Emerging Trends in Real Estate® Asia Pacific 2020 I Editorial Leadership Team

Emerging Trends in Real Estate®

Asia Pacific 2020 Contents

iv Executive Summary vi Notice to Readers 1 Chapter 1: Defying Gravity? 3 Geopolitics: the Good, the Bad, and the Ugly 4 Trade Friction: Winners and Losers 6 More Caution, More Core 7 Spreading the Load 7 Yields Begin to Rise . . . 8 . . . But Not Everywhere 9 Focus on FX 10 Pockets of Distress 12 Sustainability: Coming of Age 13 Coworking: Does It Work? 14 Retail: Is Asia Different? 16 Focus on the End User 16 Nervous about Niche? 18 Accounting for Climate Change 19 Embracing Technology

22 Chapter 2: Real Estate Capital Flows 24 Global Funds Under-Allocated 25 Japan’s Slow-Motion Exodus 26 Fundraising Slows 26 Dry Powder Builds 27 Tighter Bank Lending 28 Nonbank Lending Picks Up . . . 29 . . . But Appetite Remains Low 30 REITs on the Rise 30 Singapore 31 Japan 31 Australia 31 India

34 Chapter 3: Markets and Sectors to Watch 35 Top Investment Cities ® Emerging Trends in Real Estate 47 Property Types in Perspective Asia Pacific 2020 53 Interviewees

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Emerging Trends in Real Estate® Asia Pacific 2020 i Editorial Leadership Team

Emerging Trends in Real Estate® PwC Advisers and Researchers by Territories Asia Pacific 2020 Chairs K.K. So, PwC Australia India John Fitzgerald, Urban Land Institute Andrew Cloke Anish Sanghvi Bianca Buckman Bhairav Dalal Principal Authors Chelsea Hancock Dhiren Thakkar Mark Cooper, Urban Land Institute Consultant Christian Holle Tanya Tandon David McDougall Alex Frew McMillan, Urban Land Institute Consultant Indonesia James Dunning Brian Arnold James McKenzie Contributing Editor David Wake Jane Reilly Colin Galloway, Urban Land Institute Margie Margaret Josh Cardwell Contributing Researchers Liz Stesel Japan Michael Owen, Urban Land Institute Morgan Hart Akemi Kitou Nick Antonopoulos Eishin Funahashi Pauline Oh, Urban Land Institute Nita Prekazi Hideo Ohta Yusnita Baharuddin, Urban Land Institute Rachel Smith Hiroshi Takagi Ross Hamilton Koichiro Hirayama ULI Editorial and Production Staff Scott Hadfield Raymond Kahn James A. Mulligan, Senior Editor Shannon Davis Soichiro Seriguchi David James Rose, Managing Editor/Manuscript Editor Sue Horlin Takashi Yabutani May Chow, Senior Vice President, Marketing and Tony Massaro Takehisa Hidai Takeshi Nagashima Communications, Asia Pacific Mainland China Takeshi Yamaguchi Lawreane Jamie de los Santos, Designer Gang Chen G. Bin Zhao Luxembourg Kees Hage Hong Kong SAR Robert Castelein K.K. So Paul Walters Philippines David Kan Malou Lim Taiwan Singapore Jason Liu Chee Keong Yeow David Tien Magdelene Chua Bonnie Ho Maan Huey Lim

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Recommended bibliographic listing:

PwC and the Urban Land Institute: Emerging Trends in Real Estate® Asia Pacific 2020. Washington, D.C.: PwC and the Urban Land Institute, 2019.

ISBN: 978-0-87420-442-1 ii Emerging Trends in Real Estate® Asia Pacific 2020 Executive Summary

Nonetheless, caution is widespread, Survey Responses by Geographic Scope of Firm especially as yields begin to rise in some markets. Unusually, geopolitics has become the new wildcard, with China-U.S. Other focus trade friction, protests in Hong Kong, and 1% More than a decade since the global financial crisis, Asia Pacific real estate continues the spat between Japan and South Korea to produce strong returns. But as the clock ticks down towards the end of the current causing the most concern. Interviewees cycle, caution is increasingly embedded into investor strategies. highlighted a handful of markets or sectors Focused primarily on Pan-Asia focus 24% that look most vulnerable to localised 44% one country/territory This despite the fact that there is no clear consensus as to whether the market is near, downturns—mainland China, Hong Kong at, or beyond its peak. In part, this is because of the heterogeneous nature of local SAR, and India—and these may offer markets. As one Singaporean developer observed: “The risk of a market downturn has buying opportunities in the longer term. increased significantly, but it’s market specific.” In addition, markets and sectors across the Asia Pacific are often at different stages of their own cycles. Singapore, for example, Nevertheless, sourcing deals remains as has only now rebounded from a slump that bottomed around three years ago, while hard as ever, forcing investors to find other Global focus 31% other markets have been riding the same wave after six years or more. Finally, with ways to get capital into the market. Some, economic growth continuing at a reasonable clip, interest rates remaining at near-record for example, are turning to joint ventures, lows, and with ever-increasing amounts of capital circulating around the region looking buying slices of larger assets that also for an investment home, it is hard to see where the catalyst for the next recession is allow them to spread their risk. Larger Source: Emerging Trends in Real Estate Asia Pacific 2020 survey. going to come from. In the words of one private-equity investor: “If you compare where investors, meanwhile, are boosting their Asia is today versus where the developed markets are, cyclically we feel like we’re in a commitment to core markets and, where better position.” possible, core assets, with Australia, Japan, and Singapore the most popular. After years in the shadows, sustainability In China, local regulations have drastically An outlier, but a very popular one, is is now finally becoming a priority for the restricted outflows in 2019, but the slack Ho Chi Minh City—an emerging-market region’s largest investors, and also many has been taken up by others, in particular growth hedge against more muted core smaller ones. Landlords have come Singapore and South Korea, while outflows from Japan are also picking up Survey Responses by Country/Territory market performance. around to the view that incorporating sustainable features into their buildings and can be expected to grow rapidly in The office sector remains the most will allow them both to cut running costs coming years. popular asset class, although business and increase rents as tenants become 30 models in the fastest-growing component more willing to pay for space that acts as a The sheer weight of capital now in of that sector—flexible workspace—are magnet for talented staff. circulation means that competition to 25 increasingly being called into question. place it in regional markets continues The industrial and logistics space, In terms of capital flows, cross-border unabated. One result of this is that 22.4% investment funds are holding increasing 20 meanwhile, is still the sector most often investment patterns into the Asia Pacific amounts of capital they are unable to 13.6% 18.4% tipped for outperformance. While the Asia are being affected this year by the rising 12.7% Pacific region is still undersupplied with tide of antiglobalism in markets worldwide, spend. When they do spend it, however, 15 modern logistics space, more investors with incoming capital from the United financing for deals is for the most part readily available (apart from in China and 11.6% are now seeking excess returns in States and Europe down 28 per cent 10 10.5% India, where the dynamics of domestic

