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With increased levels of activity by both occupiers and investors expected in 2011
SINGAPORE, February 14, 2011 – Property market fundamentals continue to improve across Asia Pacific, assisted by strengthening business conditions and solid corporate hiring. In some markets, expansion demand has begun to overtake relocation and upgrading demand in driving leasing transactions, and corporate occupiers are often finding that large space is in short supply. As a result, the leasing market has become more landlord favourable and many markets have now moved to the upturn phase of the rental cycle. Capital values recovered ahead of rentals and are now rising in most markets across the region. Likewise, investment activity is strengthening and volumes are expected to pick up further in 2011.
Many markets now in rental upswing
OfficeDemand for grade A office space strengthened during 2010 and for the full year net take-up was more than double the level of 2009. During 4Q10, leasing demand remained strong in the major financial centres of Hong Kong and Singapore, fuelled by the relocation and expansion of financial and professional services firms. MNCs became more visible and drove large spatial requirements in China and India, while domestic corporates in these markets also became more active in seeking high quality office accommodation. Consistent with the improving business environment, regional net absorption is expected to increase further in 2011.
Rents rose in many markets during 4Q10. The strongest performer was Beijing where net effective rents increased 9.0% q-o-q in the CBD, while rents in Shanghai also grew by a solid 7.9% q-o-q. Rents climbed further in Singapore (+8.6% q-o-q in Raffles Place) and Hong Kong (+4.6% q-o-q in Central). In a few markets where tenant demand remains weak, rents are generally beginning to stabilise or grow moderately. For example, net effective rents edged up in Tokyo CBD (+2.7% q-o-q) as withdrawal of leasing incentives helped offset some residual declines in gross rentals. This year, rents are expected to grow more strongly in markets such as Sydney, Mumbai and Tokyo, while other markets such as Singapore, Hong Kong and Shanghai may see rental growth slowing from the brisk pace in 2010. Hong Kong (Central) is expected to register the strongest growth of nearly 30%.
RetailBuoyant consumer confidence and labour market conditions are driving retail demand in the region. Leasing activity is particularly strong in China as more international brands are eager to enter the market and existing retailers open more stores. On the other hand, retailers in Hong Kong and Singapore are now more cautious due to high rents. Rents were either stable or increased in most markets in 4Q10, led by Greater China (Hong Kong +4.1% q-o-q, Beijing +3.1% q-o-q). Most markets are expected to record positive rental growth over the next few quarters, although the recovery in India and much of South East Asia is expected to remain slow and gradual.
ResidentialDuring 4Q10, growing demand from expatriates bolstered leasing activity in the high-end residential markets of Greater China and Singapore, while leasing demand remained subdued in most South East Asian cities. Rents in Hong Kong and Singapore grew by 3.0% q-o-q, while the Chinese Tier I markets generally saw increases of about 2% q-o-q. Single digit growth is expected for most markets over 2011, although Hong Kong and Singapore are likely to register stronger growth.
IndustrialThe regional industrial market is continuing to improve on the back of strong retail sales and the recovery in the export sector. During 4Q10, rents rose further in Greater China while Singapore recorded a surge in rents for conventional and high-tech industrial space.
Investor activity strengthensCommercial real estate investment volumes continue to increase in Asia Pacific. In 4Q10, regional volumes totalled USD 25 billion, up 32% y-o-y. Full year 2010 volumes amounted to US$85 billion, a solid 29% increase on 2009. Most major markets saw significant growth during the year, led by Singapore, Australia, China and Hong Kong. While Japan remains the region’s largest market, it bucked the growth trend and saw a 7% annual fall in investment activity. Office remains the dominant sectoral choice, but retail and industrial assets are increasingly on the radar of investors. Intra-Asian and domestic investors accounted for the bulk of transactions in 2010, a trend which is likely to continue in 2011.
"While ongoing global risks such as sovereign debt, inflation and currency volatility may act to dampen investor sentiment, we are confident that Asia Pacific investment volumes will continue to increase this year. We estimate that 2011 regional investment volumes are likely to exceed US$100 billion, a 20% increase on 2010. Attractive factors for investors include the region’s economic outperformance, improving property market fundamentals and low borrowing costs. For some investors, currency hedging costs will be a major factor in decision-making this year," says Dr Jane Murray, head of research for Asia Pacific.
Almost all major markets saw either stable or increasing capital values in 4Q10. The largest quarterly increase for the office sector was recorded in Singapore (Raffles Place) and Shanghai (both +10.0% q-o-q), followed by Hong Kong (Central), Beijing (CBD) and Guangzhou (about +7.5% q-o-q). Capital values are expected to strengthen further in nearly all AP markets during 2011 as market fundamentals and investor confidence continue to strengthen. Hong Kong, Tokyo, Singapore and the China Tier I cities should see solid office capital value growth of between 10 and 25%.
“Although there are still various downside risks, we are increasingly confident that AP property market fundamentals will continue to improve on the back of the region’s strong economic performance and structural drivers. Increased levels of activity by both occupiers and investors are expected in 2011. Rental growth is expected to pick up in many markets this year, with growth in laggard markets accelerating from 2012 onwards. Capital values should see further upward movement, largely in line with rentals over the short term, though residential prices in most markets are still subject to significant policy risks,” Dr Murray concludes.
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Dr. Jane Murray
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