2019 will be a year of significant change for the Asia Pacific real estate market.
Robust economic growth and an influx of capital have powered the Asia Pacific real estate market over the past decade. However, 2019 will bring an unprecedented set of challenges, including U.S-China trade conflict, financial sector instability and the rising cost of borrowing. Now is the opportune time for occupiers and investors to refine their real estate strategies and build resilience to market volatility.
Infographics
CBRE RESEARCH
This report was prepared by the CBRE Asia Pacific Research Team, which forms part of CBRE Research – a network of preeminent researchers who collaborate to provide real estate market research and econometric forecasting to real estate investors and occupiers around the globe.
© 2019 CBRE, Inc. Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.
Economy
Key changes ahead
- Prolonged economic expansion – Despite being a decade into the upcycle, above long-term trend economic growth is set to continue for the next one to two years
- Key risks remain – U.S.-China trade conflict and the end of quantitative easing pose major concerns
- A new growth leader – India has replaced China as the fastest growing major economy
Economy
PROLONGED ECONOMIC EXPANSION
Asia Pacific has experienced almost a decade of uninterrupted economic expansion, driven by expansionary monetary policy and robust growth in China. While urbanisation and broad-based income growth remain solid, growth momentum is expected to somewhat weaken in 2019 due to U.S.-China trade conflict, rising interest rates and financial market volatility.
CBRE expects global economic growth to last a further two or to three years, with a mild downturn concluding the current growth cycle. Global GDP growth will slow from 3.1% in 2018 to 2.9% in 2019, with Asia Pacific growth expected to weaken from 4.5% in 2018 to 4.2% in 2019.
Although companies in Asia Pacific will continue to expand, economic uncertainty will cloud decision-making. Occupiers must focus on enhancing the resilience of their real estate portfolios by identifying high risk markets and business lines and increasing agility. Investors must rigorously evaluate potential acquisitions and balance portfolios by taking profits in markets reaching the peak.
Figure 1: Asia Pacific and global real GDP growth
Source: CBRE Research, January 2019.
U.S.-CHINA TRADE TENSION ENDURES
The U.S. and China remain mired in a protracted trade conflict with no resolution in sight. Although the U.S. has agreed to delay until March 1 the imposition of 25% tariffs on US$200 billion worth of goods, negotiations continue.
The focus of U.S.-China negotiations is expected to shift towards opening the Chinese technology sector and creating a level playing field for U.S. companies in China. The U.S. aims to use this to counterbalance the "Made in China 2025" roadmap which seeks to transform China from being a low-end producer to a high-end manufacturer of goods.
Figure 2: Values of goods (US$ billion) subjected to U.S. tariffs
Source: CBRE Research, January 2019.
GROWTH IN CHINA TO SOFTEN
The trade conflict is expected to ensure Chinese GDP growth slips to 6.2 % in 2019, the slowest rate of growth since 1990. However, the impact will be somewhat offset by the government’s curbing of debt growth and the provision of further monetary and economic stimuli.
Weaker business sentiment resulting from the trade conflict will also affect Taiwan, Hong Kong and North Asia to some extent. However, a recent China CFO survey by UBS found that these markets are preferred locations for Chinese manufacturing companies considering relocation, due mainly to their good infrastructure and mature supply chains. India and emerging Southeast Asia have also seen an uptick in enquiries from manufacturers, while the trade conflict could enable Singapore to strengthen its role as a regional commercial hub.
Figure 3: Asia Pacific economic outlook by country
Sources: Oxford Economics, CBRE Research, January 2019.
Although India has replaced China as the region’s fastest growing economy, the recent default on a US$13 billion bond repayment by Infrastructure Leasing and Financial Services Limited (IL&FS) has heightened concerns around bad loans. Leading non-bank financial companies have considerable exposure to property developers and are already reluctant to lend. However, the upcoming general election in October 2019 is expected to ensure fiscal policy remains favourable to lending and investment.
Growth in Japan is expected to remain at circa-1% although expenditure will be front-loaded ahead of the planned escalation of consumption tax to 10% in October from the current 8%.
Asia Pacific is well-placed to weather downturns and financial crises, with its total foreign reserves now standing at around US$7 billion, a level eight times higher than that during the Asian Financial Crisis in 1997. Backed by strong fiscal reserves and robust domestic demand, currency depreciation against the USD was largely within 10% in 2018, with further depreciation likely but limited.
Figure 4: Foreign reserves by country
Source: Oxford Economics, January 2019.
QUANTITATIVE EASING COMES TO AN END
The end of quantitative easing in the U.S. and Eurozone will reduce market liquidity and exert upward pressure on global interest rates. Hong Kong, Singapore, Korea and several Southeast Asian markets hiked rates in 2018, with further increases likely this year.
However, major central banks in Asia remain reluctant to increase rates in tandem with those in the U.S. as a loose monetary environment is required to support economic growth. The Bank of Japan (BoJ) plans to continue with monetary easing to reach inflation and growth targets, although it has recently begun to reduce asset purchases. China continues to pursue a policy of gradual deleveraging and is expected to retain an accommodative stance towards monetary policy. Elsewhere, the housing price downturn and weak wage growth will limit the Reserve Bank of Australia’s (RBA) ability to hike rates.