Percentage of responses 7.1% subsectors of that market, such as cold year-on-year in the second quarter of 2019 storage or last-mile warehouses. to just US$2.54 billion—the lowest figure markets have seen banks retrench). 5 since 2012. At the same time, however, Lending practices have been tightened to 3.7% There is a growing perception that the the value of cross-border deals involving an extent, but for creditworthy investors there is no problem. As one Hong 0 retail sector in Asia has been oversold, money from within the Asia Pacific was Australia Mainland Hong Kong India Japan Philippines Singapore Others* Kong–based advisor put it: “There’s no China SAR with too many good assets penalised due up 23 per cent year-on-year to US$7.76 to problems surfacing elsewhere in the billion. This reflects the huge volume of change at the top. We see easy access world. Selective but sometimes large- capital held by regional institutions and for low-leveraged deals from good- scale buying has been seen in several sovereign funds that is outgrowing the quality sponsors.” With interest rates in Source: Emerging Trends in Real Estate Asia Pacific 2020 survey. markets, with investors now increasingly capacity of domestic markets to absorb. the second half of 2019 reversing course to the downside, the overarching trend *Includes New Zealand, Thailand, Malaysia, South Korea, United Kingdom, Germany, Belgium, Taiwan, focused on adapting existing assets to Burma, United States, Russia, Indonesia, Vietnam, and Netherlands. meet the changing demands of modern in terms of access to bank finance will consumers. probably continue to be accommodative.

iv Emerging Trends in Real Estate® Asia Pacific 2020 Emerging Trends in Real Estate® Asia Pacific 2020 v Chapter 1: Defying Gravity?

Asian REIT markets have rebounded This year’s investment prospect rankings in all areas. While placing significant “We need to be a little bit more cautious in investing in APAC, particularly in in 2019, as interest rates in the United again reflect investor preference for amounts of capital in Vietnam remains States began to decline. Many REITs in regional markets that are large, liquid, and problematic given the relatively small size areas of the economy that are going to be impacted by U.S.-China trade the region, and especially in Singapore, defensive—Singapore, Tokyo, Sydney, and of local markets and a general shortage are now on acquisition sprees to take Melbourne therefore figure strongly. This of investment-grade assets, it is receiving relations.” advantage of the lower cost of capital for is partly a reflection of a flight-to-safety strong inflows of capital as a result of new purchases, as well as an anticipated mentality resulting from growing concerns incremental shifts of manufacturing upswing in investor interest in yield- about a global economic downturn. In capacity away from China. Remarkably, bearing stocks, including in particular from addition, though, these are all markets Ho Chi Minh City this year, also ranked investment funds, which have become offering significant numbers of core assets as the top city for all asset classes in this While investors across the Asia Pacific Emerging signs of a potential recession more willing to buy into REITs as opposed that are the preferred targets of regional year’s buy/hold/sell tables. region are notably more cautious about in the U.S. economy have only added to to fixed assets. institutional investors that today constitute market prospects than in previous years, concerns. In a September 2019 report, the biggest driver of new demand for the jury remains out on whether the top analysts Oxford Economics stated: “Of The first domestic Indian REIT listed in assets. has been reached or breached. What’s seven indicators that have been strongly 2019. Its shares were rapidly bid up in certain, though, is that concerns today associated with global recessions over value until by the end of 2019 its implied While investor sentiment towards local are greater than ever. As one interviewee the last 45 years, only two are currently yield had compressed to under 6 per emerging markets is now on the wane due commented: “I have been cautiously sending recession signals. However, one cent—a remarkably low level for a market to global economic concerns, Ho Chi Minh optimistic for years—now I’m just of these two—the U.S. yield curve—has where risk is perceived to be high. City received consistently strong feedback cautious.” And as an investment manager the best predictive record and tends to in Australia noted: “For the past five or six send the earliest warning.” years I’ve probably sounded like a broken record, but it is a little bit different this Recent statistics add to the sense of year.” unease. Respondents’ expectations of profitability declined in this year’s survey Notice to Readers The biggest single factor, as cited by to an eight-year low, while data from Emerging Trends in Real Estate® Asia Pacific is a trends and forecast publication now in its 14th edition, and is one of the most respondents to our Asia Pacific survey, analysts Real Capital Analytics (RCA) highly regarded and widely read forecast reports in the real estate industry. Emerging Trends in Real Estate® Asia Pacific 2020, is the impact of the ongoing U.S.-China show a 20 per cent decline in year-on- undertaken jointly by PwC and the Urban Land Institute, provides an outlook on real estate investment and development trends, trade friction, which is being felt across the year transaction volumes through the first real estate finance and capital markets, property sectors, metropolitan areas, and other real estate issues throughout the Asia region as the Mainland economy slows. half of 2019, together with a fall in rolling Pacific region.

Emerging Trends in Real Estate® Asia Pacific 2020 reflects the views of individuals who completed surveys or were interviewed as a part of the research process for this report. The views expressed herein, including all comments appearing in quotes, are Exhibit 1-1 Asia Real Estate Transaction Volumes by Source of Capital obtained exclusively from these surveys and interviews and do not express the opinions of either PwC or ULI. Interviewees and survey participants represent a wide range of industry experts, including investors, fund managers, developers, property companies, lenders, brokers, advisers, and consultants. ULI and PwC researchers personally interviewed 94 individuals and survey responses were received from 463 individuals, whose company affiliations are broken down below. Domestic Intra-Asia Investment into Asia % Cross-border

Private property owner or developer 26% 60% Real estate service firm (e.g., consulting, financial, legal, or property advisory) 23% Fund/investment manager 21% 50% Homebuilder or residential developer 10% Institutional equity investor 3% Bank lender or securitised lender 1% 40% Other entities 15%

30% Throughout the publication, the views of interviewees and/or survey respondents have been presented as direct quotations from the participant without attribution to any particular participant. A list of the interview participants in this year’s study who chose to be identified % Cross-border 20% appears at the end of this report, but it should be noted that all interviewees are given the option to remain anonymous regarding their participation. In several cases, quotes contained herein were obtained from interviewees who are not listed. Readers are cautioned not to Investment into Asia (US$ billion) attempt to attribute any quote to a specific individual or company. 10%

To all who helped, the Urban Land Institute and PwC extend sincere thanks for sharing valuable time and expertise. Without the 0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 involvement of these many individuals, this report would not have been possible. 2012 2013 2014 2015 2016 2017 2018 2019

Source: Real Capital Analytics.

