According to a new report by global real estate firm Jones Lang LaSalle, the Asia Pacific real estate market continued to witness positive sentiment and increased activity across most sectors in 1Q11.
The region's economy grew by an estimated 7.0% in 2010, significantly above growth in the rest of the world of around 3%. Business activity still remains buoyant, despite a number of challenges including natural disasters and rising inflationary pressures. Economic outperformance is expected to continue during 2011, although growth is expected to moderate due to a slowdown in external demand and government spending.
Dr Jane Murray, head of Asia Pacific research at Jones Lang LaSalle says, "Positive business sentiment and continued corporate hiring underpinned the Asia Pacific office leasing market in 1Q11. Occupancy levels generally improved as corporate space requirements increased in most markets. A notable exception was Japan where the earthquake has resulted in a slowdown in expansion activity in Tokyo and a reassessment of accommodation strategy by some corporates. In most markets across Asia Pacific, the leasing market is becoming more landlord-favourable and office rentals are rising. Investment activity continued to strengthen in 1Q11, and we expect both volumes and capital values to increase further going forward."
Rents are rising in most markets
The office sector - In 1Q11, 1.5 million sqm of new Grade A office space was completed in the Tier I markets of Asia Pacific, with over 80% of the total being delivered to cities in China and India. Aggregate net absorption of office space reached 1.4 million sqm, a marked y-o-y improvement of over 30%. Among the major financial centres, Hong Kong and Singapore both recorded strong net take-up, largely due to relocation and expansion of financial and professional service firms. MNCs and domestic companies drove large spatial requirements in the Tier I cities of China and India. However, tenant demand in North Asia and some emerging South East Asian markets still consists largely of consolidation and relocations.
Rents rose further in most markets in 1Q11. Net effective rentals increased the most in Jakarta (+9.5% q-o-q) on the back of strong leasing activity and falling vacancy. A further strong uplift was also seen in Hong Kong (+9.2% q-o-q in Central) and Singapore (+7.9% q-o-q in Raffles Place). Rents in Shanghai and Beijing grew by 6 to 7% q-o-q, with the result for both markets being driven by strong demand from MNCs and domestic corporates. Net effective rentals in Tokyo declined by 1.5% as gross rents continued to fall while rent-free periods remained unchanged following the recent crisis. In a few other markets where tenant demand remains weak, rents have either stabilised (e.g., Taipei) or are seeing further declines (e.g., Seoul, Bangkok).
Looking forward, rents are expected to grow more strongly this year in markets such as India, although rental growth in Singapore, Shanghai and Hong Kong may moderate slightly from the hectic pace seen in 2010. The highest growth, of up to 30%, is expected in Hong Kong. Tokyo will however see a further delay in recovery and a few other markets including Seoul and Kuala Lumpur are expected to see further rental declines due to weak demand and / or oversupply.
The retail sector - Strong labour market conditions and consumer confidence are underpinning retail demand across most markets in the region. Leasing demand is particularly strong in Greater China. Retailers in India and some South East Asian markets are more cautious, while the retail market in Australia remained subdued in 1Q11. Rents were either stable or increased in most markets during the quarter, with growth led by Hong Kong, Beijing, Jakarta, Manila and Kuala Lumpur (2 to 3% q-o-q). Most markets are expected to see further rental growth over the next few quarters, although India is expected to lag due to the large demand-supply imbalance in most markets.
The residential sector - Leasing activity in the luxury and high-end residential markets in China and South East Asian markets was largely stable in 1Q11. Demand was stronger in Hong Kong, partly due to more short-term leases associated with temporary relocations from Japan. Luxury rents in China Tier I cities and Singapore remained largely unchanged during the quarter, while rents in Hong Kong, Manila and Jakarta increased by 2-3%.
The industrial sector - The regional industrial market improved further on the back of mostly solid exports and retail sales in 1Q11. Rents continued to grow in Greater China and Australia, while Singapore recorded the largest increase in rents for both conventional and high-tech industrial space.
Capital values and investment activity strengthen
Commercial real estate investment volumes continue to increase, underpinned by improving property market fundamentals and credit conditions. Regional volumes in 1Q11 totalled US$27 billion, up 11% q-o-q and 14% y-o-y. Japan led the investment market in 1Q11 with strong acquisition activity by J-REITs and private equity funds, albeit before the earthquake. Volumes in Singapore surged by 60% compared to the previous quarter. However, volumes declined in China, a likely response to regulatory tightening and rapid capital value appreciation, and also in Australia due to shortages of high quality prime grade assets. Investment volumes in the region are projected to reach US$100 billion in 2011 (a 15-20% increase on 2010); although the anticipated fall in investment volumes in Japan over the near term could negatively impact overall volumes.
Almost all major markets outside of North Asia saw either stable or increasing capital values in 1Q11. The largest quarterly increases were recorded in Hong Kong (+13.1%) and Jakarta (+11.0%). Shanghai, Beijing and Guangzhou followed with quarterly increases of 7.0 to 8.5%. Capital values are expected to strengthen further in most markets outside of North Asia during 2011 as market fundamentals and investor confidence continue to grow, led by Hong Kong, Singapore and China Tier I cities (between 10 and 25% for the full year).
"Notwithstanding the various risks that are still evident globally and regionally, we remain confident that AP's property market fundamentals will continue to improve on the back of the region's strong economic growth and structural drivers. A further pick-up in activity levels by both occupiers and investors is expected during the course of this year. Rental growth is forecast to accelerate in many markets in 2011, with growth in laggard markets picking up speed from 2012 onwards. Capital values are expected to move upwards, largely in line with rentals over the short term, although residential prices in most markets are still subject to significant policy risks," adds Dr Murray.