The office-leasing market in Asia should remain healthy in 2015. Although it is likely that we will see an interest-rate hike in the United States during the year, we are still in a low-cost environment for borrowing in terms of historical averages. Multinationals are also benefitting from the decline in energy costs that took place in mid-2014. These two factors are helping to reduce the cost structures of many companies and allowing them to maintain or improve profit margins. This improvement in profitability is a welcome sign, as top-line growth expectations are expected to be only mildly positive.
Since new supply remains limited in core locations, multinational companies will be looking at new stock coming up in decentralised locations as their best bet for expansion and consolidation. Thanks to supportive local-government policies in China, mainland companies in the e-commerce and finance industries are set to show exceptional growth in 2015. In India, energy and construction groups will be expanding, and demanding more office space.
There should be a greater volume of traffic in the logistics industry, underpinning decent prospects for demand for industrial and warehouse space. The drivers are the likely continued growth in private consumption in the region, underpinned by the increased spending power of young people, rapid urbanisation, and the emergence of the middle class. The range of opportunities in industrial and logistics real estate will broaden in 2015 thanks in part to economic improvements under way in Southeast Asia that are likely to spur consumer spending. Warehouse operators and occupiers will have more options in mainland China, as the number of new logistics facilities in second- and third-tier cities rises. To put it simply, the volume of deals in the logistics sector should boom in 2015, with a diverse range of activity including the sale of individual properties, equity investments and joint ventures.
In terms of retail real estate, China and India are going to be the markets that see the greatest growth in 2015 thanks to supportive government policies surrounding e-commerce. In China, retail-sales growth will be running at one of the fastest paces in the region in the year ahead, encouraging both local and international retailers to establish or broaden their footprints. In India, international retailers see opportunity as the middle class becomes increasingly brand-conscious. However, the lack of new supply will remain a key challenge for most retailers. Opportunities in decentralised sub-markets are going to be the most-appealing options for mid-tier brands that want to establish their footholds at a reasonable cost.
Capital Markets: More Stock for Sale in 2015
Most cities in the region are anticipated to see a recovery in growth. As a result, the situation for inbound real-estate investment in Asia looks much more positive in 2015. We forecast that GDP in the region will pick up more significantly, by an average of 40 basis points next year. Our view is that more long-term capital is coming back to Asia due to the narrowing of the gap in yield between Asia and overseas markets. More stock will also be available for sale either from investment funds or from brand-new developments completed in districts outside the city core. Developments will be pitched at reasonable prices, resulting in a distinct surge in sales transactions.
On the policy front, we predict that some of the prevailing cooling measures will be relaxed, particularly when more-realistic levels of supply come to market. Prospective investors should welcome these changes, as they lower any liquidity risk. The situation contrasts with overseas markets, where yields have been compressed and existing investment-grade assets are increasingly difficult to find.
In Asia, yields should remain largely compressed for prime assets in core locations, and the cost of borrowing is likely to edge up in 2015. As a result, investors will have to behave differently in order to achieve better returns. One of the ways to do this is to aim at value-added opportunities. Thanks to the relocation of occupiers to non-core submarkets, investors will see these as opportunities to add value to their existing projects by repositioning them or converting them for other use.
Slowing growth in China is a challenge, but investors with a medium- to long-term view on growth prospects in the region should actually perceive this an opportunity rather than a challenge. India and Indonesia are set to take off as a result of the stabilization of their political landscapes. Last but not least, Japan is well worth its moment in the spotlight thanks to the recent depreciation of the Japanese yen, effectively giving overseas buyers a discount.