Rise of Asian Institutional Investors, Fund Managers Drives Market
According to CBRE, cross-border property investment in Asia accounted for 36% of total turnover year-to-date - rising 36% quarter-on-quarter to $10.6 billion - marking this the highest total recorded since 2008.
Based on CBRE's preliminary Q3 2015 figures, investment turnover grew 20% quarter-on-quarter in Q3 2015 to $25.6 billion, despite the year-to-date investment volume being down 24% compared to the same period in 2014. Sustained investor interest remained upbeat in Australia and Japan, with these two markets accounting for 56% of total regional turnover in the quarter. Asian capital was particularly active in the Pacific, lured by high yields. Australia--especially in Sydney and Melbourne--attracted strong investor demand from Asian investors due to stable fundamentals being relatively affordable in these markets, compared to assets in their own domestic markets.
Ada Choi, Senior Director, Research, CBRE Asia Pacific, commented, "the region's investment environment saw solid activity this quarter driven by renewed interest from western investors and the rise of Asian institutional investors and fund managers. International institutional investors continued to expand their real estate portfolios in the region as they're seeking long-term investments to generate profit above inflation."
"With cross-border investment gathering pace, Asian investors still continue to be drawn to offshore opportunities, looking abroad to diversify a growing pool of domestic wealth globally."
"Investment volume in Q3 was mainly boosted by big-ticket transactions across a variety of asset classes, which included the sale of the InterContinental Hong Kong hotel to GAW Capital for $940 million and CIC's acquisition of a $1.7 billion office portfolio from Investa in Australia. This reflects the strong investment appetite among large-scale institutional investors for big-ticket deals," added Ms. Choi.
Furthermore, findings also revealed that India saw an increase in capital inflows from major international investors, underpinned by a faster GDP growth than China and having one of the strongest business sentiments in the region. Markets in India show healthy activity in the occupier markets, particularly supported by a solid office demand from the e-commerce and BPO sector.
However, despite strong investment activity in the quarter, the region generally saw weaker rental growth in the occupier markets.
Dr. Henry Chin
Dr. Henry Chin, Head of Research, CBRE Asia Pacific, commented, "in Q3 2015, occupier markets saw slower rental growth on the back of weaker fundamentals such as weaker business and consumer sentiment. In the office sector, new office supply of 20 million sq. ft. NFA is expected to complete in Q4 2015, and this will make it more challenging for landlords to retain tenants. The bulk of leasing activity is taking place in decentralized areas in key markets and major business process outsourcing destinations such as India. Cost saving relocation has surpassed flight-to-quality as the primary driver of decentralization."
In the retail sector, overall rents fell 0.3% quarter-on-quarter as Hong Kong suffered its sharpest decline since 1998 (-9.1% quarter-on-quarter) due to the shift in mainland Chinese tourist spending patterns coupled with slower tourist arrivals. In contrast, Hong Kong's office market sentiment remained positive with vacancy in Central CBD staying at less than 1%.
"Tourism still remains an ongoing factor, impacting the retail sector in several markets with a change in tourist consumption and traveling patterns, especially by mainland Chinese tourists. Hong Kong and Singapore's retail markets were mostly affected by the weaker tourism industry, and retailers are slowing down expansion plans in China due to concerns on China's economic growth. Most Chinese cities recorded very little rental growth in Q3. In contrast, visitor numbers continued to increase in Japan on the back of the cheap Japanese yen, resulting to more leasing demand in Tokyo--mainly driven by upmarket retailers. Demand for prime space from international retailers also remained strong in Australia, particularly from premium brands and F&B retailers," says Dr. Chin.
Elsewhere, the recently negotiated Trans-Pacific Partnership (TPP) is expected to increase trade flows, lower the cost of goods, and improve employment prospects for participating Asia Pacific countries. The major beneficiary will be the industrial sector, with favourable support for Vietnam, Australia, and New Zealand. There is still some way to go for implementation of the TPP, therefore, these benefits will emerge in the longer-term.
Other key Asia market highlights:
In the office sector, overall corporate sentiment deteriorated in the quarter due to stock market volatility and renewed fears over a China slowdown. Net absorption contracted by nearly 30% quarter-on-quarter to 11.2 million sq. ft. NFA as demand weakened in most markets, with the exception of Bangalore, New Delhi, Shanghai, Shenzhen and Seoul. CBRE continues to expect 10% year-on-year increase in net absorption in 2015.
Office rents edged up by just 0.3% quarter-on-quarter. A rental correction in Singapore (-3.5% quarter-on-quarter) offset solid growth recorded in Hong Kong (+3.0% quarter-on-quarter) and Auckland (+2.2% quarter-on-quarter).
F&B remained the most active sector in retail but previous upbeat markets such as Shenzhen and Singapore are now approaching saturation.
Retail rents in the Pacific continued to rise--2.3% quarter-on-quarter--amid solid demand from overseas retailers.
In Q3, leasing demand for logistics warehousing space was stable and continued to be driven by third-party logistics, e-commerce and retailers; however, the supply side dictated rental movement in many markets.
Overall logistics rents decreased by 0.6% quarter-on-quarter, weighted down by oversupply issues in Melbourne (-2.4% quarter-on-quarter), Tokyo (-2.2% quarter-on-quarter) and Singapore (-1.6% quarter-on-quarter), leading to a 0.7% quarter-on-quarter decline in capital values, the first drop since Q3 2009.
The strong supply pipeline and rising operation costs will continue to pull down regional logistics rental growth in the short-term, however, markets with tight supply, such as Hong Kong and South China, will have a base for stable rental growth, in spite of the subdued retail environment.