OUTLOOK
Weaker investment sentimentFinancial market volatility and the U.S.-China trade conflict will prompt greater caution among investors Solid real estate fundamentalsCorporate expansion is prudent but healthy. New opportunities for growth will emerge as Asian markets, particularly China, remove barriers to entry |
Contacts
Henry Chin, Ph.D.
Head of Research, APAC/EMEA
[email protected]
Ada Choi, CFA
Executive Director, Asia Pacific
[email protected]
Capital Markets
Take profit for early investment
- Take Profits: Investors are advised to take profits from early investments and review their portfolios and investment strategies as higher prices, compressed yields and escalating borrowing costs translate to fewer options with justifiable returns.
- Go Structural: Investors’ attention should be less focused on cyclical investment and pivot toward sectors that have benefited from structural trends, including modern logistics, and niche sectors such as data center and multifamily.
- Debt financing: Investors will have considerable opportunities to provide real estate debt financing given conservative lending by banks.
- Prudent Investing: Buyers will evaluate potential deals with caution due to the tighter yield spread against the cost of borrowing and pricing that is well above the previous peak.
- Moderating Volume: Asia Pacific commercial property investment turnover will reach around US$120 billion in 2019.
Capital Markets
THE END OF CHEAP FINANCING
Low-cost financing and high liquidity have driven real estate price appreciation over the past decade. However, commercial property lending rates in major Asia Pacific markets including Japan, Korea, Hong Kong, Singapore and Australia have increased gradually over the past two years, while the European Central Bank (ECB) has moved to end quantitative easing and the U.S. Federal Reserve is unwinding its balance sheet.
Figure 5: Commercial property lending rate*
* The commercial property lending rate is the cost of borrowing for commercial property acquisitions. It is calculated by adding the minimum interest rate spread to the reference rate charged by commercial banks. Note on reference rate: Australia – 3M Bank Bill Swap Rate; China – 5 Yr Lending Rate; Hong Kong – 3M HIBOR; Japan – 3M TIBOR; Korea – 3M CD Rate; Singapore – 3M SOR
Source: CBRE Research, January 2019.
INVESTMENT DEMAND REMAINS STRONG
Overall investment demand for real estate remains strong, reflected by the rebound in purchasing activity in late 2018, which saw several major transactions completed in Q4 2018. However, economic uncertainties, U.S.-China trade conflict and higher interest rates continue to cloud the outlook. CBRE believes that swings in market sentiment rather than underlying demand will be the main factor inhibiting investment activity in 2019. The limited availability of assets for sale will also act as a brake on the further growth in investment volume, with many investible properties having been acquired by long term buyers over the past few years.
Potential buyers remain abundant, led by private equity real estate funds which continue to benefit from the positive fund-raising environment. CBRE estimates that around US$62 billion of private equity capital (after leveraging) will be deployed by Asia Pacific-focused close-ended real estate funds between 2019-2023. Western institutional investors including insurance companies, pension funds and sovereign wealth funds remain keen on Asia Pacific to geographically diversify their portfolios.
Purchasing demand from property companies and REITs continues but is likely to moderate in 2019 amid a stronger focus on portfolio evaluation and repositioning. Developers are expected to be net sellers, with debt-laden groups keen to dispose of assets or seek equity partners, particularly in China.
As the bulk of capital currently in the market originates from within Asia Pacific rather than from the West, the end of quantitative easing in the U.S. and Eurozone is unlikely to impact market liquidity or result in an exodus of funds.
Figure 6: Total commercial real estate investment volume in Asia Pacific
Remarks: Transactions include deals above US$10 million in the office, retail, industrial, hotel, mixed and other commercial sectors. Residential and development site are excluded.
Source: CBRE Research, RCA, January 2019.
HIGH PRICES REQUIRE PRUDENT INVESTING
High prices, flat yields and rising borrowing costs will make it increasingly challenging for investors to locate assets able to justify returns.
Although Asia Pacific commercial office property values are now nearly 50% higher than the previous cyclical peak in 2008, office rents are basically unchanged. Capital value inflation backed by cheap liquidity is prominent, particularly in Chinese tier I cities and Australia.
Office capital values in Singapore, Tokyo, Brisbane and Perth are within a range of 20% below the previous peak recorded in 2008. However, rents in these markets are even weaker, standing within a range of 35%-60% below the previous peak. High pricing therefore also applies to markets offering lower yields.
Figure 7: Grade A office capital value and rental growth compared to previous peak in 2018
Source: CBRE Research, January 2019.
INVESTMENT WITH A TIGHTER YIELD SPREAD
High liquidity and positive rental growth make it unlikely that property yields will expand in tandem with borrowing costs. While selected markets including Shenzhen, Taipei and Seoul may see some yield expansion pressure in 2019, the magnitude will be within 10 bps.
The coming year will therefore see a narrower yield spread between property yields and the lending rate. Selected locations in Greater China have experienced negative carry while some markets in Asia are expecting to record a yield spread of less than 200 bps across the three main sectors.
Figure 8: Prime yield relative to commercial property lending rate
Source: CBRE Research, January 2019.
TIME TO LOCK IN GAINS
Real estate is a cyclical asset class and timing to entry or exit is critical. Figure 9 demonstrates the accumulated three years’ forecasted unlevered total returns for Grade A CBD offices, assuming a three year holding period.