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12-month volumes from the record levels Exhibit 1-2 Most Active Asia Pacific Metros H1’19 Geopolitics: the Good, the as a spike in supply. Having said that, investment values. According to a locally seen in mid-2018. In both China and Bad, and the Ugly the biggest occupiers in Shanghai are based investor who acts for a number of Japan, quarterly volumes fell to the lowest domestic companies, and the refocusing large institutions and sovereign wealth levels in a decade, as both domestic and Historically, real estate investors prefer to of the economy from exports to domestic funds, “A couple of the big sovereign funds focus on bottom-up rather than top-down cross-border investment slumped. 2018 H1 ’19 Metro Grand Total ($m) % YOY demand–driven activities will mop up called to ask if this is an opportunity, but macroeconomic factors. Hence: “location, 1 1 Hong Kong SAR $10,637 –46% that supply relatively quickly. So, there I had to tell them, essentially, that no one location, location” trumps “events, my dear Not all indicators are negative, however. 2 2 Tokyo $9,719 –19% could be a short window to buy.” RCA is selling. Apartment owners may panic- boy, events.” Indeed, there seem to be few signs of 3 3 Seoul $8,357 –2% data show Chinese transaction volumes sell, but you’re not going to see anything regional economic instability that might 6 4 Beijing $5,839 138% falling by 19 per cent year-on-year to $15 on the commercial side. The sentiment is Nonetheless, political upheaval has trigger a widespread downturn. Inflation 4 5 Sydney $5,763 17% billion in the first half of 2019, with a more wait and see—if they don’t have to close become a common theme across the is in check, financial systems appear 7 6 Singapore $4,884 73% dramatic 39 per cent fall in the second a deal, they’re not going to close, but well capitalised, and global interest rates 5 7 Shanghai $4,572 –2% world in 2019. U.S.-China trade friction quarter. Given that domestic players have basically, the Singaporeans and Koreans remain at or near all-time lows. 8 8 Melbourne $2,821 –14% may be the obvious harbinger of doom, been handicapped by restricted access to see it as just a blip—no one is expecting but it is hardly the lone red flag. Japan 10 9 Osaka $2,007 165% capital, foreign buyers are now especially carnage.” and South Korea are also engaged in a According to one fund manager: “In 21 10 Shenzhen $1,257 1,233% active in the market. most asset classes, you have reasonably 26 11 Tianjin $1,237 295% renewed political spat, while a series of Going forward, there was also a street protests over a number of months decent operating fundamentals in terms 9 12 Brisbane $1,217 –21% In Hong Kong, meanwhile, the impact consensus that Hong Kong is unlikely to have also flared up in Hong Kong, of occupancy levels and demand. There 15 13 Mumbai $1,074 –23% of street protests has begun to be felt in suffer an exodus of businesses to other wreaking havoc on the city’s retail and is a limited amount of new supply, 11 14 Taipei $679 –33% earnest. Tourist arrivals were down 40 destinations. In particular, the prospect of hotel sectors. credit growth to the sector has been 13 15 Yokohama $503 –56% per cent year-on-year in August, hotels Hong Kong’s financial industry migrating reasonable, [and] lending standards for were on average only half full and, in the to locations such as Singapore or new construction have been responsible. What are the consequences from retail sector, one major landlord reported Shanghai is seen as unlikely due to the a real estate point of view? While Those are all typically the areas that Source: Real Capital Analytics. same-store sales down 50 to 90 per cent continuing advantages offered by Hong would precipitate some sort of cyclical undoubtedly negative for the markets, over the same period. That said, the office Kong’s reliable legal system, its low tax downturn.” the current dislocations are also creating sector has emerged largely unscathed. rate, and its proximity to mainland China. opportunities. In China, for example, the Although central business district (CBD) Given that the Mainland’s capital account Other indicators are also supportive. As Exhibit 1-3 Real Estate Firm Profitability Trends trade friction has followed hard on the vacancies were up and rents were down is unlikely to open up, Shanghai will remain one investor pointed out: “Real estate still heels of an ongoing regulatory crackdown marginally, there has been little effect on unable to compete as a major finance hub. feels like an attractive asset class vis-à-vis on alternative finance products as well bond yields and where interest rates are.” as a general tightening of credit imposed According to another, liquidity is also a by the central bank. Interviewees based Exhibit 1-4 Most Problematic Issues for Real Estate Investors factor: “We’ve been at the top now in Asia in China warned that the malaise was for about five years, and every year we sit starting to gain traction. In the words of down and say, ‘Well is this it, are we now one private-equity investor, the economy Excellent “is getting hit harder than people outside ready for a correction?’ And then all these Trade wars 6.64 people rock up with billions of dollars to China realise.” spend on Asian property and of course Low yields 6.32 they support values.” As a result, for many multinational Good corporations (MNCs), expansion plans Global economic growth 6.12 are now on hold. “They’re more treading Meanwhile, DWS research projects Asian economic growth 6.00 unlevered aggregate total returns for core water than anything else, which certainly impacts commercial office leasing,” one Lack of investable properties 5.85 Asia Pacific real estate to range between Fair 5.5 per cent and 7.6 per cent annually China investor said. However, “If you look Currency volatility 5.84 from 2019 to 2023, well below the 2018 at the market as a whole, the growth story is still very much about the tech sector, figure of 10 per cent. 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Competition from Asian buyers 5.74 and Chinese tech firms are doing very well. They are absorbing a lot of space. Competition from global buyers 5.22

Cost of finance 4.36 Source: Emerging Trends in Real Estate Asia Pacific 2020 survey. According to a different fund manager,

“There is clearly an impact in the Impending interest rate hikes 4.04 Shanghai and Beijing markets. Shanghai, 123456789 in particular, has recently had quite a Least Neutral Most bit of office development – so you have problematic problematic shrinking demand from MNCs nervous about the trade friction at the same time Source: Emerging Trends in Real Estate Asia Pacific 2020 survey.

