Apr 27, 2012
DTZ Foresight Asia Pacific Fair Value Q1 2012 Slowdown in 2012
31 May 2012 Contents
Fair Value highlights Economic context Market classifications Office market forecasts Retail market forecasts Industrial market forecasts 2 3 4 5 6 7
The DTZ Fair Value Index score for Asia Pacific stood at 60 at end Q1 2012, meaning that the investment market outlook is broadly unchanged from Q4 when the score was 59.
TM
Of the countries covered by our Asia Pacific Index, Australia and China offer the most attractive investment opportunities. In Australia, investors can take advantage of the substantial yield premium offered by property over bond yields. While some China Tier I cities have become more expensive over the past year, the rental growth outlook over the medium term remains strong. Slower economic growth is impacting occupier demand for office space across the region, and several markets have recorded declines in rent in recent months, including Hong Kong and Mumbai. In Tokyo, an influx of new supply led to a further decline in prime rents in Q1. After recording strong rental growth in 2010 and 2011 of 7% and 6% respectively, we forecast all-property rental growth in Asia Pacific to drop below 1% this year as sentiment weakens given the uncertainty clouding the global economy (Figure 1). Rental growth is expected to pick-up in 2013 and we retain a positive view over the medium term. Buoyed by the prospect of strong rental growth over coming years, both Beijing and Tokyo offices are currently rated as HOT, with expected returns well in excess of estimated required returns. Notwithstanding that rents in Beijing have risen by 75% over the past two years, the market remains tight and with limited supply we are forecasting further rapid growth. This is feeding through to strong forecast capital growth of 12.6% per year from 2012-16. Meanwhile, Tokyo offers investors the prospect of a recovery. After falling by a cumulative 36% over the past four years, we are forecasting a bounce back in rents from H2 2012. Together with some yield compression, this is driving our capital growth forecast of 6.1% on average over the next five years.
Figure 1
Authors
Ben Burston Forecasting & Strategy Research ben.burston@dtz.com Fergus Hicks Forecasting & Strategy Research fergus.hicks@dtz.com
Contacts
Kate Barrow Head of Asia Pacific Forecasting kate.barrow@dtz.com Chua Chor Hoon Head of Asia Pacific Research chorhoon.chua@dtz.com Tony McGough Global Head of Forecasting & Strategy Research tony.mcgough@dtz.com Hans Vrensen Global Head of Research hans.vrensen@dtz.com
Asia Pacific rental growth forecasts by sector
10% 8% 6% 4%
2%
0% -2% 2010
Office
Source: DTZ Research
2011
Retail
2012
Industrial
2013
All-property
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DTZ Foresight Asia Pacific Fair Value Q1 2012
Fair Value highlights
Fair Value Index Q1 overview
The DTZ Fair Value Index score for Asia Pacific stood at 60 at end Q1 2012, meaning that the investment market outlook is broadly unchanged from Q4 when the score was 59 (Table 1).
TM
Table 1
Asia Pacific Fair Value Index scores
Q4 2011 Asia Pacific all-property Asia Pacific office Asia Pacific retail Asia Pacific industrial Global all-property Europe all-property US all-property
Source: DTZ Research
Q1 2012 60 65 53 61 57 46 84
59 63 53 61 52 36 83
The Asia Pacific market is providing global investors with an attractive proposition in a difficult economic climate. The market is offering higher rental growth potential in comparison to the European and US markets, which are based more on income driven returns given that their economies are struggling to sustain growth.
Australia expected to out-perform
Of the markets covered by our Asia Pacific Index, 24 are rated as HOT this quarter, and with a further 23 WARM markets, we consider 47 of the 59 markets covered to offer good value for investors at current pricing (Figure 2). Australia and China currently offer the most attractive investment opportunities (Figure 3). In Australia, investors can take advantage of the substantial yield premium offered by property over bond yields, which have decreased further this quarter. While some China Tier I cities have become more expensive over the past year, they still offer investors the prospect of high returns, driven by the strong rental growth outlook over the medium term.
