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Research Report
Asia Pacific Real Estate
Strategic Outlook
March 2015
Please note certain information in this presentation constitutes forward-looking
statements. Due to various risks, uncertainties and assumptions made in our
analysis, actual events or results or the actual performance of the markets covered
by this presentation report may differ materially from those described. The
information herein reflect our current views only, are subject to change, and are not
intended to be promissory or relied upon by the reader. There can be no certainty
that events will turn out as we have opined herein.
For Professional Clients (MiFID Directive 2004/39/EC Annex II) only.
For Qualified Investors (Art. 10 Para. 3 of the Swiss Federal Collective Investment
Schemes Act (CISA)). Not for distribution.
For institutional investors only.
Prepared By:
Table of Contents
Koichiro (Ko) Obu
Head of Research & Strategy,
Asia Pacific
[email protected]
Executive Summary ............................................................................. 1
Mark Ho
Property Market Research
[email protected]
The Economy ....................................................................................... 4
Natasha Lee
Property Market Research
[email protected]
Minxuan Hu
Property Market Research
[email protected]
Mark Roberts
Head of Research & Strategy
[email protected]
Our View .................................................................................. 2
Economic Outlook ................................................................... 6
Risks to the Forecast ............................................................... 7
Strategic Real Estate Outlook .............................................................. 9
Strategic Views ........................................................................ 9
Capital Markets...................................................................... 11
Investment Market Outlook.................................................... 14
Leasing Market Outlook......................................................... 18
Property Sectors and Returns ............................................................ 22
Office ..................................................................................... 22
Retail ..................................................................................... 24
Industrial ................................................................................ 26
Appendix: Real Estate Market Forecasts ........................................... 28
Important Information ......................................................................... 30
Research & Strategy Team – Alternatives and Real Assets .............. 32
The opinions and forecasts expressed are those of Asia Pacific Real Estate Strategic Outlook and not necessarily
those of Deutsche AWM Distributors, Inc. All opinions and claims are based upon data at the time of publication
of this article (February 2015) and may not come to pass. This information is subject to change at any time, based
upon economic, market and other conditions and should not be construed as a recommendation.
DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015
Executive Summary
Real estate performance across much of the Asia Pacific region has been a balance
between a strong capital market and a softer but recovering leasing market, particularly in
the office sector. Japan, China and Singapore experienced noticeable improvements in
the leasing market in 2014. The five year returns forecasts were slightly trimmed
compared to our previous view, as we believe further cap rate compression will be limited
in most markets.
Economy: Growth for the Asia Pacific macro economy continued to taper in 2014 with
exports remaining in a soft patch while governments exercised more prudence on the
fiscal front. China experienced headwinds in investment due to its sagging housing and
manufacturing sectors. Knock-on effects were felt in the Australian export industries,
especially as the commodity sector continues to slow down. Consumer sentiment in
Japan and South Korea were both eroded due to the consumption tax (VAT) hike and the
Sewol Ferry tragedy, respectively, in 2014. The region’s growth momentum is turning,
however, with export growth prospects becoming more positive and governments having
moved to support growth more proactively, Monetary conditions and interest rates are
either being maintained or eased in key economies such as Japan and South Korea
where stronger growth is expected in 2015.
Office: Within the Asia Pacific real estate industry, the office sector accounted for half of
the transaction volume in 2014. Acquisitions have become more challenging given the
compressed yields and the prospects of interest rate rises in the medium term. Leasing
demand remained generally healthy, supported by the resilient services sector and low
unemployment rates in all the key countries of between 3.0% and 4.0%, except for
Australia where it exceeds 6.0%. Some markets including Singapore, Hong Kong and
Shanghai are faced with sizeable new pipeline supply which puts some pressure on rental
growth, although for the latter, robust growing leasing demand should mitigate those
pressures.
Retail: Retail sales were generally soft in major markets in the region in 2014, although
consumer sentiments are expected to turn modestly more upbeat in 2015 on the back of
the pick-up in the regional economy, interest rate cuts, dissipating global uncertainties and
a stable employment outlook. For most countries in the region, depressed oil prices
should also provide an added boost for private consumption. Meanwhile, the threat from
online retailing continued to mount at the expense of bricks and mortar players. Against
the backdrop of cautious optimism, neighbourhood centres and suburban retail that are
relatively more centred around non-discretionary and food and beverage spending are
expected to outperform.
Industrial/Logistics: The export-related segment of the industrial market is likely to
benefit from the gradual, if unspectacular, global economic recovery while some
weakness is expected to remain in the domestic environment. E-commerce and third party
logistics companies (3PLs) are expected to continuously drive leasing demand for the
modern logistic space. Structural changes are unfolding in the supply chain across the
region, reflecting ongoing migration of labour intensive manufacturing segments to
emerging countries while developed countries continued to scale the value-added ladder.
Consequently, there remains much scope for expansion within the modern logistics
segment, an investment theme that should remain in favour with investors.
DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015
1
Investments: Commercial real estate transaction volumes (excluding land transactions)
in 2014 totalled US$137 billion in the Asia Pacific region, a healthy 18.0% increase from a
year earlier, according to Real Capital Analytics. The volume remains at the elevated level
of 2014 on a preliminary basis where Japan leads the pack followed by Australia and
China. There is a growing concern, however, among the investors over the current tight
cap rates. Although central banks are expected to remain accommodative in the nearterm, the prospects of interest rate normalization further down the road would negatively
affect the capital values in low yielding markets.
Against this backdrop, our five-year return expectations were mildly trimmed from the
previous forecast. We have accounted for the rising interest rates by factoring in higher
reversionary cap rates in most markets. We believe that capital gains have already been
realized due to the strong investment market and future returns will be driven more by
stable income growth. Some of the key changes to our forecasts include:
▪
Strengthened rental growth for the Beijing and Shanghai office market based on the
revised demand outlook from a services sector expansion, financial liberalization, and
multi-national corporations.
▪
Lower returns for Singapore and Hong Kong due to a supply increase in the near
future and increased pressure from a US interest rate rise.
▪
Lower returns for Brisbane and Perth office markets given a subdued occupier
demand from the mining sector and new supply expected in Perth.
Our View
CORE | Focus on cash flows. Established markets in the mature economies of Australia,
Japan, and South Korea provide some defensive traits. Deutsche Asset and Wealth
Management (Deutsche AWM) anticipates that healthy economic fundamentals in 2015
could help support the office markets in Melbourne, Sydney, Tokyo, Osaka and Seoul
where combined returns are forecast to average 8-9% over the medium term, although
accessibility to prime assets is becoming more challenging for institutional investors. The
income component of logistics properties can provide attractive investment opportunities
with a steady income stream and a higher yield—typically in excess of 5.5%.
VALUE ADD | Choose markets with mispricing and repositioning opportunities.
Secondary locations in mature markets and China provide such plays. However,
accessibility to product, competition from domestic capital, and limited exit opportunities
make such openings a challenge. There may also be opportunities in core locations in
mature North Asian markets by taking on leasing up risks for newly constructed but vacant
office properties. Retail is a strong candidate for a value-add proposition including the
improvement of foot traffic and a fresher tenant mix. Real estate assets in emerging
markets typically have less sophisticated asset management skills that fail to extract the
true value of these properties. To complement the expansion of online retail, we have also
witnessed the conversions of older industrial properties to distribution/logistics facilities.
This is particularly true for the mature markets in Australia, Hong Kong and Singapore.
OPPORTUNISTIC | Develop in under-supplied markets. In many emerging markets,
development provides a viable route to access the real estate market. This means taking
on construction risk, including managing the construction process and the necessary
permits from local authorities. For example, the lack of modern logistics facilities in China
has attracted a growing number of players including Goodman (Australia), Global
DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015
2
Logistics Properties (Singapore), and Prologis (U.S.). Experienced logistics developers
can increase supply of this property type to meet the very high specifications of tenants.
Residential development is also another familiar opportunistic play although margins have
since fallen in China. As consolidation in China’s property sector continues, the
recapitalisation of some cash-starved developers could also provide an opportunity to
enter the Chinese real estate market.