Slower rental growth and potential yield expansion are shrinking cyclical real estate investment returns in many markets, particularly in Hong Kong Central, Beijing CBD, Shanghai’s major CBDs1, Tokyo Central Five Wards, Sydney CBD and Melbourne CBD.
Investors are therefore advised to review their portfolios to ascertain whether to realise gains on their earlier investments (e.g. assets acquired between 2016 or 2017 that have already registered sizable profits), or rebalance portfolios through conducting asset repositioning and enhancement.
Figure 9: Accumulated three years forecasted Grade A CBD office unlevered total returns in local currency
Note: A three year holding period is assumed. The bar shows the aggregate three years forecasted unlevered total returns.
The total return is the sum of the prime yield and synthetic capital value growth
China includes Beijing and Shanghai; Japan includes Tokyo only; Korea includes Seoul only; Australia includes Sydney and Melbourne
Source: CBRE Research, January 2019.
1Major CBDs cover Nanjing West Road, Huaihai Middle Road, People's Square, Xujiahui, Hongqiao, Luijiazui and Zhuyuan
INVESTMENT STRATEGY: CYCLICAL AND STRUCTURAL THEMES
Although the late stage cycle is approaching, investors are advised to devise a combination of short term tactics to take advantage of a potential recovery in selected markets, and long-term strategies to capitalise on structural market changes.
Cyclical investment themes
Focus on counter-cyclical markets
Office markets continue to offer a range of cyclical opportunities, led by Singapore and Guangzhou, which remain in the upward rental cycle. However, the lack of investable en-bloc office assets in these markets will confine investors to well-located strata-titled office opportunities. Brisbane and Perth will provide prospects for counter-cyclical office investment plays.
Capture decentralisation demand arising from occupier cost-saving
Investors are advised to focus on new high specification Grade A office assets in non-core districts supported by new infrastructure. These include Hongkou and Hongqiao in Shanghai, Wangjing in Beijing and Kowloon East in Hong Kong. Business parks in Beijing and Shanghai also offer opportunities.
Consider real estate debt investment
There are considerable opportunities for investors to provide long term senior lending for asset acquisitions as well as structured debt financing to development projects to fill the funding gap. Australia offers prospects for engaging in senior loans and junior and mezzanine debt, while development loans, junior and mezzanine debt and non-performing loans will be the main plays in China.
Structural investment themes
Core assets remain ideal defensive plays
Well-located high-quality assets can withstand short-term market weakness. Long term investors are advised to focus on prime core assets in mature markets.
Implement placemaking to unlock potential value
Placemaking via asset enhancement remains a critical component of investment strategy with the objective of creating an integrated communal locality, especially in markets such as Hong Kong, China, Tokyo and Singapore, where prime yields are low.
Increase exposure to modern logistics facilities
Built-to-core logistics facilities will remain a viable option for investors seeking to increase exposure to this sector. Vietnam, which is expected to benefit from the relocation of manufacturing due to U.S.-China trade conflict, and Indonesia, with its large population and solid consumption growth, will be a key focus. Greenfield development will be main route due to lack of completed investable stocks.
Focus on niche sectors
While alternative sectors continue to hold strong appeal, accessing them can be challenging. Data centres involve significant barriers to entry including high initial investment and specialised technical knowledge. Declining homeownership affordability and increasingly mobile populations will continue to generate demand for rental housing, although the pace of development of the multifamily sector in Asia Pacific remains slow. Japan still the only market in Asia Pacific offering institutional grade multifamily assets. Chinese government show desire to speed up the development of multifamily sector with the discussion to promote multifamily REITs.
OUTLOOK
Implement placemaking to unlock potential hidden valueInvestors will focus on asset level tenant mix and design to create integrated communities with a neighbourhood feel – and it applies for office, retail and industrial sectors. Ride on structural trendsModern logistics, data centres and multifamily assets will continue to benefit from shifting lifestyle and spending patterns. Consider debt investmentInvestors are shifting to debt strategies as the market cycle matures, with debt frequently offering more protection than equity. |
Contacts
Tom Moffat
Executive Managing Director
Capital Markets, Asia
[email protected]
Bruce Baker
Senior Managing Director
Capital Markets, Pacific
[email protected]
Mark Coster
Senior Managing Director
Capital Markets, Pacific
[email protected]
Yvonne Siew
Executive Director
Capital Advisors, Asia Pacific
[email protected]
Leo Chung, CFA
Capital Markets Specialist
Asia Pacific
[email protected]
Office Sector
Smart Space Usage
- Consistent Demand: Office markets across Asia Pacific will operate within a stabilized pace of expansion. Technology companies and flexible space operators, including coworking, are expected to lead demand for office space.
- Co-working Fragmentation: Financial performance will be key for operators. CBRE expects operators to focus on improving occupancy rather than opening new centers, which could lead to a slower demand growth and consolidation in 2019.
- Peak Development: New developments are peaking, with nearly half of new office supply concentrated in non-core or decentralized areas – particularly in Shanghai, Bangalore and Delhi NCR.
- Moderating Rents: Overall, the region is expected to record slower rental growth compared to the five-year average – apart from Singapore and Guangzhou. Perth is expected to see the strongest rental recovery.
