Which Asia Pacific office markets outperformed in 2019?

VIETNAM, 7 February 2020 – According to JLL’s latest data, Southeast Asian and Indian markets offered the best returns for investors in 2019, and are expected to continue performing well in 2020.

For each market, we looked at the scenario where an investor purchases an office property at the beginning of the year, reaps rental income over the year and sells off the property at the end of the year, at prices based on market yields and rents. We then computed an unleveraged internal rate of return (IRR) based on the local currency, and parsed the IRR into three components: initial yield, cash flow change and yield change. In essence, we are then able to dissect how returns on investment are impacted by the initial yield, market rent growth and changes in the market yield over the year.

Based on 2019 figures, markets that outperformed were located in Japan, Southeast Asia, India and Australia.

• Japan – In Tokyo and Osaka, possessing 7-8% IRR, while initial yields were relatively low, both rent growth and yield compression were significant factors in supporting high returns on investment.
• India – Bangalore and Chennai also enjoyed robust returns due to high yields, yield compression and rent growth over 2019, owing to the continued resilience of the IT industry in these markets.
• Australia – Returns in the Sydney and Melbourne CBDs were also healthy, as vacancy rates in these markets remained relatively low.
• Southeast Asia – The spotlight is on the region with high-scoring emerging markets such as Ho Chi Minh City (IRR above 6%), Hanoi and Manila (IRR 5%), Bangkok (IRR asymptotic 4%).These emerging markets, in addition to having high initial yields, also offered investors high investment returns via both yield compression and rent growth, supported by favourable demographic profiles.

In the last quarter of 2019, HCMC’s office market witnessed Grade A&B’s rents soaring to a decade high, reaching USD 29.1 per sqm. This was supported by strong demand and higher rental rates in newer office developments. Landlords continued to have strong bargaining power this quarter given the restless rental growth amid limited stock.

For Hanoi, in 4Q19, both Grade A&B submarkets recorded a higher net absorption in comparison to 3Q19, indicating a stable demand. The occupancy rate of the market continued to increase and reached 93.0%, in which Grade A submarket achieved the rate of 94.0%.

Over the next ten years, we expect demand for office space to continue to grow strongly by 8-10% annually in Ho Chi Minh City as the economy develops. We expect the proportion of the population employed in services to rise from 30% to 40%, and an annual GDP growth of 5.5-6.0%. This provides a great opportunity for developers to acquire sites to build more office space to cater to new companies and expansionary demand.

Nonetheless, on a regional basis, returns in 2020 are generally forecast to be smaller than in 2019, as rent growth and yield compression may both slow down during the year relative to last year.

We expect markets in Southeast Asia and India to continue to offer robust returns. Ho Chi Minh City, Hanoi, Bangkok and Manila are expected to continue to outperform, especially the Vietnam markets of Ho Chi Minh City and Hanoi, due to favourable economic and demographic fundamentals.

Figure 1: 2019 Performance by IRR Component

Note: Bubble sizes are proportional to initial market yield
Source: JLL Research

Figure 2: 2019 Performance by IRR Component

Source: JLL Research

Figure 3: 2020 Performance by IRR Component

Note: Bubble sizes are proportional to initial market yield
Source: JLL Research

Figure 4: 2020 Performance by IRR Component

Source: JLL Research

*NOTE: Analysis of the markets here focused on the overall geography for most markets, with the exception of Sydney, Melbourne, Tokyo and Bangkok, where only the CBD or CBA was analysed.

Download Vietnam Property Market Overview 4Q19