Figure 2
Fair Value Index Q1 ratings by country
Asia Pacific index score: 60
100% 80% 60% 40% 20% 0% 2 1 12 9 6 3 7
2 24 6 23 7 12 Other Hot Asia Pacific
2
2 India Warm
Australia China Cold
Source: DTZ Research
Slowdown in 2012
In 2012, we expect to see a significant slowing in rental growth across the region. After recording strong growth in prime rents in 2010 and 2011 of 7% and 6% respectively, all-property rental growth in Asia Pacific is expected to drop below 1% this year as sentiment weakens given the uncertainty clouding the global economy. There will of course, be considerable divergence between markets, with volatile markets more exposed to international trade flows, such as Hong Kong and Singapore, expected to see a bigger impact on rents. Growth is expected to pick-up again in 2013 and we retain a positive view over the medium term.
Figure 3
Asia Pacific rental growth forecasts by sector
10% 8% 6% 4%
2%
0% -2% 2010
Office
Source: DTZ Research
2011
Retail
2012
Industrial
2013
All-property
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DTZ Foresight Asia Pacific Fair Value Q1 2012
Economic context
Low required returns reflect uncertain economic outlook
With the European Central Bank (ECB) having implemented two tranches of its Long-term Refinancing Operation (LTRO) in December and again in February, financial markets found a semblance of calm during Q1, as spreads on risk assets fell. In recent weeks, however, the impact of the LTRO in calming fears has faded, and we have witnessed a further escalation in the euro crisis following the failure of the recent Greek election to produce a government committed to standing by the bailout agreements struck earlier in the year. This has fed through to bond yields in the Asia Pacific region, which have fallen over the past six months. By historical standards bond yields are low across the region, and this is lowering our required return estimates.
Figure 4
Global bond yields
6% 5% 4%
3%
2% 1% 0% Jan-10 Jul-10 Jan-11 US Australia Hong Kong Jul-11 Jan-12 China Japan Singapore
Source: Bloomberg
Figure 5
Looser policy in Australia, China and India
24% 21% 18% 15%
12% 2009
9% 7% 5% 3%
1%
Authorities reacting to slowdown
Growth in many of the region's economies has slowed, as a deterioration in global growth dampens momentum. Slowing exports, particularly to Europe, are impacting prospects, and growth for 2012 in the region as a whole is forecast to be below trend. Authorities are reacting to the slowdown by loosening policy, with Australia, China and India all taking steps to bolster growth (Figure 5).
2010 2011 2012 China - reserve ratio requirement Australia - RBA cash rate (RHS) India - repo rate (RHS)
Divergence in market performance across the region
The slowdown in economic growth is impacting on occupier demand for space, and we have seen several markets record declines in office rents in recent months, including Hong Kong, Mumbai and Tokyo (Figure 6). Further decline in rents in Tokyo was exacerbated by a surge in new supply. It is important to note, however, that several cities are continuing to record strong growth in office rents in spite of the broader economic uncertainty. Perth continues to benefit from strong business investment associated with the mining and resources sector, while Beijing CBD has proven to be a very strong performer on the back of solid demand from both foreign and domestic corporates combined with sustained tight supply.
Source: Bloomberg
Figure 6
Divergent performance change in prime office rents over the last 6 months to Q1 2012
24%
7%
1%
0%
0% -2% -3% -11%
Source: DTZ Research
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DTZ Foresight Asia Pacific Fair Value Q1 2012
Market classifications
Yield premium rises further in Australia
The majority of Australian markets remain HOT, primarily due to the significant yield premium property is currently offering investors (Figure 7). As we noted last quarter, the spread of property over bond yields has widened markedly, and this has been intensified by the RBA's May decision to lower the cash rate by a further 50bps, building on the consecutive rate cuts in late 2011. At the time of writing, the five year bond yield stands at a record low of 2.4%, and this may fall further given the likelihood of further cuts to the cash rate. In contrast, prime property yields remain in the range of 7-8%, and we consider pricing very attractive at this level.
Figure 7
Selected Australian office yields and 5 yr bond yield
8% 6% 4% 2% 2010 2011 2012 Brisbane offices Melbourne offices Australia 5 yr bond yield Sydney offices
Source: DTZ Research, Bloomberg
Figure 8
Beijing and Tokyo both HOT: expected returns 2012-16 (pa)
Beijing Tokyo
Beijing and Tokyo among the leading markets
Buoyed by the prospect of strong rental growth over the coming years, both Beijing and Tokyo offices are currently rated as HOT, with expected returns well in excess of estimated required returns. Prime office rents in Beijing have risen by a substantial 75% over the past two years and further increases are expected in light of the sustained imbalance between supply and demand. This is feeding through to strong forecast capital growth of 12.6% per year over the five years from end Q1. On the other hand, Tokyo offers investors the prospect of a recovery, with rents having fallen by a cumulative 36% over the past four years. We are forecasting a bounce back in office rentals, along with some yield compression down from the current 4.2%. This is driving our capital growth forecast of 6.1%.