- Space Redefinition: Tenants will continue to redefine the usage of office space. Real estate assets will become more agile. The use of flexible space to complement core portfolios will be accelerated as tenants respond to the changing business environment and minimize costs and liabilities.
Office Sector
SOLID DEMAND BUT A SOFTER OUTLOOK
Although corporates remain in expansion mode, weaker sentiment resulting from U.S.-China trade conflict and a renewed focus on cost control are negatively impacting short-term office demand growth. Net office absorption is projected to decline by around 5% this year following 2018’s historical peak of over 50 million sq. ft. of Grade A office take-up. Nevertheless, the long-term growth of office demand remains firm and continues to be supported by the structural shift towards services and knowledge-based industries in emerging Asia.
While Grade A office leasing demand in China is expected to be resilient, slower economic growth will result in weaker leasing momentum despite the introduction of stimulus policies such as the opening of the financial sector to foreign investment.
Demand in India will be supply-led as occupiers flock to new office supply, especially well-located projects offering large floorplates constructed by major developers. Demand will be particularly strong in Special Economic Zones (SEZs) ahead of the 2020 sunset date for tax exemptions.
Figure 11: Grade A office demand-supply
Source: CBRE Research, January 2019.
TECH AND COWORKING REMAIN MAJOR DEMAND DRVIERS
Tech companies accounted for 24% of total office leasing demand in 2018 amid rapid expansion by major firms along with new demand from unicorns and start-ups. Government policies such as "Made in China 2025" and "Make in India" are set to ensure healthy demand from this sector. However, landlords are advised to be vigilant towards lease covenants due to the high failure rate among start-ups.
Flexible space providers including coworking and serviced office operators have increased their footprint by more than 300% over the past three years following aggressive expansion in existing cities and new markets. With the sector occupying just 1.7% of total prime office stock in Asia Pacific, there is still considerable room for growth. However, CBRE expects operators to focus on improving occupancy rather than opening new centres, which could lead to slower demand growth in 2019.
Traditional office occupying sectors such as finance and professional services are set to focus on cost-effective office solutions that do not involve significant CAPEX, such as flight-to-quality relocations. Domestic financial institutions may display stronger demand but foreign banks will continue to focus on maximising space efficiency and surrendering excess space. Boutique investment and advisory firms are expected to consider utilising coworking centres in prime locations.
Figure 12: Type of leasing demand by sector
Note: Beijing, Shanghai, Hong Kong, Singapore, Seoul, Bangalore, Delhi NCR, Mumbai, Sydney and Melbourne CBD are the markets covered.
Source: CBRE Research, January 2019.
NEW SUPPLY HITS PEAK CYCLE
New Grade A office supply is expected to reach over 66 million sq. ft. NFA in 2019, an increase of 20% y-o-y. The rise is mainly due to delays to projects originally due for completion in 2018, with around 10 million sq. ft. of stock in Beijing, Delhi NCR and other Indian tier I cities deferred to this year.
The bulk of new supply will continue to be focused on China and India, which collectively account for 67% of stock scheduled for completion this year. Southeast Asia and the Pacific will see only a limited volume of new space, predominantly in Jakarta, Manila and Melbourne.
New supply will mostly be in decentralised locations as the shortage of prime areas land encourages the development of new business districts. These include new projects in Shanghai’s Qiantan, Singapore’s Paya Lebar Quarter and Tokyo’s Toranomon Hills, many of which feature a strong placemaking element designed to attract occupiers by creating a community feel with a broad offering of amenities.
Figure 13: New office supply pipeline by market (million sq. ft. NFA)
Note: Grade A new supply for Asian markets; Net new supply for Pacific markets.
Source: CBRE Research, January 2019.
TIGHT AVAILABILITY IN CORE MARKETS
The large volume of new office supply this year is expected to push up regional vacancy to 13%, an increase of 100 bps from 2018. However, individual markets will vary, with tight availability in gateway cities unlikely to improve.
While Melbourne will see the addition of the largest volume of new office stock for a decade, and new supply in Hong Kong will exceed the five-year average, much of this new space is pre-committed, meaning that vacancy in these markets will remain low. Elsewhere, the lack of new Grade A supply combined with stock withdrawal points to the likely reduction of vacancy in Singapore and Sydney.
Vacancy will vary widely across the submarket level in China and India, with the availability of CBD space remaining limited but large new supply due for completion in non-core locations. Vacancy is forecasted to remain in the single digits in Luijiazui in Shanghai and the Outer Ring Road in Bangalore, but could surge to 30% in peripheral areas of both cities.
Figure 14: Top 5 markets of new supply pipelines (2019F -2020F)
Note: CBD/ Core and non CBD/ non Core locations are subjected to local market’s definitions
Source: CBRE Research, January 2019.
WEAKER RENTAL GROWTH
CBRE expects more than two-thirds of Asia Pacific office markets to experience slower rental growth in 2019 compared to the five-year average. Rental growth will be led by Singapore and Guangzhou, largely due to their limited new Grade A supply until 2021.
India is forecast to see strong rental growth in peripheral areas, supported by the completion of new metro lines, along with solid gains in smaller cities such as Hyderabad and Pune. Among tier I cities, Bangalore will outperform the NCR and Mumbai but growth will be below the five-year average.
