According to CBRE's latest MarketView and Investment Trends research, the commencement of COVID-19 vaccination programs and an improving economic outlook contributed to a steady increase in commercial property leasing and capital markets activity in Asia Pacific in Q1 2021.
However, the recovery remains uneven across the region, with the momentum in individual countries largely correlated with the degree of success in containing COVID-19. This has been illustrated by the recent surge in infections in India, which has further clouded the economic and business outlook, while the reintroduction of lockdown measures and other restrictions in Japan and some emerging markets in South East Asia are expected to weigh on real estate related activity in the coming months.
Office Sector Highlights
In the office sector, CBRE's MarketView report highlights increased tenant inquiries and more frequent site inspections, as overall occupier demand strengthened during the quarter. Regional Grade A net absorption rebounded from a low base to reach 9.1 million sq. ft. NFA (+1.5% q-o-q and -2.7% y-o-y).
Strong demand from Technology, Media & Telecommunications (TMT) and finance companies resulted in several major flight-to-quality relocations during the period, including several anchor-tenant deals at newly completed projects. Mainland China is leading the office market recovery, while the Singapore and Korea markets have bottomed out.
Steady pre-leasing activity offset the impact of new supply, with the recovery in demand ensuring regional vacancy rose only slightly, reaching 14.8% at quarter's end. The decline in Asia Pacific Grade A rents decelerated from the previous quarter's 1.2% q-o-q to 0.7% q-o-q in Q1 2021, bringing the y-o-y fall to 5.0%.
Ada Choi, CBRE's Asia Pacific Head of Occupier Research, Data Intelligence and Management, said, "The successful control of COVID-19 in most markets and increased office space utilization should help Asia Pacific office leasing demand and rents remain on a recovery track throughout 2021. As employees return, more occupiers are evaluating the feasibility of hybrid working models. At the same time, many firms are rethinking workplace design and taking new physical distancing concerns into account, which may persuade some companies not to shrink their existing office footprint."
Retail Sector Highlights
In the retail sector, Asia Pacific retail rents fell by 0.4% y-o-y in Q1 2021, a slower rate of decline than the 2.1% y-o-y drop recorded in the previous quarter. This quarter's improved performance was largely due to rents in tier 1 cities in Mainland China returning to growth.
Retailers in most markets were more active in looking for new leasing opportunities, particularly in prime locations, backed by a steady improvement in retail sales and consumer confidence. Particularly apparent was leasing demand from New Energy Vehicle (NEV) companies seeking prime locations in Mainland China.
Although the leasing market will continue to favor tenants in the medium term, availability is now beginning to tighten. However, CBRE retains its 2021 forecast of a mild decline in Asia Pacific retail rents.
Industrial Sector Highlights
Industrial sentiment continued to pick up in Q1 2021, with global manufacturing Purchasing Manufacturers Indices (PMI) reaching 55 in March, a ten-year high. Warehousing demand remained upbeat, with Asia net absorption totaling 15.6 million sq. ft., the highest first quarter total in recent years. Asia Pacific logistics rents rose by 0.7% q-o-q, the strongest rate of growth since the onset of the pandemic.
Large 3PLs and e-commerce occupiers drove leasing demand this quarter, supported by emerging requirements from a range of alternative industries, including community purchasing platforms, central kitchens, food delivery providers and pharmaceutical companies.
Following the recent Suez Canal obstruction - which caused significant disruption to global supply chains and raised shipping costs for major global shipping companies serving global retailers, e-commerce platforms and manufacturers - occupiers are also revisiting safety stock strategies and increasing inventory levels.
This is expected to drive demand for bonded warehouses, distribution centres and warehouses serving port facilities in the months ahead.
Asia Investment Trends
CBRE's research also highlights that Asia Pacific commercial real estate investment sales totaled US$26 billion in Q1 2021, an increase of 12% y-o-y. Investment sentiment continued to strengthen over the quarter, with many markets reporting higher inquiry levels.
Logistics remains the hottest asset class, with yields continuing to compress across most markets. Business and high-tech parks catering to tech tenants continue to be another area of interest for investors, especially in Mainland China and Singapore, underpinned by the resilience of tech companies throughout the pandemic.
Retail is gaining interest as a counter-cyclical play, with strong domestic tourism consumption in Mainland China, falling capital values in Hong Kong, and a rebound in J-REIT prices in Japan attracting capital to the sector. Investors are also considering the hotel sector for repositioning opportunities.
"Overall purchasing appetite for commercial property assets is strong, led by private investors. Funds are also actively reviewing acquisition and disposal opportunities, buoyed by current liquidity and pricing levels ahead of upcoming fund expires," said Dr. Henry Chin, Global Head of Investor Thought Leadership and APAC Head of Research for CBRE.
"Non-core assets and businesses will continue to be disposed in the coming months as corporates recycle and repatriate capital to reduce debt. We expect Asia Pacific investment volume to increase by 10% in 2021, driven by purchasing activity and disposals, led by funds and developers."