Select opportunities with caution. Bond-type prime assets have become scarce due to
limited deal flow, difficulty in meeting cash yield requirements, and the expected negative
impact from rising interest rates in some of the markets. While we still expect modest
returns; caution should be taken when investing in the highly cyclical office markets of
Hong Kong and Singapore due to near future rental corrections and the possibility of rising
cap rates. Currently these markets are dominated by end users and private investors with
strata-title transactions often seen. We favour non-discretionary suburban retail as it
provides a cushion against fluctuations in discretionary spending, although the negative
impacts of online retailing cannot be fully discounted. Neighbourhood centres and
suburban retail typically attract these types of tenants.
DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015
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The Economy
The Asia Pacific macro economy experienced a temporary lull in 2014 with soft domestic
demand seen in some of the region’s large economies. China’s growth continued to taper
with ongoing structural reforms and drags from the housing and manufacturing sectors.
Australian export industries were affected by it especially as the commodity sector
continues to slow down. Consumer sentiment in Japan was eroded due to the
consumption tax (VAT) hike in April 2014 while weak consumption prevailed also in South
Korea especially after the Sewol Ferry tragedy. The region’s growth momentum is turning,
however, with signs of stabilization on the housing market in China supported by the
implementation of the policy rate cut together with accommodative fiscal policy. Growthsupportive monetary and fiscal measures were introduced in other mature economies
such as Japan and South Korea and should stimulate stronger growth in 2015.
Risks remain, however, such as the financial sector vulnerabilities in China, slowdown the
Eurozone coupled with more international geopolitical risks from Russia, the Middle East
to North Asia. Without any shocks or unexpected shifts in the baseline, the regional
economy is set for healthy growth over the coming years, but the full scale recovery is
expected after 2016 following the current struggle in commodity prices. Regional GDP
growth in Asia Pacific is estimated to be 5.6% in 2015, only a mild increase from 5.5% in
2014 according to the IMF’s report published in October 2014.
Real GDP growth & unemployment rates
GDP (YoY)
(%)
Unemployment Rate
12
15%
10
8
6
4
2
0
Australia
China
Hong Kong
Japan
Malaysia
Singapore
2010
2012
2014
2016f
2018f
2010
2012
2014
2016f
2018f
2010
2012
2014
2016f
2018f
2010
2012
2014
2016f
2018f
2010
2012
2014
2016f
2018f
2010
2012
2014
2016f
2018f
2010
2012
2014
2016f
2018f
-2
South Korea
f = forecast
Note: There is no guarantee the forecasts will materialise
Source: Deutsche Asset & Wealth Management; Oxford Economics, February 2015
Past performance is not a reliable indicator of future performance
External demand: Outlook for external demand has been upgraded, with the U.S.
economy now on track for solid recovery providing the brightest spark. While the
Eurozone economy is still fragile, prospects appear more sanguine following the ECB’s
accommodative monetary measures implemented in January 2015. However, headwinds
from a slowing China are expected to persist. China has become the largest trading
partner for many countries in the Asia Pacific region, including Australia, South Korea and
DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015
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to a lesser degree Japan, and these economies are experiencing a slowdown especially
in the commodity and manufacturing sectors.
Exports to China (as % of total exports)
2007
40%
2013
30%
20%
10%
0%
Australia
S Korea
Japan
Singapore
Source: Consensus Economics February 2015
Monetary policy: The Bank of Japan (BoJ) continues to maintain a policy of ultra-low
interest rates, which pushed the yen’s value further down to around 118 yen against the
U.S. dollar as of January 2015, close to the lowest value in seven years. The devalued
yen has helped to boost corporate earnings of large export-led manufacturers in Japan.
Bank of Korea (BoK) and People’s Bank of China (PBoC) also lowered the policy rates in
the second half of 2014, respectively, with the intention to stimulate the weak domestic
economy. The Reserve Bank of Australia (RBA) has trimmed its policy rate by another
25bps to a record low of 2.25% in February 2015 amidst concerns that the economy is
facing another year of below average growth.
Policy rates in major Asia Pacific economies
Australia
(%)
China
Japan
South Korea
8
6
4
2
Dec 14
Dec 13
Dec 12
Dec 11
Dec 10
Dec 09
Dec 08
Dec 07
Dec 06
Dec 05
Dec 04
Dec 03
Dec 02
Dec 01
Dec 00
0
Source: Deutsche Asset & Wealth Management; Bloomberg, February 2015
Inflation: Overall inflationary environment across Asia is expected to remain benign, with
consumer prices in Asia forecast to ratchet down marginally from 3.7% in 2014 to 3.5% in
2015.With regional governments generally adopting a growth-supportive stance at the
moment, the timing of interest rate rises have been deferred. Nevertheless, long term
interest rates (10-year government bond yield) are forecasted to rise gradually by about 12 percentage points in all markets we cover across the region over the next five years,
according to Oxford Economics, reflecting an eventual return to normal levels. Deutsche
DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015
5
AWM anticipates a risk of cap rates increasing in some markets, especially in the small
and open economies of Hong Kong and Singapore (cap rates are already widened in
Singapore).
Inflation & long-term interest rates
Long Term Interest Rate
(%)
Inflation
6
5
4
3
2
1
0
Australia
China
Hong Kong
Japan
Malaysia
Singapore
2010
2012
2014
2016f
2018f
2010
2012
2014
2016f
2018f
2010
2012
2014
2016f
2018f
2010
2012
2014
2016f
2018f
2010
2012
2014
2016f
2018f
2010
2012
2014
2016f
2018f
2010
2012
2014
2016f
2018f
-1
South Korea
f = forecast
Note: There is no guarantee the forecasts will materialise
Source: Deutsche Asset & Wealth Management; Oxford Economics, February 2015
Past performance is not a reliable indicator of future performance
Economic Outlook
Japan: Japan’s prime minister Abe unveiled a new growth strategy in 2014 including
corporate tax cuts, an investment policy change on Japan’s government pension fund and
deregulation of the labour market. The corporate sector remained healthy in 2014 and the
unemployment rate fell to its lowest level since 1997. Domestic consumption struggled,
however, due to the negative effects from the VAT hike in April 2014 which resulted in the
economic slump. Japan is expected to witness a modest economic recovery in 2015 given
Abe, who tightened his grip on power at the victory in the lower house election in
December 2014, is set to implement further stimulus and reform initiatives.
South Korea: South Korea’s GDP expanded by 3.0% in 2014 driven by a recovery in
exports, while consumer sentiment was eroded by the Ferry disaster. In August 2014, the
government announced a $40 billion stimulus package aimed at propping up the economy
whilst the BoK lowered the policy rate twice in the year to 2.0%. External conditions
remain challenging for exporters with subdued trade volumes among emerging countries
while the Free Trade Agreement with China should bring about positive effects on the
trading volumes. BoK estimates a 3.4% growth in 2015.
China: Growth is expected to dip further before rebounding in the second half of the year
to record around 7.0% in 2015, compared to 7.4% in 2014. Given a still-robust
employment outlook, policy makers are expected to continue pushing ahead with
economic reforms in 2015, albeit more cautiously than before as growth concerns have
mounted. Already, the pilot free trade zone set up in Shanghai as a test bed for
liberalization measures has attracted the attention of multinational companies that are
eager to tap new opportunities brought about by more efficient movement of capital and
goods. The scheme will be expanded to three other areas – Tianjin, Fujian and
Guangdong – in 2015, marking gradual progress towards further market liberalization.
Drags from the property sector persist as inventory levels remain elevated despite the
rebound in transaction volume. Overcapacity and restructuring challenges remain for the
DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015
6
manufacturing sector, but improved export prospects due to U.S. recovery could provide
some modest relief. Supportive macro measures introduced in end-2014 – interest rate
cut, liquidity injection and expansion of infrastructure investments – as well as additional
interest rate and reserve requirement rate cuts in the first half of 2015 should help to lift
the economy in the second half of the year. Low oil prices and a benign inflationary
environment would afford policy makers headroom for more supportive measures when
necessary. The fiscal positions of local governments pose a key risk and bears close
watching.