Rents will continue to rise in Australia but the growth engine will shift to the resource-orientated markets of Perth and Brisbane, where renewed interest from the natural gas and engineering sectors is backing flight to centre activity.
In Greater China, rents in Shanghai will continue to decline as new supply comes on stream, while those in Hong Kong Central will slide into negative territory amid weaker demand from Chinese companies and decentralisation by multinationals.
Among other major markets, rents in Tokyo are projected to remain flat amid steady pre-commitments to new projects. However, downward pressure will emerge in H2 2019 as new supply due for completion in 2020 commences pre-leasing.
Rental growth in most emerging Southeast Asian markets will weaken. The downward rental trend in Jakarta is expected to continue, while new supply in Manila and Kuala Lumpur will also drag on rental growth. Nevertheless, the long term office demand outlook in these markets remains healthy as they shift towards more service-oriented economies.
Figure 15: 2019 office rental growth by market
| MARKET | 2019F | 5-YEAR AVERAGE |
| Outperforming | ||
| Singapore | 9.3 | 2.7 |
| Guangzhou | 6.8 | 4.1 |
| Recovering | ||
| Perth | 8.8 | -13.8 |
| Brisbane | 4.1 | -1.8 |
| Hanoi | 2.4 | -1.2 |
| Mumbai - BKC | 1.6 | -1.5 |
| On Par | ||
| Gurgaon – Core | 1.8 | 1.7 |
| Taipei | 1.5 | 1.2 |
| Seoul - CBD | 0.1 | -0.1 |
| Beijing | 0.0 | -0.6 |
| Kuala Lumpur | 0.0 | 0.3 |
| Slowing | ||
| Bangalore - ORR | 7.2 | 11.3 |
| Bangalore - CBD | 5.0 | 12.0 |
| Ho Chi Minh City | 4.0 | 4.6 |
| Sydney | 3.9 | 17.1 |
| Manila | 2.9 | 11.8 |
| Melbourne | 2.7 | 5.5 |
| Bangkok | 2.6 | 4.6 |
| Tokyo | 0.4 | 4.2 |
| Shenzhen | 0.4 | 3.2 |
| Auckland | 0.3 | 2.7 |
| Declining | ||
| Shanghai | -2.0 | 3.8 |
| Jakarta | -2.0 | -3.0 |
| Hong Kong | -2.5 | 6.8 |
Note: Office rental growth refers to Grade A office in CBD areas only, unless specified
Source: CBRE Research, January 2019.
OFFICE STRATEGY: “CORE x FLEXI”
Onset of the late economic cycle will require companies to be more responsive to the rapidly changing business environment and minimise costs and liabilities. This will impact occupiers’ core real estate portfolios as well as the flexible space they use to complement their overall operations. CBRE believes companies must integrate these core and flexible elements at both the asset and portfolio level into what we have termed a “Core x Flexi” strategy.
The “Core” component involves mitigating cost escalation in rental growth markets such as Singapore, Guangzhou and Ho Chi Minh City. Other cost control approaches include leveraging the downward market cycle, precommitting to new supply and decentralising where possible. Technology will take on an increasingly prominent role in facilitatating workplace strategy, in particular space utilisation.
The “Flexi” element requires companies to utilise flexible office space operated by mainstream landlords or third-party providers that can complement their core portfolios. Depending on the nature of the users’ business, these options can include coworking, serviced offices and turnkey space.
With occupiers focusing on reducing underutilised space in their portfolios, demand for “space as a service” is expected to create new requirements for landlord-managed meeting and event rooms, in addition to the standard amenity offering. Landlords are advised to partner closely with tenants and utilise the latest technology to enhance the quality of their service offering and competitiveness of their properties.
OUTLOOK
Space RedefinitionTenants will continue to redefine the usage of office space. Real estate assets will become more agile. The use of flexible space to complement core portfolios will be accelerated as tenants respond to the changing business environment and minimize costs and liabilities. Service differentiation by landlordsCloser partnerships with tenants will be essential to creating a better end product |
Contacts
Manish Kashyap
Regional Managing Director
Advisory & Transaction Services, Asia Pacific
[email protected]
Paul Hubbard-Brown
Executive Director
Advisory & Transaction Services, Asia Pacific
[email protected]
Rohini Saluja
Executive Director
Advisory & Transaction Services, Asia Pacific
[email protected]
Cynthia Chan
Office Specialist
Research, Asia Pacific
[email protected]
Retail Sector
Omnichannel Evolution
- Changing Dynamics: A move towards an omnichannel strategy – where retailers adopt holistic approach in formulating their online and offline sales channels to maximize brand experience. Retailers will still maintain a physical presence with enhanced service offerings, while looking to slow the pace of store network expansion or reduce the number of stores.
- New Relationships: Landlords will benefit from revolutionizing their relationship with tenants and broaden their trade mix with more elements of entertainment. It will become increasingly important for landlords to transcend the traditional role of space provider and partner with tenants in executing their marketing and growth strategies.
- Soft Rentals: Rental growth is expected to remain soft in 2019. Growth will mainly be driven by prime locations, with lower quality assets expected to struggle.
