DTZ Asia Pacific Fair Value rankings in 2Q on the back of upgrades to forecast rental growth. DTZ’s forecast
rental growth of Jakarta offices at 12.5% per annum with rental growth driven by strong leasing activity on the back of strong economic performance resulting in greater
expansion and new entrants, particularly in the booming oil and gas, commodities and consumer goods sectors.
“The favourable combination of rising rents and yield compression will lift capital values in Jakarta, providing investors with the prospect of strong returns. Jakarta is attractively priced compared to the other Asean markets and with prime property yields, at circa 9%, the market is offering good income. We are forecasting total returns of 25%
per annum over the next five years,” said Chua Chor Hoon, DTZ’s head of Asia-Pacific research.
Prime office markets in China continue to see strong rental growth and DTZ expects the Chinese prime office market to maintain its strong performance over the next five years, with Beijing entering the top five most expensive office markets by 2016.
Meanwhile, despite moderate forecast rental growth, Sydney offers high yields. Kuala Lumpur and Bangkok have fairly weak average forecast annual rental growth due to various reasons such as economy uncertainty, shrinking GDP growth rates and high development pipeline while Hong Kong, Singapore and Taipei offer investors the lowest yields and limited rental growth, accoring to DTZ.
On a more positive note, Singapore is expected to experience a rebound in prime office rents in 2016.
The DTZ report predicted that most retail markets in the Asia-Pacific will see double-digit growth over the next few years. Rental growth is strongest in India especially Delhi and Mumbai retail which are forecast to deliver returns in excess of 15% per annum over the next five years — the highest of all the Asia Pacific retail markets.
Kuala Lumpur’s retail market is expected to give 12% total returns per annum to 2016. Hong Kong and Shanghai will continue to reap robust rental growth, riding on the rising power of Chinese consumers.
Muted growth is expected in Bangkok and Singapore, with the former’s competitive business environment, high rents and cautionary consumer spending affecting retailers while large supply and tight labour market put pressure on the later’s market. Nevertheless, both retail markets are still Hot; as falling bond yields widened the premium offered in Bangkok while Singapore offers investors solid income returns.
The less volatile industrial market is largely positive, and is expected to provide stable yields over the medium term in almost all cities with the exception of Hong Kong which may see a -1% return per annum to 2016 as a result of falling rents and rising yields on capital values.
Australia leads the region with industrial rents picking up in 2Q in Melbourne — the first increase in two years. DTZ is optimistic about the city, noting that the affordable rents, good development opportunities and excellent infrastructure will eventually cause the market to grow by 4.2% per annum to 2016, making it the strongest performer in the region. Two other Australian cities — namely Brisbane and Perth — are also attractive to investors.
The report adjusted its rental forecast in Taipei to 2.5% per annum due to an increased leniency of restriction on industrial premises, however this could be hindered by limited capital growth prospects.