South East Asia: Growth in key South East Asian economies are generally expected to
recover in 2015, riding on trade tailwinds from the U.S. recovery and lower oil prices, but
also reflecting low-base effects of 2014. However for Malaysia and Indonesia, declining
commodity prices and currency pressures would weigh on consumption and add to capital
outflow risks. Although consumer sentiments have improved, particularly in India and
Thailand, the recovery remains tentative. Contrasting central banks bias reflects the
uneven picture across the region, dovish in India and Indonesia and hawkish in Malaysia
to avert capital flight.
Singapore: The economy could experience modest growth of 3.0% in 2015 as it gains
strength from a stronger expansion in developed economies. The unemployment rate is
expected to remain low at 2.0%. However, household consumption could remain
lacklustre, dampened by the weakening housing market. To bolster growth, the Singapore
central bank has moved to slow down its currency appreciation ahead of its scheduled
review in April in order to support its trade reliant economy.
Australia: Increased home building on the back of record-low interest rates has been a
driver of growth for Australian economy while the growth rate moderated due the price
correction in commodities in the second half of 2014. The economy faces a number of
constraints as the recovery in non-mining investment and labour market indicators remain
patchy. The RBA anticipates that the economy will be slightly below trend in 2015 with
growth forecasts of 2.75% before rebounding to a healthy level in 2016 and 2017.
Risks to the Forecast
China’s housing market slump: Asian economies’ high correlation to Mainland China
and also the Euro bloc renders them susceptible to shocks from these economies.
Although the residential sector’s outlook has improved in China, its financial sector
remains under threat from the shadow banking sector and strained fiscal positions of local
governments. China needs to maintain the right balance in pursuing reforms to rectify
these issues while maintaining sufficient growth to support employment. Meanwhile,
economic uncertainties in Europe continue to persist. Any shocks to Europe would be
sharply felt in export-reliant Asia.
Japan coming up short on delivering much needed structural changes: Aggressive
monetary easing and fiscal stimulus have put Japan’s economy on a path toward healthy
recovery, although it currently struggles with a slump in consumer spending following the
consumption tax (VAT) hike in April 2014. Attention from economists has now turned
towards much needed structural reforms as the key to Japan’s long-term economic
sustainability. These include corporate tax cuts, investment policy change on Japan’s
government pension fund, and deregulation of the labour market.
DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015
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Disorderly U.S. interest rate normalization triggering volatility: Interest rate
normalization is next on the agenda for the U.S. Federal Reserve after winding down of
the quantitative easing program. While this is well anticipated by the market, the manner
in which interest rates are hiked could yet generate market volatility. Key REIT markets,
such as Singapore, Japan and Australia, are structurally sensitive to long term interest
rate volatility since REITs are invested by yield seeking investors. We’ve reflected
increases in the long term interest rates in our base cases for each market but cap rates
might widen more than our expectation.
DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015
8
Strategic Real Estate Outlook
Real estate performance across much of the Asia Pacific region has been a balance
between a strong capital market and a softer but recovering leasing market, particularly in
the office sector. Japan, China and Singapore experienced relatively stronger office
leasing demand in 2014. The recovery is expected to extend into 2015 for key markets
with the exception of Australia, where leasing demand is likely to remain subdued.
Continued global and domestic capital flows into quality assets in the region contributed to
a further cap rate compression during the period, especially for the developed markets of
Japan, South Korea and Australia. Given the current low yields and the possibility of
interest rate rises in the medium term, capital growth prospects have diminished over our
forecast horizon. Accordingly, the five year returns forecasts are slightly trimmed
compared to our previous view, since we believe further cap rate compression is limited if
at all in most markets. Nevertheless, future cap rate widening could yet create good entry
opportunities for investors seeking to gain exposure within the region.
Annual total return by sector in Asia Pacific (weighted average), 2001-2019F
Office
Retail
Industrial
30%
20%
10%
0%
2019f
2018f
2017f
2016f
2015f
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
-10%
f = forecast
Note: There is no guarantee the forecasts will materialise
Source: Deutsche Asset & Wealth Management, February 2015
Strategic Views
Although the macro economy, capital markets, and real estate fundamentals have all
moved broadly in line with our previous forecast in August 2014, we have since witnessed
further tightening of cap rates. It has become more challenging for investors seeking
prime asset investment opportunities in some markets in the region to achieve their
returns objectives with some possibly choosing to trade up the risk curve in response. We
hold the view that while part of the cap rate compression was driven by anticipation of a
recovering rental cycle, other structural driving forces were also at play: (1) diversification
needs as evident from the gradual but steady increase in cross-border transactions since
2011 and (2) higher allocation to real estate by institutional investors. As revealed in
Preqin’s Investor Outlook for the second half of 2014, 52.0% of institutional investors
committed to private real estate funds in just the first eight months of 2014 compared to
the average of 41.0% for each of the years from 2011 to 2013. So while pressures on cap
rate widening will intensify with expectations of eventual interest rate rises, we believe that
some of the fears may be exaggerated. As such, we favour markets with relatively good
yield spreads to mitigate risks arising from cap rate widening and healthy leasing
DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015
9
fundamentals to provide increasing rental income to drive returns going forward. In
addition, we believe that there is some more way to go for the cross border diversification
trend and as such, prefer gateway cities with their deep markets and greater appeal to
foreign investors.
▪
▪
▪
▪
Commercial markets in Tokyo and Osaka provide attractive yield spreads and are
likely to provide good performance in the medium term, fuelled by the recovery in
space demand from the corporate sector and well under control supply. Total returns
look modest on an unlevered basis but excess returns are one of the highest due to
the very low interest rate environment. Given the tight cap rates in prime areas, we
suggest that yield-seeking investors look toward frequently transacted mid-sized
grade-B assets, forward commitment or suburban retail.
The Seoul market is expected to provide stable performance. Led by the leasing
market recovery, foreign investors are back and stiffly competing with domestic
capital for investment. Since deal flow is limited for prime office and high street retail,
we propose that investors consider asset repositioning and/or suburban retail
portfolios in order to achieve minimum required cash returns on their investments.
Melbourne and Sydney remain attractive due to the highest yields among mature
economies. Due to the short-term softness of the Australian economy driven by the
slowdown in the mining sector, there are short-term challenges such as elevated
vacancy rates of about 10.0% and generous incentives granted to tenants in the main
markets. We expect, however, rental growth to revert to trend from 2016 onwards
given a limited new supply and the recovery of space demand.
The income component of logistics properties together with their longer leases and
stable or stepped-up rents provide attractive investment opportunities. Because of
limited liquidity yields are higher than other sectors making it is especially attractive
for income seeking investors. The combined average property level total return is
expected to be around 10.0% for logistics investments across the region in the
medium term.
Opportunities with caution:
▪
Moderating headline growth and sizeable new pipeline supplies in decentralized
areas puts pressure on the Chinese leasing market. In the investment market, owner
occupiers and domestic investors are driving valuations to challenging levels. There
remains a further attractive upside for Tier-1 cities, however, from ongoing structural
reforms and the return of leasing appetite from multi-national corporations (MNCs).
Local partnerships could be the key to source deals.
▪
In the highly cyclical office markets of Hong Kong and Singapore, rental corrections
are expected. Cap rates are tight in the office sector and investment opportunities are
limited only for non-yield seeking investors such as private investors or end users
(owner occupation). Initial yields can be negatively affected by any increases in longterm interest rates occurring over the medium term. Opportunities are likely to arise in
Singapore when cap rates start to decompress.
▪
We favour non-discretionary retail as this provides a cushion against fluctuations in
discretionary spending, although the negative impact of online retailing cannot be fully
discounted. Neighbourhood centres and suburban retail typically attract these types of
tenants, and annual gross returns are expected to be in the high single digits on an
unlevered basis for most markets in the region.
DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015
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Capital Markets
Transactions: Commercial real estate transaction volumes (excluding land transactions)
in 2013 totalled US$137 billion in the Asia Pacific region, a healthy 18.0% increase a year.
The volume remains at the elevated level of 2014 on the preliminary basis where Japan
leads the pack followed by Australia and China.
Asia Pacific transaction volume
(US$bn)
Japan
50
Australia
China
Hong Kong
Singapore
S Korea
Others
44
39
39
40
35
32
31
30
32
30
29
27
27
28 28
29
31
33 33 33
33
30
29
28
26
25
23
20
20
18
18
17
11
12 13
10
14Q4
14Q3
14Q2
14Q1
13Q4
13Q3
13Q2
13Q1
12Q4
12Q3
12Q2
11Q4
12Q1
11Q3
11Q2
11Q1
10Q4
10Q3
10Q2
10Q1
09Q4
09Q3
09Q2
09Q1
08Q4
08Q3
08Q2
08Q1
07Q4
07Q3
07Q2
07Q1
0
Note: Figures exclude land acquisitions and developments, hospitality and apartments/residential
Source: Real Capital Analytics; Deutsche Asset & Wealth Management, February 2015
Past performance is not indicative of future returns
REITs: REIT stock indices in major markets in the region experienced healthy growths in
2014 while the amount of fundraising halved down from 2013 when it exceeded US$20
billion, the all-time high. Although listed REITs remain one of the main purchasers of real
estate, volume declined in Japan and Singapore.
Equity capital raised by listed REITs
(US$ bn)
(US$bn)
24
Combined Market
Cap (RHS)
Others
280
Hong Kong
18
210
Singapore
Australia
Japan
12
140
2014E
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
0
2002
0
2001
70
2000
6
Note: Figures exclude land acquisitions and developments, hospitality and apartments/residential
Source: Real Capital Analytics; Deutsche Asset & Wealth Management, February 2015
DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015
11
Investor Profile: Domestic buyers still dominate the investment market in the region while
cross border investors have stepped up their activities in search of diversification. The
volume share of transactions by REITs slightly declined from 28.0% in 2013 to 26.0% in
2014 on the preliminary basis while cross border investors share increased from 19.0% in
2013 to 28.0% in 2014 on the preliminary basis according to Real Capital Analytics.
Institutional investors with preferences over income-producing assets remain challenged
by strong competition from REITs and private investors in acquisition activities.
Accordingly, Asian investors are expected to remain active in outbound cross-border
investments, reflecting the desire to explore higher yielding offshore markets. These
include investors from China, Hong Kong, Singapore, South Korea, Malaysia and Taiwan
which could contribute to yield convergence among global markets.
Asia Pacific investor profile
(US$bn)
140
137
136
Unknown
120
112
117
115
114
User/Other
100
84
Institutional
80
63
Private
60
40
Listed / REITs
20
Cross-Border
0
2007
2008
2009
2010
2011
2012
2013
2014E
Note: Figures exclude land acquisitions and developments
Source: Real Capital Analytics; Deutsche Asset & Wealth Management, February 2015
Looking ahead, the trend of global and domestic capital chasing prime office assets and
favourable credit conditions could result in further mild cap rate compression in some
markets such as Japan, Australia and South Korea by 20-50 basis points before yields
start to decompress in years to come. Yields are forecast to rise in other markets,
including Hong Kong and Singapore, which will affect the capital values in these highly
cyclical markets. The market witnesses a continuation of the forward funding trend as
banks remain cautious in their lending for development.
Office sector: Initial yields and 10Y government bond yield
10Y Govt. Bond Yield
8%
Initial Yield
7%
6%
5%
4%
3%
2%
1%
Tokyo
Osaka
Seoul
CBD
Beijing
Overall
Shanghai
Overall
2010
2012
2014
2016f
2018f
2010
2012
2014
2016f
2018f
2010
2012
2014
2016f
2018f
2010
2012
2014
2016f
2018f
Hong Kong
Overall
2010
2012
2014
2016f
2018f
Melbourne
CBD
2010
2012
2014
2016f
2018f
2010
2012
2014
2016f
2018f
Sydney
CBD
2010
2012
2014
2016f
2018f
2010
2012
2014
2016f
2018f
0%
Singapore
Raffles Pl.
f = forecast
Note: There is no guarantee the forecast returns shown will materialise
Source: Deutsche Asset & Wealth Management; Oxford Economics, Global Insight, February 2015
Past performance is not indicative of future returns
DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015
12
Given low yields in the office sector, some investors may try to seek opportunities in the
retail sector. Institutional grade assets are tightly held by local developers in some
countries, the lack of investment grade stock available capping deal volumes. Investment
demand for retail assets in China softened due to the government’s anti-corruption
campaign which restricts using luxury goods for bribery purposes, while retail sales
struggled in Japan after the consumption tax hike implemented in April 2014.
Retail sector: Initial yields and 10Y government bond yield
10%
10Y Govt. Bond Yield
Initial Yield
8%
6%
4%
Sydney
RC
Melbourne
RC
Sydney
Hong Kong
Neighbourhood
Overall
Tokyo
Seoul
Beijing
Core
Shanghai
Prime
Singapore
Prime
2010
2012
2014
2016f
2018f
2010
2012
2014
2016f
2018f
2010
2012
2014
2016f
2018f
2010
2012
2014
2016f
2018f
2010
2012
2014
2016f
2018f
2010
2012
2014
2016f
2018f
2010
2012
2014
2016f
2018f
2010
2012
2014
2016f
2018f
2010
2012
2014
2016f
2018f
0%
2010
2012
2014
2016f
2018f
2%
Singapore
Suburban
f = forecast. Past performance is not indicative of future returns
Note: There is no guarantee the forecast returns shown will materialise
Source: Deutsche Asset & Wealth Management; Oxford Economics, Global Insight, February 2015
Investor interest in the industrial and logistics sector has grown due to higher yields and
the gradual maturity of the sector. The supply of modern facilities continues to lag demand
from retailers and 3PLs as a large number of such assets are owned privately or tightly
held by developers in some markets. A further mild yield compression is expected in
Japan and Australia, while it stabilizes at the current level in other markets.
Industrial sector: Initial yields and 10Y government bond yield
10Y Govt. Bond Yield
Initial Yield
10%
8%
6%
4%
2%
Tokyo
Seoul
Beijing
Shanghai
2010
2012
2014
2016f
2018f
2010
2012
2014
2016f
2018f
2010
2012
2014
2016f
2018f
Hong Kong
2010
2012
2014
2016f
2018f
Melbourne
South East
2010
2012
2014
2016f
2018f
2010
2012
2014
2016f
2018f
Sydney
South
2010
2012
2014
2016f
2018f
2010
2012
2014
2016f
2018f
0%
Singapore
High Tech
f = forecast. Past performance is not indicative of future returns
Note: There is no guarantee the forecast returns shown will materialise
Source: Deutsche Asset & Wealth Management; Oxford Economics, Global Insight, February 2015
DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015
13
Credit markets: The financing environment has become more accommodative than the
previous period in major markets due to the positive effects of recent rate cuts and
supportive measures. “All-in” funding costs fell more than 40 basis points in Australia,
China, Singapore and South Korea last year while it was as low as 1.0% in Japan.
Typical commercial lending terms
LTV (%)
Australia
China
Hong Kong
Japan
Singapore
South Korea
60%
50-60%
40-50%
50%
65%
50-60%
Spread
(bps)
100 - 200
150 - 200
300 - 350
50 - 100
115 - 130
140 - 190
Reference rate
3M BBSW Rate : 2.7%
3-5Y PBOC lending rate: 6.0%
1Y HIBOR: 0.85%
5Y JPY swap rate: 0.25%
3M Swap Offer Rate: 0.55%
5Y KTB: 2.1%
Interest rate
(bps)
370 - 470
750 - 800
385 - 435
75 - 125
170 - 185
350 - 400
Source: Bloomberg, Deutsche Asset & Wealth Management, February 2015
Investment Market Outlook
Japan: On the back of very favourable credit conditions the transaction volume in
Japan in the rolling 12 months to September 2014 was around JPY 4.7 trillion,
indicating a 27.0% increase from the same period the previous year, and the second
largest volume amount in the last fifteen years. Cap rates are expected to remain tight
in this environment below 4.0% for prime assets in Tokyo or around mid 4.0% in Osaka.