Retail Sector
CONSUMPTION REMAINS SOLID BUT RISKS INCREASE
Although private consumption remains in the expansionary cycle, downward pressure is building as the U.S.-China trade conflict, stock market correction and stalling housing market negatively impact sentiment. Other key headwinds include the deprecation of Asian currencies such as Indian Rupee, Indonesian Rupiah and the Philippine Peso. The weaker RMB may also impact regional tourist spending this year.
The structural shift to e-commerce continues, with Asia Pacific online retail sales expected to grow by 16.8% y-o-y in 2019, compared to a 2% y-o-y increase in bricks-and-mortar retail sales. However, e-commerce sales growth is expected to normalise in the coming years as expansion shifts to emerging markets and lower tier cities.
Although traditional retail trades remain under pressure and rental growth is weak, shopping centre landlords have succeeded in raising occupancy by adjusting their tenant mixes. Despite the large volume of new supply, shopping centre vacancy in China declined from 9.5% in 2013 to 6.5% in 2018.
Figure 16: Asia Pacific online and offline retail sales growth
Source: Euromonitor, January 2019.
BRICK-AND-MORTAR STORES STILL KEY BUT NUMBER OF OUTLETS DECLINES
Despite a sustained challenge from e-commerce, bricks-and-mortar shops remain the primary means for most retailers to reach consumers. Even when purchasing goods online, consumers conduct product research and testing in actual physical retail environments. Retailers continue to invest in physical stores in Asia Pacific but are adopting a more prudent approach by slowing the pace of new openings or reducing the overall number of stores.
CBRE expects to see a stronger focus on boosting same-store sales growth, enhancing in-store shopping experiences and augmenting online sales channels. Store openings will be driven by new market entries and upgrading moves or the introduction of concept stores. Demand for large flagship stores will be confined to top tier cities and their use will be focused on showcasing retailers’ most innovative products and experiences. Cost conscious- retailers may opt for smaller concept or pop-up stores to complement marketing campaigns.
LANDLORDS CLOSELY MONITOR TRADE MIX
Weaker demand from luxury brands and fashion retailers and strong expansion by F&B and entertainment operators has forced shopping centre landlords to fine-tune their trade mix. Property owners are also introducing niche brands, online-to-offline stores and experiential retailers to their tenant portfolios in a bid to fill vacancy and attract footfall.
Leasing demand from F&B operators will remain strong but weaker discretionary spending may impact sales. Other key challenges in this sector include intense competition, high restaurant turnover and the lack of customer loyalty. Beauty, fitness and personal stores are expected to stay active, with more brands opening standalone stores in prime locations. Experience-oriented trades including entertainment and experiential learning retailers such as cooking and arts studios will continue to expand.
Fast fashion brands are expected to spend 2019 focusing on adding to their footprint in Vietnam and lower tier Indian cities. Mid-tier brands, especially those targeting middle to upper middle-class consumers, may struggle as shoppers seek better value amid the weaker economic outlook. Established luxury retailers will concentrate on upgrading flagship stores, with new openings driven by secondary and niche brands.
Expansion by sportswear brands is set to slow after the rapid growth of recent years. Retailers in this category will target resources on major markets and utilise e-commerce to reach consumers in lower tier cities. Flagship stores will be repositioned as brand experience centres while store networks are likely to be consolidated to achieve better cost control.
Figure 17: New Retail Entrants to Asia Pacific: by Trade
Source: CBRE Research, January 2019.
THE SUPPLY PEAK ENDS
New shopping centre supply in Asia Pacific is forecast to total 53 million sq. ft. in 2019, above the same as volume of new stock completed in 2018. The bulk of pipeline supply is concentrated in Shenzhen and Shanghai. New Delhi, where prime retail supply is tight, is also expected to see a spike in new retail stock.
The lack of new supply in core locations combined with retailers’ preference for prime space will ensure availability remains tight. Neighbourhood malls are expected to perform well as non-discretionary spending is relatively less affected by swings in macroeconomic sentiment.
Although shopping centre landlords are succeeding in securing large space occupiers such as F&B and experience-based retailers to fill secondary floors, their inability to pay high rents will weigh on overall shopping centre rental growth over the course of the coming year.
Figure 18: New retail supply pipeline by market
Source: CBRE Research, January 2019.
RETAIL RENTS TO STAGNATE
Retail rental growth is forecast to remain soft due to weaker consumption sentiment and competition from e-commerce. Growth will be confined to prime assets, with secondary space likely to struggle.
Growth will be led by Tokyo (Ginza), which is expected to see strong expansionary demand for standalone stores from luxury retailers, combined with low vacancy. Australian prime CBD rents will be flat as high household debt and the cooling housing market weigh on consumption sentiment.
Greater China will continue to experience weak rental growth. Although the rental correction in Hong Kong and Singapore is over, a strong rebound is unlikely.
Figure 19: 2019 retail rental growth by market
| MARKET | 2019F | 5-YEAR AVERAGE |
| Outperforming | ||
| Ho Chi Minh City | 5.7 | 0.7 |
| Tokyo (Ginza) | 3.2 | -0.2 |
| Guangzhou | 1.4 | 0.9 |
| Recovering | ||
| Singapore | 2.0 | -1.3 |
| Brisbane | 1.5 | 0.0 |
| Hong Kong | 0.0 | -6.4 |
| Hanoi | -0.2 | -2.8 |
| Slowing | ||
| Beijing | 1.8 | 2.4 |
| Sydney | 1.5 | 12.1 |
| Shanghai | 1.0 | 1.9 |
| Shenzhen | 1.0 | 1.3 |
| Auckland | 0.5 | 1.8 |
| Taipei | 0.4 | 1.0 |
| Melbourne | 0.0 | 3.4 |
Source: CBRE Research, January 2019.