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Singapore, meanwhile, is too far away and metro, so the traffic is surmountable, Trade Friction: Winners and One result of this migration is that space Exhibit 1-5 Projected Change in Economic Factors, Next Three to Five Years to be a major player, offers minimal cost Losers in emerging-market logistics and business and of course liquidity in Bangkok is the savings compared with Hong Kong, and parks “has been selling like hot cakes”, best, in terms of buying and selling real struggles with a number of challenges Another way that trade friction is altering as investors scramble to find a home for estate generally. As companies become regional investment patterns relates to the of its own, including difficulties obtaining new factories. Industrial real estate rents more fly-in fly-out, and as there’s a lot Worsen No change Improve working visas for staff. migration of manufacturing capacity out rose by double digits year-on-year in the more regionalism, a high-cost base like of China. This shift had been underway first half of 2019 in several Vietnamese Singapore, especially with its tightening Global economic growth Still, with so much capital circulating in the for several years, but tariff hikes have provinces, according to Savills research, visa requirements and high home prices, now accelerated the process. While the region, certain markets probably stand including 54.6 per cent in Binh Duong and make places like Bangkok an interesting Construction costs to benefit. Little new capital is finding its amount of capacity leaving China is still 31.1 per cent in Tay Ninh, northwest of option as a base.” small relative to the total, even a minor way to China, for example, which must Ho Chi Minh City. With incoming foreign Asian economic growth therefore be heading elsewhere. As one shift in a market as big as China can have investment, meanwhile, rising 69.1 per a major impact on the emerging-market fund manager said: “I think at the margins, cent to US$16.74 billion in the first five Competition from Asian buyers people hesitant to put money to work in economies where most of the outgoing months of the year, Vietnam is now well- capacity is now heading. So far, the prime mainland China and Hong Kong SAR will entrenched as the favoured China-plus- Yield compression perhaps be even more focused on Tokyo beneficiaries have been South East Asian one model. economies, although some countries have and Australia. And maybe Singapore is Cost of finance also a net beneficiary of what’s going on benefitted more than others. According Another result is that Bangkok is now to one interviewee: “Over the past year, of in China.” figuring increasingly as a candidate for Availability of investable properties the 25 major industrial refugees that have multinationals’ regional headquarters. left China, most have gone to Vietnam, According to one executive active 0% 20% 40% 60% 80% 100% Thailand, or Myanmar.” Indonesia has throughout South East Asia, “Thailand is so far seen little activity, and the same featuring more and more in people’s minds applies to the Philippines. This is because, just because executives like being in Source: Emerging Trends in Real Estate Asia Pacific 2020 survey. although “they’ve been poking around, Bangkok. The quality of lifestyle products they’re very used to competing on tax for their families is abundant, people have incentives, and that’s where Vietnam gotten used to commuting by the Skytrain trumps the Philippines, despite having a more opaque legal contract system.”

China: Key Themes Despite a slowing economy, concerns A few years ago, foreign investors often loosening has been allowed for small and for developers, investors, and consumer buyer of a mixed-use development site growth prospects, but it is not likely to over ongoing trade friction, and a tighter had trouble landing deals in China’s medium-sized companies. “We’re still buyers and introduced price controls for will be able to sell the residential element achieve the growth levels it has been regulatory environment, more and more primary cities. Today, however, the seeing a very tight lending market towards residential properties in some cities, has as usual, but must continue to hold the historically achieving. We are probably overseas investors are beating a path number and size of such transactions real estate, [and] as of right now, I don’t led some investors to take a cooler view commercial part of the development more enthusiastic about areas or assets to Chinese real estate markets. First-tier have increased significantly. “I think there’s see that changing,” one developer said. of China. However, the logistics sector for 10 years or more after construction within the Chinese economy that face cities, and especially Shanghai, are today been a dramatic shift over the last few continues to be a favourite. According to is complete. This naturally makes life domestic consumption.” regarded as gateway destinations where years,” one investor said. “Historically, The Chinese office sector has been the one overseas investor: “We are looking at difficult for fund managers, unless they are the largest global institutions feel they the Chinese [imposed] tight controls over asset class hit hardest by the trade friction, some logistics deals in China. There’s still investing in conjunction with a source of must have a presence as they diversify foreign capital entering the market, and although investors continue to selectively a massive undersupply of good-quality long-term capital. As a result, “we’ve been their portfolios. it was very difficult to compete against target assets in the biggest destinations. stock, and it’s hard to get the land. It moving to more brownfield, value-add the locals. Clearly, as the economy has According to one fund manager, “We takes years to line those deals up, but projects,” one fund manager said. “The Commercial real estate transaction started to slow, you have less aggressive prefer to invest in the first-tier cities, where they certainly seem to lease well and requirements on greenfield development volumes in China hit a record high US$25 domestic capital and a weaker Chinese we tend to see higher levels of growth, quickly once they’re built. There is massive are becoming onerous for anyone billion in the first half of 2019, according to currency, but there is also a desire from greater levels of liquidity, and larger domestic growth in consumption, which investing via a fund.” JLL. The results were driven by a bumper Beijing to see more foreign capital come opportunities. Cities that have the most is supporting logistics, the trade war first quarter, with investment volumes into China.” innovative companies, particularly oriented notwithstanding.” Finally, a number of interviewees predicted rising 174 per cent year-on-year to some towards the technology sector, are where that the days of “easy growth” have US$17 billion. As usual, most activity was A further boost for foreign investors has you have the highest growth. A notable change in markets in first-tier already ended in China. According to one focused on Shanghai, which saw US$10.9 been Beijing’s reluctance to slacken cities has been requirements in public investor: “We still want to invest; however, billion of transactions, making it the fourth- lending restrictions for domestic real The current regulatory environment, land auctions insisting that buyers agree we do have to be cognizant of the fact most-liquid city in the world, behind only estate buyers, even though some which has tightened access to capital to long-term ownership. For example, the that growth is slowing. China has fantastic New York, Tokyo, and Paris.