Foreign investors have been attracted by the recovering rental markets, healthy yield
spreads together with the yen’s depreciation, while some investors try to avoid prime
sectors. The main target opportunities and types of assets include forward commitment,
hospitality, suburban retail malls, grade-B offices and offices with vacant spaces.
Transaction Volume and Lending Attitude by Banks in Japan
(JPY tn)
transaction volume (12 months, LHS)
lending attitude DI (6 months prior, RHS)
36
6
2014.09
2014.03
2013.09
2013.03
2012.09
2012.03
2011.09
2011.03
2010.09
2010.03
2009.09
2009.03
2008.09
2008.03
2007.09
2007.03
2006.09
2006.03
2005.09
-36
2005.03
0
2004.09
-24
2004.03
1
2003.09
-12
2003.03
2
2002.09
0
2002.03
3
2001.09
12
2001.03
4
2000.09
24
Diffusion Index (DI)
5
Sources: Urban Research Institute, Bank of Japan, Real Capital Analytics, Deutsche Asset & Wealth
Management, February 2015
There is no guarantee forecast returns shown will materialize
DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015
14
South Korea: The investment market is still dominated by domestic investors, while
international investors increase activities. Given cap rates standing at 5.0% or lower for
prime office in Seoul’s CBD, many investors have moved up the risk spectrum and
considered transactions as asset repositioning, leasing ups, forward commitment, asset
conversions, or more opaque sectors such as suburban retail and industrial. Cap rates
compressed more than 100 basis points in the last three years in the Seoul office sector
and are expected to move further downward in accordance with the lowered interest rate.
Transaction Volume in South Korea
(KRW tn)
Transaction Valume (Korea - All Sectors)
10
Other Cities
8
Seoul Industrial
Seoul Retail
6
Seoul Office
4
2
2014E
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
0
Source: Real Capital Analytics, Deutsche Asset & Wealth Management, February 2015
There is no guarantee forecast returns shown will materialize
China: Transaction volumes have come off roughly 20.0% in 2014 from the previous
year’s level. While investor interest in the logistics sector has intensified, investors have
also become more cautious towards the office and retail sectors, particularly in lower tier
cities as a sizeable pipeline supply looms nearer. In the meantime, domestic investors
continue to turn their attention overseas as outbound investment rules relaxed further.
Transaction Volume in China
(USD bn)
Office
Retail
Industrial
Apt
Hotel
28
24
20
16
12
8
4
14Q3
14Q2
14Q1
14 YTD
2013
2012
2011
2010
2009
2008
2007
0
Source: Real Capital Analytics, Deutsche Asset & Wealth Management, February 2015
There is no guarantee forecast returns shown will materialize
DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015
15
Hong Kong: Transaction volume reached its highest level in the third quarter of 2014
since the introduction of Double Stamp Duty in the first quarter of 2013, reflecting
recovering investor sentiments. Activities continued to be dominated by local end-users
while the risk of rising interest rates has seen investors growing more cautious. Given the
generally low yield environment, many investors have adopted a value-add strategy
including converting older but well located buildings to other uses. We could anticipate
some properties to come to market as local developers offload non-core properties to
bolster cash reserves.
Transaction Volume in Hong Kong
(USD bn)
20
Office
Retail
Industrial
Apt
Hotel
16
12
8
4
14Q3
14Q2
14Q1
14 YTD
2013
2012
2011
2010
2009
2008
2007
0
Source: Real Capital Analytics, Deutsche Asset & Wealth Management, February 2015
There is no guarantee forecast returns shown will materialize
Singapore: Similar to the situation in Hong Kong, core investors have grown increasingly
wary of widening yields on the expectation of rising interest rates. Nevertheless, the office
sector has seen a number of en-bloc transactions in 2014, driven by opportunistic
investors looking to capitalize on the rebound in rents and improved sentiments in the
strata-title segment. Looking ahead, investment activities in the core space could
potentially pick up with some funds looking to offload properties as they approach the end
of their fund lives.
Office
Retail
2011
(USD bn)
2009
Transaction Volume in Singapore
Industrial Apt
Hotel
16
12
8
4
14Q3
14Q2
14Q1
0
14 YTD
2013
2012
2010
2008
2007
0
Source: Real Capital Analytics, Deutsche Asset & Wealth Management, February 2015
There is no guarantee forecast returns shown will materialize
DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015
16
Australia: Investors continue to retain a strong interest in Australia given the higher
yields, asset liquidity and greater transparency compared to other Asian markets. The
transaction volume in the country in 2014 exceeded the historical high recorded back in
2007. The asking prices for buildings in core Central Business District (CBD) locations
appear demanding with cap rates going below 6.0% for long term leased assets. However,
we believe the low cap rates is in part due to relatively high vacancy rates of about 10.0%
at the moment, a result from the earlier wave of new completions as is the case in
Melbourne. As the leasing markets regain traction, current vacant space would yet provide
an additional source of rental growth. We expect hedging costs to remain a challenge for
foreign investors.
Transaction Volume in Australia
(AUD bn)
Office
Retail
Industrial
Hotel
Apartment
30
20
10
0
2007
2008
2009
2010
2011
2012
2013
2014
Source: Real Capital Analytics, Deutsche Asset & Wealth Management, February 2015
There is no guarantee forecast returns shown will materialize
DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015
17
Leasing Market Outlook
Japan: Office space demand in Japan remains healthy fuelled by a resilient corporate
sector. The office vacancy rate in central Tokyo fell to 5.5% in December 2014 from 7.3%
a year ago. With only a moderate level of new supply planned, the healthy demand supply
balance is expected to persist in coming years. Office rents in Tokyo entered the recovery
cycle in 2014 and a further recovery is expected ahead.
Office Supply and Vacancy Rate in Tokyo
Grade-A (LHS)
(million sqm)
Grade-B&C (LHS)
Vacancy (RHS)
(%)
Forecast
2.0
10
18F
17F
16F
14
15E
13
12
11
10
09
08
07
06
05
04
03
02
01
99
00
0
98
0.0
97
2
96
0.4
95
4
94
0.8
93
6
92
1.2
91
8
90
1.6
Source: Miki Shoji, Jones Lang LaSalle, Mori Building, Deutsche Asset & Wealth Management, February
2015
There is no guarantee forecast returns shown will materialize
Vacancy rates have continued improving across all other major cities in Japan. Vacancy
rates in Osaka, Nagoya, Fukuoka and Sapporo declined to 8.0% or below as of the end of
December 2014, by well absorbing new supply provided in each market in recent years.
Office Vacancy Rates in Major Japanese Cities
Sapporo
(%)
16
Fukuoka
Nagoya
Osaka
Tokyo
12
8
4
2014.12
2014.06
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
0
Source: Miki Shoji, Deutsche Asset & Wealth Management, February 2015
There is no guarantee forecast returns shown will materialize
DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015
18
South Korea: New office supply peaked in 2010-2013 in the Seoul CBD, pushing up the
vacancy rate to over 9.0% in 2013 which was followed by a mild recovery to 8.0% in 2014.
Given the limited amount of new supply planned going forward, the vacancy rate is now
expected to decline in the second half of 2015 onwards.