19.7% 9.3% Required Expected return return
Source: DTZ Research
6.2%
10.3%
Required Expected return return
Table 2
Selected market pricing relative to Fair Value
Q1 2012 Beijing offices Tokyo offices Bengaluru offices Sydney retail Singapore retail Perth industrial Melbourne retail Shenzhen offices
Source: DTZ Research
Degree of overpricing (negative is underpriced) -31% -15% -7% -6% -3% -3% 10% 14%
HOT HOT HOT HOT WARM WARM COLD COLD
Major market rankings
Table 2 presents a selection of our Fair Value rankings for major Asia Pacific markets. In addition to Beijing and Tokyo, the Bengaluru office and Sydney retail markets also offer investors strong returns. The low yielding Melbourne retail and Shenzhen office markets are considered to be over-valued at present.
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DTZ Foresight Asia Pacific Fair Value Q1 2012
Office market forecasts
Chinese rents to maintain rapid growth
Although the Chinese economy slowed in Q1 we expect Beijing office rents to show further large rises over the next five years. Strong occupier demand and tight supply, with only limited development opportunities, should exert significant upward pressure on rents (Figure 9). In Hong Kong and Singapore, on the other hand, we have downgraded our office rent forecasts as the precarious global economy weighs on occupiers. Hong Kong office rents are expected to decline 15% in 2012 before bouncing back in 2013, while in Singapore rents are projected to decline into 2013, falling 16% from end-2011 levels. In Tokyo we think that prime rents are currently around bottom and will rise 4.2% for 2012 as a whole, before gathering momentum in 2013/14.
Figure 9
Prime office rental growth 2012-16, %pa
15% 10% 5% 0% -5%
0%
-0.4%
Source: DTZ Research
Figure 10
Prime office yields in selected markets
12% Forecast 10% 8% 6% 4% 2%
0%
Yields to fall in most markets
For the vast majority of Asia Pacific office markets we expect office yields to decline over the next five years (Figure 10). This reflects the increasing maturity of these markets and falling risk premiums as a result. Yields in the Australian markets are also expected to move lower due to the sizeable premium which currently exists between office yields and bond yields. By contrast, office yields are currently at exceptionally low levels in the more developed markets of Hong Kong, Singapore and Taipei. In Hong Kong, the prime office yield currently stands at 2.5%. We expect a correction in pricing in these markets over the medium term with yields to rise as the interest rate environment eventually normalises in the United States and locally.
Beijing Singapore
Source: DTZ Research
Delhi Taipei
Sydney Hong Kong
Figure 11
Prime office total returns 2012-16, %pa
25% 20% 15% 10% 5% 0% -5% -10%
Highest returns in China and India
In general, the Indian and Chinese office markets offer investors the prospect of the highest total returns over the next five years. The favourable combination of strong rental growth and yield compression should lift capital values and boost total returns. The very strong rental growth forecast in Beijing leads to a total return of 22.1%pa over the next five years (Figure 11). By contrast, in the three markets in which we expect yields to rise, capital values are forecast to decline. This drags total returns below 5%pa for all three markets, with a negative return of -1.9%pa expected for prime offices in Hong Kong.
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Hundreds
Income Return
Source: DTZ Research
Capital Value Change
Total Return
5
DTZ Foresight Asia Pacific Fair Value Q1 2012
Retail market forecasts
Retail rental growth strongest in India
We expect to see the strongest growth in retail rents over the next five years in India, with growth around 5%pa forecast for both Mumbai and Delhi. Downside risks exist though due to concerns that government economic reforms are stalling, an example being the reversal last autumn of a policy to allow foreign firms to enter the retail market. Hong Kong rents are forecast to show strong growth as retailers benefit from shopper demand from the mainland (Figure 12). By contrast, we expect prime retail rents in Singapore to fall 3.0% by end-2013 as retailers brace themselves for slower growth in tourist arrivals, competition from new supply, , and a tighter labour market due to government policies to reduce the inflow of foreign labour. In Beijing, new supply is also expected to temper rent increases.