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Beijing, and Sydney—all large markets with per cent as of June 2019, the outward More Caution, More Core Exhibit 1-6 Top Eight Metros Areas Share of APAC Volume Yields Begin to Rise . . . core assets. According to one investor, move may be attributed to social tensions. The reluctance to declare a downturn For the past four or five years, real estate “We’ve been super defensive for the past But yields have also begun to expand in does not mean that Asia Pacific real professionals across many markets have three years, just looking at things where major markets such as Melbourne and estate investors have their heads in the been wearily sucking their teeth and there is really strong local demand and Tokyo. Whether this turns into a trend sand. More and more, they are turning declaring that cap rate compression 80% that are very, very affordable.” remains to be seen, but as one interviewee to defensive strategies in order to hedge cannot go on. So far, however, they have noted: “I can’t see cap rates getting against a potential reversal. been wrong, with transaction yields Another said, “We have become extremely lower. I know the U.S. has cut interest continuing to drop incrementally or at least disciplined in terms of underwriting and rates, but I really cannot see any sensible One way of doing this is to hold onto remain compressed. making sure the rental growth profile is opportunities for cap rates to [continue to] investments longer. Our 2020 survey 70% something that we validate extensively. come down.” confirms a steady decrease in shorter- We also need to be focused on costs More recently, however, office yields in term plays over the last five years and a such as tenant incentives, capex [capital some markets have begun to turn. In Hong corresponding increase in longer-term expenditures], and maintenance.” Kong, where cap rates moved out 35 basis investment horizons, with more than twice 60% points from their 2018 lows to reach 2.6 as many respondents (i.e., 24 per cent) indicating an intention to hold for 10 or more years compared with 2016 data. To Spreading the Load an extent, this phenomenon also reflects Exhibit 1-8 Asia Office Yields 50% the increasing volumes of institutional ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 Another way to reduce risk is to share it money now looking for an investment with others. Larger players are therefore home. increasingly willing to structure deals as partnerships, and are even turning to Source: Real Capital Analytics. Hong Kong SAR Singapore Seoul Sydney Melbourne Tokyo According to one fund manager, “Over funding investments as a way to diversify. the next 12 to 24 months, we would like JLL reported that Asia Pacific investors to rebalance a little bit by doing more core racked up some $13 billion of joint venture 10% Exhibit 1-7 Time Horizon for Investing investments, buying a steady stream of transactions in the first half of 2019, after cash flows with a long weighted-average an equally busy 2018. “These deals help lease length and downside protection. So, investors access prime assets with large 8% even if there is a correction, we still have 2020 2019 2018 2017 2016 lot sizes and also reduce concentration those cash flows coming in and are not risk,” according to one investment adviser. dependent on capital gains.” Joint ventures and club deals are 6% There is also a flight to quality in terms of 1–3 years particularly favoured in China, where a location. RCA data show that since the number of recent deals have resulted third quarter of 2017, investors’ caution, in partnerships between domestic and 4% expressed by their preference for core international investors, often involving markets, has been rising (see Exhibit multiple partners. Anecdotal evidence, 1-6). “Investors generally are probably a however, also suggests that some larger little bit more cautious on opportunistic 3–5 years investors, who in the past have been 2% [investing] and leaning a little bit more more inclined to target joint ventures 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 towards core strategies because of their or club deals, are beginning to invest concerns around valuation and risk. So in funds once more. According to one they are orienting a little bit more towards fund manager, “We hear that some 5–10 years Source: Real Capital Analytics. lower-risk strategies and probably a little investors that you don’t think of as fund bit away from more cyclical asset classes, investors are going into multiple funds. We like hotels, and more towards less risky understand this is partially to reduce risk assets,” one investment manager said. but also a way to gather information—if you are investing with five fund managers, This assertion is also backed by the data. 10–plus years you have five research departments and RCA statistics for the first half of 2019 acquisitions teams to tap into.” show a 39 per cent fall in hotel investment volumes. The top metropolitan areas for real estate transactions in the first half 01020304050 of 2019 were Hong Kong, Tokyo, Seoul,

Source: Emerging Trends in Real Estate Asia Pacific 2020 survey.

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. . . But Not Everywhere In any event, the mild unwinding of cap because no one can find a home for the Focus on FX natural alternative to conventional hedging dramatic movements. You can do well rates seen in some locations still leaves capital, so you’re finding extraordinarily strategies. Overseas investors also tend to at the property level and then lose it on This reversal in cap rates is hardly prices very much on the risk side of the low cap rates for assets that are, frankly, Instability in global currency markets borrow in local currencies in order to gain the currency. Generally speaking, it is so universal, however, and in some locations, risk/return spectrum as too much capital an opportunistic play. And that’s the funny means that exchange rates and foreign a partial hedge. expensive to hedge that it takes a massive yields have continued to compress. continues to chase too few assets. “The thing about it. In a lot of cases, you should exchange (FX) hedging strategies are knock off your returns and, until you have weight of capital has readjusted all the be saying, “Time to hit the door.” becoming increasingly important for In some cases, FX hedging can have some certainty about when your money is In India, for example, some observers returns,” as one Singapore-based fund returns. a significant positive effect on returns, coming out, it is difficult to actually hedge see substantial compression of high-end manager said. “It has mispriced risk depending on the currency pairing. For it effectively.” office yields as the economy continues According to one European investor, example, as of mid-2019, Singaporean to mature. “I think India is the next big currency is “an important factor in every capital received much stronger currency The most notable trend in the past 12 growth story—in the same way we saw transaction, [but] now the impact can vary. returns in Europe or Japan than it did in months has been the strength of the U.S. Exhibit 1-9 Office Sector Cap Rates, Core Locations H1 2019 one-off yield compression in China over It is huge in certain places like India, [while] Australia. As one adviser commented: dollar, particularly compared with the the last 15 years, we’ll [also] see one-off there is a lower impact in places like Japan “There is a strong FX arbitrage for Asian Indian rupee, the Australian dollar, and the yield compression in India.” This is the and Singapore.” investors into Europe at the moment and Chinese yuan. major reason India is so popular amongst [also] from the U.S. into anywhere else.” those deploying patient long-term capital. Approaches to currency hedging vary Country City Range Outlook Income-producing Indian properties are widely. Broadly speaking, European, South Nonetheless, currency movements can now in huge demand—so much so that Australia Sydney 4.00–5.00 Korean, and Japanese investors are more make life difficult. According to one investors are sometimes willing to enter Melbourne 4.25–5.00 inclined to hedge, while very large global investor, “Currency is becoming more into forward purchases of Indian assets investors tend to adopt diversification as a of a factor because we have had some with strong developers in popular locations Brisbane 4.75–5.75 such as Hyderabad and Bangalore. Perth 4.75–6.50 New Zealand Auckland 5.00–6.50 According to one locally based consultant, Exhibit 1-10 Internal Rate of Return Impact to Investor Returns Using Cross–Currency Swaps Wellington 5.50–7.50 eight to 10 (mainly foreign) investors are now competing for each income- China Beijing 3.00–4.50 Home currency (investor capital from…) producing asset brought to market. Shanghai 3.00–4.25 “Bidding wars normally start at around 8.5 Guangzhou 3.75–4.75 Hong Kong SAR Japan Mainland China Singapore South Korea Europe Australia U.K. U.S.A. to 9 per cent and we’ve seen numbers go (HKD) (JPY) (CNH) (SGD) (KRW) (EUR) (AUD) (GBP) (USD) Shenzhen 3.50–4.50 even tighter to 7.5 per cent. From a global Hong Kong SAR N/A –2.06% 0.91% 0.01% –1.14% –2.02% –0.43% –0.81% –0.03% investor’s perspective, this may not seem Hong Kong 1.50–2.80 (HKD) too bad, but given the risks Indian markets Japan Japan Tokyo 2.20–3.50 1.99% N/A 2.91% 2.01% 0.87% –0.02% 1.58% 1.19% 1.97% have, I think people are overexcited.” (JPY) Osaka 2.80–4.00 Mainland China –0.92% –2.96% N/A –0.90% –2.04% –2.93% –1.33% –0.94% Meanwhile in Australia, recent interest South Korea Seoul 4.00–5.00 (CNH) –1.72% rate cuts, combined with continued rental Singapore Singapore 3.00–3.75 Singapore –0.03% –2.07% 0.90% N/A –1.14% –2.03% –0.43% –0.04% growth in the Sydney office market, have (SGD) –0.82% led some to suggest that further cap India Gurgaon 8.00–8.75 South Korea 0.88% –1.16% 1.81% 0.91% N/A –1.12% 0.48% 0.09% 0.87% rate compression is on the cards. The Mumbai 8.00–8.75 (KRW) reason, according to a Sydney-based Bangalore 8.00–8.75 Europe 1.96% –0.08% 2.88% 1.98% 0.84% N/A 1.55% 1.17% 1.94% fund manager, “is historically strong (EUR) occupational markets with a macro overlay Property currency (investing into…) Australia of interest rates being lower for longer—the 0.39% –1.65% 1.31% 0.41% –0.73% –1.62% N/A –0.41% 0.37% (AUD) 10-year bond rate is below 1 per cent U.K. Source: CBRE. 0.75% –1.29% 1.67% 0.77% –0.37% –1.26% 0.34% N/A 0.73% now.” (GBP)