Office Supply and Vacancy Rate in Seoul
(000 py)
CBD
CBD
GBD
YBD
Vacancy CBD (%)
2014 E
2015 F
0.0%
2013
-
2012
2.4%
2011
40
2010
4.8%
2009
80
2008
7.2%
2007
120
2006
9.6%
2005
160
2004
12.0%
2003
200
Source: Mate Plus, Deutsche Asset & Wealth Management, February 2015
There is no guarantee forecast returns shown will materialize
China: Leasing demand continued to surprise on the upside despite slowing headline
GDP growth, a reflection of structural changes in the economy. The services sector
continued to expand healthily, driven by domestic firms, especially from the rapidly
growing finance, IT and professional services sectors. While foreign firm demand
remained quiet, signs are emerging that this may change soon. 58 multinational
companies received approvals to set up regional or global headquarters in Shanghai in
2014, with many citing continued liberalizations in the free trade zone as an important
consideration. In Beijing, healthy demand and limited supply have driven vacancy to a
historically low level. Looking ahead, office demand in Shanghai and Beijing are expected
to strengthen further, sustained by domestic demand and the eventual return of foreign
demand. Improved prospects for mergers and acquisitions as well as IPOs could provide
additional boosts.
Office Supply and Vacancy Rate in Beijing and Shanghai
2018F
2017F
2016F
2005
2004
2015F
0%
2014
0.0
2013
7%
2012
0.3
2011
14%
2010
0.6
2009
21%
2008
0.9
2007
1.2
BJ new supply
BJ vacancy rate (RHS)
28%
2006
SH new supply
SH vacancy rate (RHS)
(mn sqm)
Source: Jones Lang LaSalle, Deutsche Asset & Wealth Management, February 2015
There is no guarantee forecast returns shown will materialize
DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015
19
Hong Kong: Considerable new office supply arriving in decentralized areas at a period of
soft leasing demand is expected to drive rents lower in Hong Kong where landlords have
historically been responsive to vacancy rate movements. Meanwhile, consolidation in the
financial sector poses further downside risks, although this might be offset to some extent
by anticipation of a pickup in mergers and acquisitions activity in Mainland China.
Office Supply and Vacancy Rate in Hong Kong
(tho. sqm)
New supply
Net absorption
Vacancy rate (RHS)
2018F
2017F
2016F
2015F
2014
2013
0%
2012
0
2011
2%
2010
100
2009
4%
2008
200
2007
6%
2006
300
2005
8%
2004
400
Source: Jones Lang LaSalle, Deutsche Asset & Wealth Management, February 2015
There is no guarantee forecast returns shown will materialize
Singapore: Office vacancy rate have been receding since 2011 and are expected to
taper further in 2015, given the subdued new office completions from 2013 to 2015.
However, an unprecedented wave of office supply is expected in 2016, which would
reverse the falling vacancy rate trend and put the rental market under pressure through till
2017 as the market digests this new supply. We have pencilled in a rental correction of
about 8.0% during this period with Marina Bay and Shenton Way being most vulnerable
as the new supply is concentrated in these submarkets.
Office Supply and Vacancy Rate in Singapore
(tho. sqm)
Supply
Absorption
Vacancy Rate (RHS)
300
12%
250
10%
200
8%
150
6%
100
4%
50
2%
0
0%
-50
2019F
2018F
2017F
2016F
2015F
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
-2%
Source: Jones Lang LaSalle, Deutsche Asset & Wealth Management, February 2015
There is no guarantee forecast returns shown will materialize
DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015
20
Australia: Office supply in Melbourne peaked in 2013 and only a moderate new supply is
expected in the next three years while Sydney will see the supply surge in 2016, including
Sydney International Towers, three new towers at Barangaroo. The vacancy rate in
Sydney is expected to widen in 2016 before it declines to 10.0% or below the following
year.
Office Net Supply and Vacancy Rate in Sydney and Melbourne
supply (LHS)
vacancy (RHS %)
12%
(000 m2) Sydney
200
supply (LHS)
vacancy (RHS %)
12%
(000 m2)Melbourne
200
150
9%
150
9%
100
6%
100
6%
50
3%
50
3%
0
0%
0
0%
-50
-50
-3%
2000
2002
2004
2006
2008
2010
2012
2014
2015F
2017F
2019F
2000
2002
2004
2006
2008
2010
2012
2014
2015F
2017F
2019F
-3%
Source: Jones Lang LaSalle, Deutsche Asset & Wealth Management, February 2015
There is no guarantee forecast returns shown will materialize
There has been a strong correlation between the vacancy rate and tenant incentives in
Australia. On the back of the elevated vacancy rate landlords are now required to provide
generous incentives to tenants, about 31.0% or a 37 month rent free period, is given to
tenants for ten year leases in Sydney, this is expected to recover only mildly going forward.
Office Vacancy Rate and Rent Free Period in Sydney and Melbourne
rent f ree
vacancy (%)
Sydney
(months)
40
rent f ree
vacancy (%)
12%
Melbourne
0
0%
2018F
0%
2016F
0
2013
3%
2011
10
2009
3%
2007
10
2005
6%
2003
20
2018F
6%
2016F
20
2013
9%
2011
30
2009
9%
2007
30
2005
(months)
40
2003
12%
Source: Jones Lang LaSalle, Deutsche Asset & Wealth Management, February 2015
There is no guarantee forecast returns shown will materialize
DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015
21
Property Sectors and Returns
Office
Fundamentals: Vacancy rates recovered in many markets in the region in 2014 including
all Japanese cities, most Chinese cities, Kuala Lumpur and Singapore, while they were
almost flat in other major markets including Seoul, Hong Kong, Sydney and Melbourne
and widened substantially in Brisbane and Perth given the slowdown of the mining sector.
We expect vacancies to recover over the medium term in most markets as confidence
returns to the corporate sector and the level of new supply is kept under control. The
exceptions will be Nagoya, Shanghai, Guangzhou, Hong Kong and Kuala Lumpur where a
large amount of supply is planned.
Office sector: Projected vacancy rate in selected markets
12.6%
Perth - CBD
Kuala Lumpur
14.9%
12.5%
8.9%
12.4%
Brisbane - CBD
16.6%
11.3%
Singapore - Shenton Way
Shanghai - Puxi
11.1%
9.6%
Nagoya
10.8%
8.0%
Melbourne - CBD
9.1%
Sydney - CBD
9.1%
7.7%
Yokohama
Guangzhou
8.5%
6.5%
2.8%
5.9%
Seoul - CBD
5.8%
4.6%
5.1%
Hong Kong - Overall
Osaka
10.9%
10.1%
6.6%
5.6%
Shanghai - Pudong
14.8%
9.0%
8.0%
4.8%
5.2%
Tokyo
3.6%
4.0%
3.4%
Hong Kong - Central
Singapore - Marina Bay
5.3%
Average 2015 to 2019
2.1%
2.0%
1.4%
2.3%
Beijing - Overall
Singapore - Raffles Place
0%
2%
2014
4%
6%
8%
10%
12%
14%
16%
18%
f = forecast
Note: There is no guarantee the forecasts will materialise
Source: Deutsche Asset & Wealth Management, February 2015
Office rental growth is anticipated at a healthy level of around 5.0% or more in Singapore,
Beijing and Tokyo in 2015, while growth will be more moderate in other cities. Significant
rental decline is expected in Hong Kong, Perth and Brisbane. Looking ahead in the longer
term, a healthy growth of over 4.0% per annum is likely in Shanghai while more moderate
growth of around 3.0% is expected in key markets including Beijing, Melbourne, Sydney,
Tokyo and Seoul. In Singapore where unprecedented supply is in the pipeline, more than
5.0% of rental decline is expected in 2016 while a negative 1.0% growth on average is
expected in Hong Kong including decentralized areas over the five year horizon.
DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015
22
Office sector: Projected rental growth between 2015f and 2019f
-15.0%
(CAGR)
Shanghai - Puxi
(4.5%)
Shanghai - Pudong
(4.2%)
Beijing - Overall
(3.2%)
-10.0%
2015
0.0%
-5.0%
2016
5.0%
2017
2019
10.0% 2018 15.0%
22.8%
21.2%
16.5%
Melbourne - CBD (3.0%)
Sydney - CBD
(3.0%)
Tokyo
(2.9%)
Singapore - Raffles Place
(2.6%)
Seoul - CBD
(2.6%)
Singapore - Marina Bay
(2.3%)
Hong Kong - Central
(1.9%)
15.3%
15.1%
14.5%
13.9%
13.0%
12.5%
10.1%
10.1%
Singapore - Shenton Way
(1.8%)
Guangzhou
(1.1%)
Kuala Lumpur
(1.1%)
Yokohama
(1.0%)
5.0%
Osaka (1.0%)
5.0%
Brisbane - CBD
(0.9%)
Perth - CBD
(0.5%)
6.0%
5.3%
4.6%
3.2%
Nagoya (-0.2%)
-1.0%
Hong Kong - Overall (-1.0%)
-15%
5Y Cumulative
20.0%
25.0%
-4.5%
-10%
-5%
0%
5%
10%
15%
20%
25%
f = forecast
Note: There is no guarantee the forecasts will materialise
Source: Deutsche Asset & Wealth Management, February 2015
Except for cities in Greater China, there is
vacancy rate and rental growth forecast
expected in Perth and Brisbane due to
commodity sector and also in Hong Kong,
surge in the pipeline.
an inverse relationship between the expected
in most cities. Weak leasing conditions are
negative effects from the slowdown in the
Nagoya and Kuala Lumpur due to the supply
Office sector: Projected vacancy rate vs rental growth between 2015f and 2019f
18%
Vacancy Rate (2015f - 2019f)
16%
14%
Perth
12%
10%
Kuala Lumpur
Brisbane
Nagoya
S'pore
Sydney
8%
6%
Hong Kong - Overall
4%
S'pore
2%
-1%
0%
Melbourne
Yokohama
Guangzhou
Osaka
0%
-2%
-2%
Shanghai - Puxi
Shenton Way
Shanghai
Pudong
Seoul
Tokyo
HK - Central
Marina Bay
Beijing
S'pore
Raffles Pl.
1%
3%
2%
4%
5%
6%
7%
8%
Rental Growth p.a. (2015f - 2019f )
f = forecast
Note: There is no guarantee the forecasts will materialise
Source: Deutsche Asset & Wealth Management, February 2015
DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015
23
Performance: Modest high single digit returns are expected in most cities in the APAC
office sector over the next five year average, driven by healthy rental growth and
stabilizing cap rates. Shanghai, Beijing, Sydney, Melbourne and Seoul will be among the
top performers while Tokyo and Japanese cities are expected to provide the best excess
returns over the long term risk free rate (10-year government bond yield). The
performance of the regional financial hubs, Hong Kong and Singapore, could be weak
where cap rate expansions seem inevitable over the period, which could negatively affect
capital returns.
Office sector: Projected compounded annual return and excess return
-2.0%
Excess Return
Avg 10Y Bond Yield
0.0%
2.0%
4.0%
Shanghai - Puxi (5.5%)
Shanghai - Pudong (4.6%)
Beijing - Overall (4.5%)
Sydney - CBD (3.8%)
Melbourne - CBD (3.7%)
Seoul - CBD (4.1%)
Kuala Lumpur (3.3%)
Brisbane - CBD (3.1%)
Tokyo (7.2%)
Perth - CBD (2.6%)
Osaka (7.0%)
Yokohama (6.7%)
Guangzhou (1.4%)
Nagoya (5.5%)
Singapore - Marina Bay (1.3%)
Singapore - Raffles Place (0.9%)
Singapore - Shenton Way (0.8%)
Hong Kong - Central (-2.0%)
Hong Kong - Overall (-5.6%)
-2%
Total Return (5Y CAGR)
6.0%Excess
8.0%
Return 10.0%
4.6%
4.2%
4.1%
2.2%
-1.5%
0%
2%
4%
10.6%
9.7%
9.6%
9.1%
9.0%
8.4%
8.3%
8.3%
8.0%
7.8%
7.8%
7.4%
6.5%
6.3%
6%
8%
10%
f = forecast
Note: There is no guarantee the forecasts will materialise
Source: Deutsche Asset & Wealth Management, February 2015
Retail
Fundamentals: Retail sales were generally below trend in most major countries in the
region in 2014 including Japan, South Korea, China and Australia due to various reasons
including tax increases, anti-corruption measures and weaker consumer sentiments. The
outlook for 2015 should be more positive, however, in line with recovery in the economy,
especially in non-discretionary products.
The current retail environment continues to be a tenants’ market with landlords offering
better incentives such as rent-free periods and contributions to fit-outs. Vacancy rates
could start to inch upwards on the back of growing supply and lower pre-commitment
rates mainly in decentralized areas. In 2015, retailers’ space demand is likely to remain
stable in the majority of locations as consumer sentiment bounces back.
The region’s strongest rental growth in the next five years is expected in Beijing, followed
by Shanghai, Singapore Prime and Guangzhou although growth will be more muted in
suburban, decentralized areas in these cities due to an influx of new supply. In other
markets in the region, such as Australian cities and Seoul, rental growth will be at healthy
levels of about 2.0% or above, almost in line with inflation rates. Rental growth is expected
to be weaker in Tokyo due to the negative impact of the consumption tax increase back in
2014 and the next one planned in 2017.
DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015
24
Retail sector: Projected rental growth between 2015f – 2019f
0.0%2015
-5.0%
(CAGR)
5.0%
2016
10.0%
2017
2018
15.0%
2019
20.0%
5Y Cumulative 25.0%
Beijing - Core (4.4%)
22.0%
Shanghai - Prime (3.0%)
15.0%
Singapore - Prime (2.8%)
13.8%
Guangzhou - Prime (2.5%)
12.6%
Sydney - RC (2.4%)
12.0%
Melbourne - RC (2.4%)
12.0%
Kuala Lumpur - KLCC (2.3%)
11.6%
Hong Kong - Overall (2.3%)
11.6%
Seoul (2.3%)
11.3%
Sydney - SRC (2.1%)
10.5%
Melbourne - SRC (2.0%)
10.0%
Sydney - Neighbourhood (1.7%)
8.5%
Singapore - Suburban (1.2%)
5.9%
Tokyo (1.0%)
5.0%
-5%
0%
5%
10%
15%
20%
25%
f = forecast RC= Regional Centres SRC= Sub-regional centres
Note: There is no guarantee the forecasts will materialise
Source: Deutsche Asset & Wealth Management, February 2015
Performance: Since there is concern of a demand shift from bricks-and-mortar to online
retailing, there is a clear trend among institutional investors toward long term leases. Also
the impact from online retail is expected to be stronger in the discretionary retail segment,
such as apparel, than non-discretionary segment of food and daily commodities.
Looking ahead, the performance of neighbourhood centres in Australia appears most
attractive due to higher yields compared to larger-sized formats, such as regional centres
(RC). Healthy excess returns (i.e. annual total returns minus bond yields) of about 3-5%
are expected in most key retail markets in the region except for Chinese cities and Hong
Kong.
Retail sector: Projected compounded annual return and excess return
Excess Return
0.0%
Sydney - Neighbourhood
Kuala Lumpur - KLCC
Beijing - Core
Sydney - SRC
Melbourne - SRC
Seoul
Melbourne - RC
Sydney - RC
Shanghai - Prime
Singapore - Prime
Hong Kong - Overall
Singapore - Suburban
Guangzhou - Prime
Tokyo
Ave 10Y Bond Yield
Total Return (5Y CAGR)
2.0%
4.0%
6.0% Excess
8.0%
12.0%
Return10.0%
10.4%
9.8%
9.5%
9.0%
8.7%
8.5%
8.2%
8.0%
6.7%
6.7%
6.6%
6.4%
6.2%
5.5%
(5.2%)
(4.8%)
(4.4%)
(3.8%)
(3.5%)
(4.2%)
(3.0%)
(2.8%)
(1.6%)
(3.4%)
(2.5%)
(3.1%)
(1.1%)
(4.7%)
0%
2%
4%
6%
8%
10%
12%
f = forecast RC= Regional Centres SRC= Sub-regional centres
Note: There is no guarantee the forecasts will materialise
Source: Deutsche Asset & Wealth Management, February 2015
DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015
25
Industrial
Fundamentals: Although some weakness is expected to remain in the domestic
environment, e-commerce and third party logistics companies are expected to propel
leasing demand in the modern logistic space across the region. Occupiers with big space
requirements are likely to find it challenging to secure space in modern logistics facilities.
