Emerging Trends in Real Estate® Asia Pacific
More than a decade since the global financial crisis, Asia Pacific real estate continues to produce strong returns, but as the clock ticks down towards the end of the current cycle, caution is increasingly embedded into investor strategies. This year's investment prospect rankings reflect investor preference for regional markets that are large, liquid and defensive.
This report is jointly produced by PwC and the Urban Land Institute and aims to shed light on real estate investment and development trends, and other issues throughout the APAC region.
Key Findings
Singapore #1 in investment prospects
As recently as our 2017 report, Singapore placed just 21st in our investment rankings, underlining how quickly the tides can shift. This year, Singapore rebounded from the slump, reclaiming the top spot in city investment prospects for 2020, and second spot in city development prospects.
Today, the office sector has largely absorbed the oversupply, and with vacancies at an all-time low and limited supply in the pipeline, confidence in medium-term prospects has returned.
Landlord willingness to sell into the stronger market also has helped liquidity. Office yields, at 3.6%, are some of the lowest in the region, and prices remain high by global standards. Rentals, meanwhile, driven by takeup from coworking operators, have been strong.
Singapore was also one of the few markets regionally to see a surge in transactions in the first half of 2019, with most activity driven by cross-border capital.
Top 5 markets to watch in APAC
- Singapore (first in investment, second in development) Until recently, Singapore experienced several subpar years. Having absorbed the glut in office supply, sentiment for Singaporean assets has rebounded from its 2017 lows. With vacancies now minimal, confidence has returned. Foreign investors are leading the charge as buying activity surges.
- Tokyo (second for investment, fourth for development) For years, Tokyo markets have offered some of the best returns in the region. With domestic interest rates remaining at rock-bottom levels, investors continue to flock there, although competition from local buyers means the market is tight.
- Ho Chi Minh City (third in investment, first in development) Vietnam emerged as the preferred emerging market destination in Asia, with manufacturers migrating to set up factories as an alternative to China. Risk is high, however, and good investment opportunities can be hard to pin down.
- Sydney (fourth in investment, third in development) A long-time favourite that continues to deliver. Sydney offers a liquid, stable, high-return market with low vacancies and good prospects for growth going forward. Depressed valuation of the Australian dollar only adds to the appeal.
- Melbourne (fifth in investment, fifth in development) Melbourne continues to be popular with investors for the same reasons as Sydney. Office assets are a little more than half the price, though, giving the city particular appeal for Asian buyers with an eye for long term capital appreciation.
Notable market trends and sentiments
- The office sector remains the most popular asset class, although business models in the fastest-growing component of that sector—flexible workspace—are increasingly being called into question.
- The industrial and logistics space is still the sector most often tipped for outperformance. While the Asia Pacific region is still undersupplied with modern logistics space, more investors are now seeking excess returns in subsectors of that market, such as cold storage or last-mile warehouses.
- There is a growing perception that the retail sector in Asia has been oversold, with too many good assets penalised due to problems surfacing elsewhere in the world.
- Landlords have come around to the view that incorporating sustainable features into their buildings will allow them both to cut running costs and increase rents as tenants become more willing to pay for space that acts as a magnet for talented staff.
- Capital flow within the Asia Pacific was up 23% year-on-year while the US and Europe is experiencing a decreasing trend. This reflects the huge volume of capital held by regional institutions and sovereign funds that is outgrowing the capacity of domestic markets to absorb.
"There is an increase in transaction value driven by cross border capital in 2019 and an improvement in the commercial office sector. The positive developments have contributed to Singapore’s ranking as the top city by investment prospect in 2020. The city-state’s pole position is a testament to its strong fundamentals and investors’ needs for defensive assets with the uncertain economic climate. There are still investment opportunities, and we continue to see increased investors’ interest in alternative asset classes, including data centres, purpose built student accommodation and healthcare."