U.S.A. 0.02% –2.02% 0.94% 0.04% –1.10% –1.99% –0.39% –0.78% N/A (USD)

Source: JLL.

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Japan: Key Themes In developing Asian nations, the Interest in office assets is buoyed by High prices in the office sector have seen Osaka, and Nagoya have been unchanged modern warehousing stock has provided “Fifteen years ago, these were secondary fundamentals of demographics and “super-strong fundamentals,” according many investors turn to the multifamily for 16, 12, and six quarters respectively, bumper opportunities for developers and cities where you could chase yield, but economic growth underpin real estate to one private-equity investor. “It’s been residential space over the last few years, according to CBRE research. However, investors. Nor is there any sign of the there was always an underlying problem investment and—for investors active in impressive to see the steady demand for but competition for assets has driven there are pockets of growth: Ginza, logistics boom ending—vacancy rates of liquidity. However, Osaka, Nagoya, and those markets—outweigh short-term office—I think that’s surprised most people cap rates to levels that some see as Tokyo’s prime shopping district, is seeing in the core markets of Greater Tokyo, Fukuoka repositioned themselves after difficulties and barriers to entry. In Japan, because there’s been substantial supply prohibitive. According to one Tokyo-based rising rents and interest from investors. Osaka, and Nagoya have been declining, the financial crisis and expanded their the situation is precisely the opposite: in 2018 and 2019. But that’s pretty much investor, “The pricing is so tight we’ve according to CBRE, with vacancies in the economic base. I don’t think these cities gross domestic product (GDP) growth been spoken for, so the office market in stopped looking at residential. We still see According to one investment manager, Tokyo Bay Area falling to zero in 2019 for are secondary anymore—they’re just not has rarely reached 2 per cent in the past Tokyo is still very promising.” it coming across, but Tokyo is trading in “People are looking for high street the first time since 2008. Tokyo.” five years, and the country has probably the low 3s [i.e., 3 per cent].” With some retail, but it is not really available. the worst demographic outlook of any However, strong activity by Japanese properties selling at a higher per-square- Domestic [players], especially the trading “Whether you are looking at assets Major provincial cities still offer higher nation in the world. Nonetheless, Japan REITs and the continuing dominance of metre price than brand-new condos in the companies, continue to be the most focused on e-commerce, or just general yields than Tokyo; while office cap rates continues to be a popular destination large domestic developers over high-end same submarket, operating incomes are aggressive buyers, picking up whatever logistics, there is a lot of life in the sector in the capital are now between 3 per cent among large investment funds. It offers office space mean that pickings are slim further reduced once leasing, renovation, they can. But there’s also concern over the and the price is still making sense when and 3.5 per cent, the equivalent in Osaka liquidity, a large base of investable assets, for all but the best-established foreign and turnover costs are factored in. “So, consumption tax going up and whether you can buy in the mid-4s as opposed to and Nagoya might offer 50 to 75 basis and easy access to nonrecourse bank players. “We are trying to find stuff in the if you’re buying a 3-cap [rate], you’re that will be sustainable, particularly if the low 3s,” according to one interviewee. points in additional yield. finance at rates that still come in at less market, but we just cannot find enough probably looking at a 2.5 on a net cash tourism tails off because of the [problems] than 100 basis points, despite moderate to buy,” said one fund manager. “The flow basis.” with South Korea and China.” Difficulty placing capital in Tokyo is leading tightening over the last couple of years. [foreign] guys who bought office have sold growing numbers of investors to look most of it, so the sellers are domestics Despite rising tourist numbers, the outlook Although Japanese shoppers remain to other domestic markets as sources Overall investment volumes have been and they’re selling to other domestics.” for Japanese retail property is somewhat seemingly immune to the appeal of of more affordable deals. “The liquidity slowing for the past 12 months, but asset flat: average prime retail rents in Tokyo, e-commerce, the structural shortage of has improved,” said one fund manager. performance remains strong. Both the office and residential sectors continue to see yield compression.

Pockets of Distress with access to a credible capital partner that all but the largest players are having Other opportunities for distress relate to is likely to worsen after the Olympics, less will survive. Developers are struggling for problems accessing capital. Particularly overcapacity. In Japan, for example, the savvy owners and operators could run into Although in general, high prices and survival.” As a result, distress plays are at risk are overstretched operators in the tourism sector has been a huge success trouble before that. compressed yields remain the norm, signs becoming a major opportunity. A newly residential leasing and coworking sectors, story over the last few years. That may of stress have emerged in a few markets, introduced bankruptcy code means that both of which have already seen business have been too much of a good thing, Further opportunities exist in Vietnam, caused in particular by a lack of access more assets are being auctioned off by failures. however—overbuilding in the hotel sector which suffers a perennial problem from to capital. In India, for example, while banks at a discount. is already creating distress situations. overbuilding in the condo sector, and the office sector is a runaway success, While some see a major opportunity, also in Australia, where Chinese buyers residential developers are in a downward Still, the prospects of structuring such predicting “massive failures,” others If Japan’s current diplomatic quarrel with of residential development sites in recent spiral. A government crackdown on investments using debt may be even are more sanguine. According to South Korea is not resolved, distress years bid heavily to buy land but today banking-sector malpractice, combined more appealing. “Anyone coming to one Shanghai-based fund manager, may become worse, given that nearly a are sometimes unable to source capital to with growing credit risk among India saying, ‘I have capital to deploy for “I see a lot of people talking about quarter of Japan’s 2018 tourists came complete their projects. One local private developers, has seen banks pull the plug distress’ should be able to make equity- it, but I hardly see any deals, for a from that country. According to one equity investor said that his company had on real estate lending. With the nonbank like returns doing senior structured last-in, couple of reasons. First, these kinds of Tokyo-based fund manager, “You have been active in the “for-sale condominium financial sector in similarly dire straits, first-out senior debt, with potential for IRRs opportunities are complicated. If it’s really a lot of construction, and a lot of these market, where there’s been a lot of developers now have nowhere to turn for [internal rates of return] in the region of 22 distress, it involves lawsuits, foreclosure hotels have unsophisticated owners and overbuilding, the capital market flow is finance. to 24 per cent”, continued the consultant. arrangements, and negotiations, so it’s small, undercapitalised management disrupted, and the financing market is “So far, few people have woken to that hard to close. And the other reason is that companies that are in on either a lease or disrupted. That’s creating an opportunity In July 2019, a report by investment bank opportunity and just a handful of funds people are still not desperate enough. With an operating agreement, but they will not we’re taking advantage of.” Goldman Sachs predicted that 70 per have entered the market.” the Chinese government already talking have the ability to perform. These guys cent of Indian developers could go out about relaxing money supply by cutting have been backed but can’t service the of business within the next two years. In China, meanwhile, a government bank reserve ratios and other measures, debt. So, I think going forward there’s “These are painful times,” one Delhi-based crackdown on nonbank lending, together it’s hard to see it getting worse.” going to be opportunity once there’s a bit consultant said. “The whole game is with new central bank rules tightening of distress in tourism.” While the problem going to become redefined; only people access to real estate borrowing, means