The supply of new modern logistics assets in the Asia Pacific region will be about 30.0%
lower in 2015 compared to 2014, and the lack of supply of large modern quality facilities
will persist in many markets in the region, especially in still evolving Chinese cities. This
supply situation encourages major tenants to pre-commit or develop built-to-suit logistics
facilities and distribution warehouses to meet their needs.
Future demand will be supported by steady retail sales growth, a growing middle class
population, the expansion of the e-commerce sector and the recovery in foreign trade. In
Hong Kong has witnessed a high level of relocation demand from tenants of obsolete
industrial buildings that are to be converted to other uses as part of the government’s
revitalisation policy 1 , rental growth could be stronger due to the lack of quality space.
Rental growth is expected to be more moderate at around 2-4%, broadly in line with
inflation, in other markets in the region as tenants and shoppers remain mindful of costs.
In Tokyo expected supply surge will be well absorbed within two years, while rental growth
is expected to be minimal.
Industrial sector: Projected rental growth between 2015f – 2019f
-5.0%
(CAGR)
0.0%2015
5.0%
2016
201710.0%
2018
15.0%
2019
20.0%
5Y
Cumulative 25.0%
Hong Kong (4.6%)
Shanghai (4.1%)
Singapore - High Tech (3.6%)
Singapore - Logistics (3.4%)
Beijing (3.2%)
Melbourne - South East (2.8%)
Sydney - South (2.7%)
Sydney - Outer CW (2.5%)
Brisbane - South (2.4%)
Melbourne - West (2.3%)
Seoul (2.0%)
Tokyo (1.1%)
Singapore - Conventional (0.3%)
-5%
0%
5%
10%
15%
20%
25%
Note: There is no guarantee the forecasts will materialise
Source: Deutsche Asset & Wealth Management, February 2015
Performance: Tenant demand continues to outstrip supply for logistics real estate assets
in most markets, while a great deal of supply is expected in 2015 in cities like Tokyo and
Singapore. Thanks to higher yields, increasing transparency of the sector and strong
underlying space demand, the industrial sector has provided higher returns than the office
and retail sectors in the past five years, and is expected to maintain the higher returns in
the coming years too (see page 8). Five-year return forecasts for Chinese tier-1 cities,
Australian cities, Singapore, Seoul and Hong Kong all look favourable with about 8-10%
annual returns, although access to good quality assets is limited in Hong Kong, China and
1
This policy was implemented by the government in April 2010 and it directs most obsolete industrial
stock to be converted to non-industrial commercial uses, including office.
DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015
26
Seoul. Tokyo is expected to provide good excess returns in the forecast period, while
conventional industrial formats in Singapore are expected to be minimal among investors.
Industrial sector: Projected compounded annual return and excess return
0.0%
Excess Return
Shanghai
Beijing
Melbourne - South East
Singapore - High Tech
Brisbane - South
Singapore - Logistics
Sydney - South
Melbourne - West
Sydney - Outer CW
Seoul
Hong Kong
Tokyo
Singapore - Conventional
Ave 10Y Bond Yield
2.0%
4.0%
6.0%
Total Return (5Y CAGR)
8.0%
10.0%
12.0%
Excess Return
11.9%
10.7%
10.3%
10.1%
10.0%
9.9%
9.9%
9.6%
9.5%
9.1%
8.8%
(6.8%)
(5.6%)
(5.1%)
(6.8%)
(4.8%)
(6.6%)
(4.6%)
(4.4%)
(4.3%)
(4.8%)
(4.6%)
(6.3%)
(1.1%)
7.1%
4.4%
0%
2%
4%
6%
8%
10%
12%
f = forecast
Note: There is no guarantee the forecasts will materialise
Source: Deutsche Asset & Wealth Management, February 2015
DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015
27
Appendix:
Real Estate Market Forecasts
Using our market forecasts as a guide, this report has focused on the strategic outlook for
the Asia Pacific region’s economy, real estate investment, and commercial property
fundamentals. This outlook was based on the following assumptions and logic:
Justifications to Deutsche AWM forecast outlook
Outlook
Justification
Slower and gentler recovery in
Office supply peaked in 2012 in Tokyo and vacancy has since
the Grade B Tokyo and Osaka
improved. The recovery in the Grade A office market is now
office market. Retail and industrial
followed by a gentle recovery in the Grade B market as the
sectors provide higher yields.
economy rebounded to trend growth. Industrial and suburban
retail attracts yield seeking investors.
Stable returns for the Seoul office
Fundamentals in the office sector are set to improve, though
market in the medium term.
more completions in late 2015 will likely limit any strong recovery
Suburban retail and industrial
in the CBD in the near term. Opportunities remain in less
sectors provide higher yields.
transparent retail and logistics sectors given the lack of
professionally managed product in the market.
Office returns in Beijing and
Take-up still lags in the Beijing and Shanghai office markets with
Shanghai to be limited. Returns
returns limited by oversupply in decentralized areas. On the other
in the logistics markets hold
hand, returns in the logistics sector look healthy as demand
steady.
continues to outstrip supply.
Yields in the Hong Kong office
Rising interest rates will likely result in an outward movement of
market shift outward. Rents and
Hong Kong office yields. Office returns are likely to be modest in
returns in the logistics sector
the medium term while retail returns will likely remain flat. The
continue to rise.
lack of industrial and logistics space will lead to rising rents and
returns in this sector.
Singapore office rents will
A surge of new supply planned in the CBD over the next two
decline in 2016. Office cap rates
years while the market enjoys a rental turn around. As global
widen.
conditions improve, further rental growth is expected, but wider
cap rates remain a risk as interest rates rise.
Returns in the office markets of
Despite the short-term challenges of soft demand in the office
Sydney and Melbourne prove
sectors of Melbourne and Sydney, fundamentals will revert to
resilient. Retail investors enjoy
trend from 2015 onwards. We expect stronger rental growth and
steady returns for neighbourhood
limited new supply to drive this resilience. The retail returns for
retail centres. Industrial markets
neighbourhood centres hold steady given the defensive nature of
hold up well.
these assets. Logistics returns track decently as demand
outstrips supply and higher yields draw more interest from
investors, both local and offshore.
Note: There is no guarantee the forecasts will materialise
Source: Deutsche Asset & Wealth Management, February 2015
DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015
28
Deal Flow and Accessibility Challenges
Below shows deal flow and accessibility challenges for commercial real estate
investments especially for cross border investors. Hedging costs are expensive in
Australia and South Korea for Euro and US dollar investors 2 and this can be an
impediment for cross border investors when competing with domestic investors. In Japan
local investors and developers have the upper hand in the cost of capital due to extremely
cheap borrowing costs in the local debt market.
Onshore holding structures in China need to be in the form of foreign-invested enterprises
(FIEs) or wholly owned foreign enterprises (WOFEs) to receive equity investments from
foreign parties. Conversion of structures is required if the existing holding structure is not
in either of these forms and is subjected to regulatory approval, which introduces
regulatory uncertainties.
Target Market
Sectors
Melbourne/
Sydney
Office/Retail/
Industrial/Logistics

Hedging Cost
Japan
Tokyo/
Osaka
Office/Retail/
Industrial/Logistics

Cost of Capital
(Leverage Level)
South
Korea
Seoul
Australia
Singapore
Singapore
China
Tier 1 cities
Hong Kong
Hong Kong
Deal Flow
Office/Retail

Industrial/Logistics

Office/Retail/
Industrial/Logistics

Office/Retail

Industrial/Logistics

Office/Retail/
Industrial/Logistics

   more favorable
2
Challenges for
Foreign Investors
Cities
Hedging Cost
Holding Structure
  neutral
 less favorable
For example, hedging costs stood around 270 basis points in Australia and around 170 basis points in
South Korea for Euro investors as of the end of 2014.
DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015
29
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