RETAIL STRATEGY: THE OMNICHANNEL EVOLUTION
CBRE anticipates that retailers will conduct portfolio evaluation and optimisation exercises more vigorously and frequently in 2019. Standard store networks will be consolidated while greater use will be made of pop-up and featured stores to market new products and provide customers with a personalised experience.
Retailers are advised to provide a unified omnichannel offering across online and offline platforms. This will require retailers to enhance in-store fulfillment capabilities and integrate bricks-and-mortar stores into their last mile delivery networks. Retailers may also consider niche formats such as pop-ups to promote online sales and smart stores utilising new in-store technology such as smart mirrors.
Shopping centre landlords will continue to refine their tenant mix by shifting away from low growth categories and trades exposed to e-commerce. New Asian brands, domestic retailers, entertainment, experiential learning and online-to-offline retailers will be keenly sought after as tenants.
CBRE believes landlords must transform their role from serving as space providers for retailers to becoming their genuine partners. Landlords can work alongside tenants to help them implement growth strategies via portfolio expansion and optimisation, while also supporting their event and marketing campaigns.
OUTLOOK
The omnichannel evolutionA move towards an omnichannel strategy – where traditional bricks-and-mortar stores are revolutionized as brand experience centers to complement the proliferation of e-commerce platforms. New RelationshipsLandlords will benefit from revolutionizing their relationship with tenants. It will become increasingly important for landlords to transcend the traditional role of space provider and partner with tenants in executing their marketing and growth strategies. |
Contacts
Vivek Kaul
Head of Retail Asia
Advisory & Transaction Services, Asia
[email protected]
Graeme Wakefield
Head of Retail Pacific
Advisory & Transaction Services, Pacific
[email protected]
Liz Hung
Retail and Logistics Specialist
Research, Asia Pacific
[email protected]
Logistics Sector
Operational and Portfolio Upgrading
- Overperform: This segment of the market will see a sustained uptick in activity, prompted by demand for urban logistics spaces to accommodate to the shift toward omnichannel retail.
- Technology-enabled: Tenants must embrace technology to improve supply chain operational efficiency. Landlords are advised to upgrade industrial and logistics portfolios to ensure they remain competitive.
- Growth Markets: Logistics rental growth will be led by Melbourne, Shanghai and Beijing, with overall regional growth rate at about 3%.
Logistics Sector
STRUCTURAL CHANGES SUPPORT DEMAND
The ongoing macro trends of omni-channel retailing and supply chain development will ensure continued strong demand for modern industrial and logistics facilities in 2019. Advances in technology, particularly automation, will enhance the specifications and operations of logistics assets and render older properties obsolete. However, labour supply will remain critical for logistics operations. Occupiers must therefore strike a balance between asset location, infrastructure and access to labour.
OMNICHANNEL TO DRIVE NEW WAREHOUSE DEMAND
The growth of omnichannel retail will drive additional warehouse demand from e-commerce platforms, retailers and third-party logistics operators in 2019. Major e-commerce platforms are already adding to their logistics footprint in anticipation of future growth.
However, in the longer term, the gradual normalisation of e-commerce growth and tightening profit margins among third-party logistics firms struggling to meet demand for faster and cheaper delivery will negatively impact demand. The trend for e-commerce platforms to construct and operate their own facilities will also remove some leasing demand from the market.
Figure 20: Operating profit margin of selected logistics companies: FY 2016 vs FY 2017
Remarks: DHL – Pep + Express, Kerry Logistics - Integrated Logistics - Logistics Operations, Singapore Post – Logistics, Yamato - Delivery Business + BIZ-Logistics Business, SF Group - Total
Source: Capital IQ, January 2019.
CHANGES TO SUPPLY CHAIN NETWORKS
The emergence of specialised logistics properties is expected to continue in 2019. This will be driven by increasingly dispersed distribution networks capable of delivering omnichannel solutions and processing specific sites such as reverse logistics. The rapid development of online grocery shopping and rising consumption of imported F&B are set to spur demand for cold-chain logistics facilities such as temperature-controlled warehouses in developed markets, led by Korea and China. Improvements to overall perishables handling and food safety in emerging markets such as Southeast Asia and India have generated rapid growth in cold chain capacity, albeit off a small base.
SHIFTS IN MANUFACTURING BASES
The U.S.-China trade conflict and steadily rising costs on the mainland are the catalyst for a manufacturing shift to emerging Southeast Asian markets in the medium term. Free-trade agreements such as the CPTPP2 and the EU-Vietnam FTA are set to further accelerate exports from Southeast Asia and generate robust demand for industrial and logistics property.
Although China’s traditional manufacturing sector continues to struggle, the central government has prioritised the development of high-end manufacturing by adopting more favourable land policy for advanced industries, led by Dongguan in Guangdong province. This policy could further limit the supply of land for logistics development.