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According to one fund manager, “To environmental policies and performance, Sustainability: Coming of Age Coworking: Does It Work? Exhibit 1-11 Penetration of Coworking Operators in Asia Pacific Cities get investor funds, you need to have with data then made available for use by Over the last decade or so, interviewees a real ESG [environmental, social, and investors to support their allocations of The failed initial public offering (IPO) of in the Asia Pacific region have spoken corporate governance] programme and capital. the world’s largest coworking company wistfully about efforts to improve the platform. When we see RFPs [requests in September 2019 has forced investors efficiency of their buildings: green was for proposals] come in, there’s a huge “GRESB gives investors a number,” said globally to reconsider the risks relating 6% 6% 6% good, but all too often they were deterred ESG section. From our perspective, you one subscriber to the programme. “They to the structuring of the industry’s lease by the perceived costs of upgrading. need energy efficiency as one of the key can see that firm X scores 86 and firm agreements. Usually, operators obtain Today, though, a threshold of sorts requirements of any asset, simply because Y scores 50 and they can point to firm space from landlords on long-term leases 4.6% appears to have been crossed. For (often including long rent-free periods, the capital markets are going to start X being better. They don’t even need to 3.9% developers, owners, and occupiers of nonrecourse terms, and commitments 3.7% discounting it if that stuff is absent.” know how. And, of course, it makes you 3.5% prime real estate, sustainability is now from landlords to undertake costly fitouts) look worse if you’re not in GRESB.” 3% 3% intrinsically linked with quality; it is hard to The other catalyst is the need for that is then sub-let to their own end users imagine a worthy grade A office building regulatory compliance. Requirements vary One frustration for ESG advocates is the on a short-term basis. This mismatch not rated under the Leadership in Energy means that operators at risk of losing 2% from government to government around difficulty in demonstrating a causal link 1.4% 1.5% and Environmental Design (LEED) or some the region, with Australia and Singapore between ESG initiatives and improved tenants in the event of a downturn will other local certification scheme. seen as the strongest promoters of asset performance. However, according still be bound by the terms of their own environmental sustainability, and smaller to one interviewee, “If you look at the (longer) leases with building owners (who According to one global investor, “For developing markets having less imposing investor-led indices and benchmarks, are in turn exposed if an operator goes all our office investments, we are now rulebooks. That said, buildings in better risk-adjusted returns are linked to a out of business). In addition, the extent required to have some sort of green of the losses disclosed in the abortive Seoul

emerging markets are often some of the broader management of ESG issues.” Tokyo Beijing Sydney Mumbai certification, and we are happy to spend IPO now raises further questions. In SAR Shanghai

least efficient, meaning they have more to Shenzhen Bangalore Singapore Delhi NCR Melbourne the money required to achieve it because gain by introducing efficiency measures, particular, is the industry’s business model Hong Kong we consider it [both] a differentiator and even without mandatory measures. sustainable over the long term? And, more downside protection.” important in the short term, will operators still be able to raise equity and debt in an In any event, larger real estate players Source: CBRE Research, May 2019. The drivers for this are twofold: capital expect more regulatory control in this area environment where so few operators are and regulatory. On the one hand, there as governments fall increasingly in line currently profitable and competition is only is growing awareness that upgrades to with the Paris Accord, which aims towards increasing? building infrastructure can create real net-carbon-neutral economies. “The big As a result, landlords are now changing This type of relationship is becoming financial value—either through reduced risk,” said one investment manager, “is Given the sheer volume of coworking the way they contract with coworking increasingly common in the United costs such as electricity, or through higher that you buy something now that will fail space now on the market, these risks occupiers as they seek to reduce their risk. States. According to an executive of one rents. According to one investor involved the regulations or the requirements of apply not only to coworking operators, “We are shying away from leasing out the U.S.-based coworking operator who in fitting out a building in Kuala Lumpur, investors some way down the line. In three but also to building owners and potentially whole building [to operators],” continued has negotiated numerous such deals, “You’re looking at cloud management and or four years’ time, you might find that you also banks that have financed the the fund manager. Instead, “we may give “The landlord is now our client, so we’re very sophisticated artificial intelligence can’t lease it or sell it because it doesn’t purchases of buildings in which there a third or a quarter of our space to them, structuring these top-line revenue-share that can optimise the running of the have the environmental credentials.” are large concentrations of coworking building in terms of things like predictive facilities. According to CBRE, the total and then try to include more covenants, structures or profit-share structures where requiring a big deposit or guarantee.” landlords put up the majority of capital, maintenance, occupancy usage patterns, There is also growing pressure on this office footprint of coworking operators in but get a premium to the market rent. and optimisation of temperatures using a front from multinational occupiers, the Asia Pacific region has risen more than Another way the flexible space dynamic For example, in New York our rent is $64 number of different data points, including although the environment in the Asia 300 per cent since 2016, reaching some is changing is through the emergence per square foot, but we’re rerenting that satellite weather forecasting.” Pacific is not currently as demanding as 54 million square feet as of March 2019. of landlord/operator partnerships, with space for $380 per square foot. So, we in the West. According to one adviser: The industry now occupies more than 3 operators looking to secure management say to the landlord, “You’re missing out on In addition, private-equity investors, large “Elsewhere in the world, we are starting to per cent of office supply in the Asia Pacific contracts to create flexible workspaces, that opportunity—you could be making real estate investment trusts (REITs), and see major corporates requiring LEED Gold region, compared with 2 per cent in the either within individual buildings or across a 40 per cent to 50 per cent premium most major developers almost inevitably certification as a condition of tenancy. “We United States. an entire portfolio of assets. Coworking on a traditional rent.” Although so far have to cater to the requirements of have not seen that yet here, but I think that companies thereby gain access to a this model is relatively rare in the Asia institutional investors from Europe will eventually be the direction of travel.” According to one Shanghai-based fund and North America, who by and large manager, “Lots of smaller coworking large client base of established corporate Pacific, landlord/operator partnerships tenants while simultaneously slashing can be expected to evolve quickly over the require entities in which they invest to Meanwhile, more and more Asia Pacific companies in China are now having both rental overheads and the large capex medium term. meet a minimum standard in terms of real estate players are signing up to trouble servicing [debt]. There is definitely commitments needed to set up new sustainability. Larger European pension the Global Real Estate Sustainability demand, but the dilemma for investors is coworking centres. Landlords, meanwhile, funds, for example, will not give capital Benchmark (GRESB), which requires the need to consider whether there will can upgrade amenities for existing tenants to managers who cannot demonstrate managers of assets to report be a negative impact on exit in terms of environment credentials. pricing because the credit standing of the and are spared from having to compete industry is deteriorating.” with the operators by creating standalone platforms.