Figure 12
Prime retail rental growth 2012-16, %pa
6% 5% 4% 3% 2% 1% 0%
Source: DTZ Research
Figure 13
Prime retail yields in selected markets
15% 10% 5%
0%
Forecast
Australia to see yield compression
As with Asia Pacific office markets, most retail centres we expect retail yields to fall over the next five years as risk premiums drop as markets become more mature (Figure 13). The biggest drop in yields is expected in Delhi, the only market we cover for which yields are currently above 10%. Yields are also expected to decline in the Australian markets due to the sizeable gap which currently exists between property and bond yields. We expect retail yields to rise in five cities over the next five years. The most pronounced yield increase is expected in Hong Kong, where yields are currently just 2%. By 2016 we expect Hong Kong retail yields to rise to 3.25%, which would still represent a very low level.
Delhi
Melbourne
Source: DTZ Research
Sydney
Kuala Lumpur
Beijing
Hong Kong
Figure 14
Prime retail total returns 2012-16, %pa
25% 20% 15% 10% 5% 0% -5% -10%
Strongest returns in India
We expect the Indian markets of Mumbai and Delhi to deliver the highest total returns over the next five years, in excess of 15%pa (Figure 14). In both these markets the combination of strong forecast rental growth and yield compression will result in significant capital value appreciation. In most other retail markets total returns are forecast to be in the range of 6% to 11%pa. Hong Kong stands out as the only market expected to see negative total returns, at -3.0%pa, due to the impact of rising yields on capital values.
Hundreds
Income Return
Source: DTZ Research
Capital Value Change
Total Return
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DTZ Foresight Asia Pacific Fair Value Q1 2012
Industrial market forecasts
Rents to keep pace with inflation
In most Asia Pacific industrial markets, rents are expected to rise at around the rate of inflation over the next five years. Melbourne stands out as having slightly stronger prospects, with forecast rent increases of 4.2%pa. This reflects the fact that Melbourne industrial rents are currently relatively low compared to other Australian cities, offering a rental discount of up to 60% (Figure 15). Hong Kong is the only market for which industrial rents are forecast to decline over the next five years, by 0.3%pa. This reflects weakening demand as manufacturing activity is transferred to the Pearl River Delta where rents are more affordable. In Singapore, rents are forecast to drop 7.0% in 2012 as regulatory enforcement make landlords wary of leasing industrial units for unauthorised uses, and new supply comes on to the market.
Figure 15
Industrial rental growth 2012-16, % pa
5% 4% 3% 2% 1% 0% -1%
Source: DTZ Research
Figure 16
Prime industrial yields in selected markets
10%
8%
Stable yield outlook
The less volatile industrial sector is expected to see broadly stable yields over the medium term, with markets such as Singapore forecast to see little change. In Shanghai and the Australian industrial markets, yields are expected to edge slightly lower. In Shanghai this reflects the market maturing, while in Australia it reflects the moderation in bond yields (Figure 16).
6%
4%
2%
0% 2011 2012 2013 Melbourne Singapore Shanghai 2014 2015 Perth Taipei 2016
Double-digit returns in most markets
In the Australian industrial markets and Shanghai, the combination of reasonable income returns and capital value appreciation mean that total returns are forecast to be above 11%pa over the next five years. Returns are forecast to be highest in Melbourne, at 13.9%pa, boosted by reasonable rental growth (Figure 17). Hong Kong is the only industrial market forecast to suffer negative returns of 1.7%pa over the next five years. This reflects the negative impact of both falling rents and rising yields on capital values. Although just positive, total returns in Taipei are forecast to be very low, at just 0.8%pa. Taipei returns are also tempered as rising yields push down capital values.
Source: DTZ Research
Figure 17
Industrial total returns 2012-16, %pa
Hundreds
15% 10%
5%
0% -5% -10%
Income Return
Source: DTZ Research
Capital Value Change
Total Return
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Disclaimer
This report should not be relied upon as a basis for entering into transactions without seeking specific, qualified, professional advice. Whilst facts have been rigorously checked, DTZ can take no responsibility for any damage or loss suffered as a result of any inadvertent inaccuracy within this report. Information contained herein should not, in whole or part, be published, reproduced or referred to without prior approval. Any such reproduction should be credited to DTZ.
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