India is also striving to attract manufacturers through its Make in India policy which now permits 100% foreign direct investment in various sectors such as textiles, garments and food processing. The latest measures include relaxing the Integrated Industrial Area policy in Maharashtra by increasing the supply of industrial land.
2 Comprehensive and Progressive Agreement for Trans-Pacific Partnership
NEW SUPPLY UNLIKELY TO ALLEVIATE SPACE SHORTAGE
Around 79 million sq. ft. of new industrial and logistics space is scheduled to be completed in Asia Pacific in 2019, a 6% reduction on 2018.
While new supply will offer more upgrading opportunities, especially in Greater Tokyo and Greater Seoul, the space shortage will continue amid robust demand for modern logistics space. However, concerns over transportation and labour supply will ensure occupiers remain cautious towards committing to space in non-core areas of these two markets.
The development pipeline in China tier I cities will begin to taper this year. Tight supply will force occupiers to seek expansion opportunities in neighbouring tier II or tier III cities, which are expected to see the addition of some backfill space resulting from the relocation of e-commerce companies to self-owned facilities.
The undersupply situation in Hong Kong is expected to worsen, with no new stock due for completion this year and about 10% of existing space scheduled or eligible for redevelopment or conversion.
Figure 21: New logistics supply pipeline by market
Source: CBRE Research, January 2019.
MODERATE RENTAL GROWTH TO CONTINUE
Asia Pacific logistics rents registered 3% y-o-y growth in 2018, exceeding forecasts. Growth was driven by an unprecedented surge in rents in Beijing following the introduction of policies to tighten industrial land use. Other upbeat markets included Melbourne and Shanghai, where demand continued to outstrip supply. Along with Hong Kong, these markets will continue to lead rental growth in 2019, with overall rents expected to increase by around 2.7% y-o-y.
Among other key markets, the ample development pipeline will continue to constrain rental growth in Greater Tokyo and Greater Seoul, despite strong expansionary demand from e-commerce and 3PLs. Rents in Singapore and Perth have now stabilised and are forecast to grow steadily over the next few years.
Figure 22: 2019 logistics rental growth by market
| MARKET | 2019F | 5-YEAR AVERAGE |
| On Par | ||
| Beijing | 5.0 | 5.0 |
| Shanghai | 4.9 | 4.0 |
| Auckland | 3.5 | 4.2 |
| Sydney | 2.9 | 3.3 |
| Shenzhen | 3.0 | 3.5 |
| Guangzhou | 3.0 | 3.3 |
| North Vietnam | 1.5 | 2.0 |
| Outperforming | ||
| Melbourne | 5.9 | 1.5 |
| South Vietnam | 5.0 | - |
| Hong Kong | 3.5 | 2.3 |
| Greater Tokyo | 1.0 | 0.4 |
| Recovering | ||
| Brisbane | 1.8 | -1.1 |
| Singapore | 1.5 | -2.9 |
| Perth | 2.5 | -5.2 |
Source: CBRE Research, January 2019.
LOGISTICS STRATEGY: ELEVATE WAREHOUSING OPERATIONS AND PORTFOLIO QUALITY
Leasing demand for modern logistics space featuring high quality specifications and robust supporting infrastructure will continue to grow as occupiers integrate technology into their supply chains to improve operational efficiency. Popular formats will include vertical warehousing solutions such as high-bay facilities utilising automated storage and retrieval systems, as well as multi-storey warehouses capable of maximising land use efficiency.
Landlords are advised to upgrade their industrial and logistics portfolios to ensure they remain competitive. They should also design and build facilities tailored to the specific needs of target industries and trades. Major challenges will include acquiring logistics land and escalating land costs, especially in gateway cities.
CBRE believes the shortage of institutional grade industrial and logistics property in Asia Pacific, which comprises less than 10% of total regional stock, offers significant opportunities for investors. Although logistics property yields remain higher than those for other property sectors, the rapid yield compression recorded in recent years has prompted investors to seek development opportunities in the form of partnerships with developers or via investing in development funds.
While most investors remain focused on the established markets of Australia, Japan, China and Korea, experienced investors are exploring opportunities in emerging Southeast Asia and India, where the supply shortage is particularly acute. CBRE advises occupiers to partner with experienced developers with regional platforms or participate in build-to-suit projects.
OUTLOOK
Technology-enabledTenants must embrace technology to improve supply chain operational efficiency. Landlords are advised to upgrade industrial and logistics portfolios to ensure they remain competitive. Consider specialised propertiesInvestors should explore opportunities to acquire specialised logistics properties such as last mile logistics space and cold-chain logistics facilities. |
Contacts
Troy Shortell
Executive Director
Supply Chain Advisory, Asia
[email protected]
Christine Miller
Senior Director
Supply Chain Advisory, Pacific
[email protected]
Matt Haddon
Senior Managing Director
Advisory & Transaction Services, Pacific
[email protected]
Liz Hung
Retail and Logistics Specialist
Research, Asia Pacific
[email protected]
Property Market Outlook Reports
in Asia Pacific Region
Real Estate Market Outlook Reports
in Other Regions
Learn More About CBRE Real Estate Market Outlook Forums 2019
Hear From Our Experts
Hear from Our Experts
Signup to receive the latest insight and perspective on real estate, straight to your inbox:
Contact Information
