19 January 2014

Asia’s accelerating economic growth and rising industrial output and retail sales all point to a positive outlook for the region’s property markets during the coming year, according to Colliers International. 

In Colliers International Asia Real Estate Forecast 2014, the leader in global real estate services says it expects a tight supply and rising rentals in core city locations will encourage office and retail tenants to relocate to less-expensive decentralised areas.

“A striking feature in the market is likely to be a big increase in outbound capital investment by Asian investors,” says Simon Lo, Executive Director of Research & Advisory, Asia, at Colliers International. “They will be seeking to exploit the big differences between the property cycles in Asia and the US and Europe in order to achieve better yields and enjoy the strategic benefits of diversification.”

Chinese investors are set to lead the way in this trend. They are likely to spend at least twice as much on overseas property assets as last year. Their favourite investment destinations will be gateway cities like London, New York and Chicago. Taiwanese institutional investors will also be major players, following the recent relaxation of regulations concerning overseas investments by the authorities in those places. Meanwhile, Korea will be following suit to see more relaxed policy on acquisition of overseas real estate by Korean nationals.

In Hong Kong, a key trend of shifting from core to non-core locations is expected. This applies not only to office occupiers, which relocations to Kowloon East have seen, but also to retailers who continue to shift their focus from high streets to sub-urban locations. Lo explains, “The growth in the luxury segment of Hong Kong’s retail market has decelerated, with the impact of China’s political reforms on anti-extravagance rules that deter China tourists’ purchase of luxury goods. Moreover, as the number of same-day visitor arrivals increases, the market has observed a change of spending pattern towards mid-priced products and daily necessities such as beauty and personal care products. These explain the growing demand in locations out of the traditional high streets that are mostly occupied by international brands and luxury retailers.”

Key highlights from Colliers Asia Real Estate Forecast 2014 for the region include:

Modest office rental growth
Overall, Asia’s office leasing sector will remain steady, with rents increasing by an average of around 3% across the region in 2014. However, there will be some big variations. Jakarta and Manila are expected to remain the hot spots. These two cities saw substantial increases in rents last year, and the trend is set to continue with 13% and 9% growth in 2014. Its recovery from a cyclical downturn and growing demand will probably fuel a hefty 12% increase in Singapore too. The performances of office markets in different regions of China will be mixed. The region’s two key laggards are expected to be Hong Kong, due to limited growth in demand, and India, where economic and political concerns have dampened market sentiment.

Logistics fuels rise in industrial rents
Asia’s logistics real estate sector will definitely benefit from increasing logistics throughput during 2014. The rents of industrial and logistics premises will grow by an average of about 3%, as more small and medium-sized companies outsource logistics operations to third-party logistics (3PL) operators. Industrial and logistics rents in Manila are expected to remain the fastest growing in Asia, although by a more-modest 21% this year. Singapore is the only market that will likely experience a small decline in industrial rents.

Retailers focus on decentralised locations
The retail sales in the Asia region are projected to grow by an average of around 8%. Its vast retail market and spending power mean that China will account for much of this, with added momentum from the government’s relaxation of its one-child policy and proposals to facilitate the relocation of people from the countryside to the cities. Vietnam and Kazakhstan are also projected to see a major increase in retail sales.

Colliers forecasts retail rents will grow by an average of about 3% across Asia in 2014, with retailers increasing their emphasis on decentralised locations. While retail rents in Guangzhou, Hong Kong and Ho Chi Minh City, Vietnam are expected to decline, those in Hanoi and Singapore are likely to remain static. The increases in Asia’s other key retail markets will most likely range by between less than 1% and 17% during the coming year. These big variations will be due to differences between rents in core and decentralised areas, as well as the locations of new supply.

Yield expansion to continue
In anticipation of an increase in the cost of funds, Asia’s real estate yields are expected to continue its upward rise. Office yields in most Asian cities are projected to edge up by a further 10 to 30 basis points (bps) in 2014. However, Shanghai, Guangzhou and Tokyo will be the exceptions where yield compressions are foreseen for their office properties due to the unique buyers profile and economic policies in the market.

The weak Japanese Yen will offer foreign investors a window of opportunity to snap up high-quality office and industrial developments in Tokyo, where office rents are expected to edge up in line with inflation and yields are likely to be compressed by 10-15 bps in 2014. Since it is always difficult to source top-calibre properties in Tokyo, Colliers believes investors will seek out opportunities in other major Japanese cities, such as the Osaka and Nagoya metropolitan areas.

In India, recent policy amendments to increase market transparency and plans to establish REITs have set the scene for a turnaround in the property market. However, this is not likely to occur until after the general election in 1Q 2014. Further stabilisation of the Rupee would also increase the confidence of real estate investors about returning to the market.

For a global perspective on 2014’s top real estate market projections, please refer to our global report - 25 Predictions for 2014.