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Retail: Is Asia Different? Exhibit 1-12 Projected Annual Total Return by Sector and Country in Asia Various reasons have been cited for this, to entertainment or F&B, that traditionally The other crucial factor in shopping centre one being that most locations in Asia won’t pay as high a rent as fashion.” management is positioning the mall in its On a global basis, the retail sector has Pacific, 2019–2023F are structurally undersupplied compared community. “The Asian shopping centre become real estate’s whipping boy, Income return Cap rate shift NOI growth Total return Aggregate with developed markets. Only in Australia Meanwhile, non-discretionary retail has always been closer to the heart of unloved by investors and attracting dour is there substantial per capita retail continues to find favour as a defensive the community than elsewhere,” one headlines as it struggles to fend off the 10% supply. While there has been localised asset because shoppers will always developer said. “And I think that goes to threat from online competition. The story overbuilding in China and India, these need neighbourhood retailing. In China, the oldest paradigm of what a shopping is similar in the Asia Pacific, although markets still lag Europe and North America “nondiscretionary expenditures in retail, mall actually is, which is a town centre. somewhat less dire. RCA data show 8% in total supply. food and beverage, and some mall The innovation is a really simple one, a decline in regional retail investment properties are still doing pretty well,” one which is just to look at any neighbourhood volumes of 7 per cent to $16.5 billion 6% More important, the fact that Asian investment manager argued. A number of and what makes it thrive and provide all in the first half of 2019, a slower rate of consumers are the most online savvy in interviewees also commented that retail that front and centre.” decline than seen globally, while survey the world creates potential to incorporate assets are the least homogeneous in real respondents ranked the sector the one 4% digital technologies within new retail estate, making generalisations difficult. Often, the most innovative malls are with the weakest prospects, rating it less developments. Nowhere is this clearer The best mall in a city can therefore thrive, those in a niche location, or where space highly than in our 2019 report. than in China, where malls now serve while all those around it are struggling. is constrained. “If you go to a place like 2% both online and offline shopping as Shibuya in Tokyo, you can see malls However, a number of large investors well as providing a higher proportion of Retail has always been the most actively which are constantly remixing themselves continue to participate enthusiastically entertainment, education, services, and managed of the core property sectors, organically. They don’t have long-term in the sector and have made substantial 0% food and beverage (F&B) space. “China and that has intensified as landlords try leases or anchor tenants, or if they do, it commitments in several regional markets, will come out of the retail slump before to create spaces that will attract footfall. will be retailers who turn their stock over in particular mainland China, South Korea, others because they’re further along in According to one interviewee: “Landlords really quickly.” and Hong Kong SAR. -2% this amalgamation of online and offline, are starting to look at providing a more Office Retail Industrial Residential of logistics, of the next iteration of what immersive experience and a more Some interviewees also see an retail space is really about,” said one personalised offer in their malls, which opportunity in secondary malls, which -4% developer. “But to get there, retail has had technology—the ability to collect and can be bought cheaply and refurbished to to go through a revaluation, [because] if analyse data—is enabling them to do.” provide more up-to-date offerings, which Japan Japan Japan Japan Australia Australia Australia you have a lot more retail space devoted might include coworking and other service Singapore Singapor e Singapor e China Tier 1 China Tier 1 China Tier 1 South Korea South Korea South Korea

Source: DWS, as of June 2019.

Australia: Key Themes

“If I was putting my money anywhere in the most efficient markets, and I would Australia’s residential sector has been talking to are new guys, and mainly Asian commercial real estate debt specialist. As Also, as cap rates continue to compress the Asia Pacific in the long term, I would put Australia on the list of very efficient one of the few in the Asia Pacific region groups—a lot of pension funds, insurers, one investor said, “With [domestic] banks across the board, some asset classes are continue to put it in Australia.” With both markets.” to suffer a downturn over the last couple or sovereign wealth funds.” unable to participate at the same level, or losing their appeal. For the past few years, Sydney and Melbourne continuing to of years. Prices may now be stabilising, in some cases not able to participate in for example, Australian logistics has been rank near the top of this year’s investor Investor enthusiasm is supported by however, following two interest rate cuts, Going forward, there is a general some of the foreign deals, it has opened a go-to sector for investors. Today, this is ranking survey, this fund manager’s continued strong performance across tax breaks, and the easing of mortgage expectation that Japanese institutional up this opportunity to nonbank lenders. changing. According to one fund manager, opinion clearly has widespread support. the office and logistics sectors. Savills borrowing requirements. In Sydney and investors also will soon become major And it’s a pretty exciting opportunity, “Industrial is so ridiculously priced at the Australian markets offer good (for Asia) research for the second quarter of Melbourne, markets have also been investors in Australian markets, since they particularly at this point in the cycle where moment—I think you would be mad buying yields, reasonable liquidity, ongoing rental 2019 showed continuing rental growth boosted by a spike in purchases by Hong offer the type of transparency and liquidity for some investments you would much it at a 4.5 per cent yield when you can buy growth, a reliably strong economy, and in Australia as well as ongoing yield Kong investors looking for a safe haven that Japanese capital is seeking as it rather have debt than equity exposure.” prime offices in Sydney and Melbourne off even a weak currency to boost the appeal compression, even in Sydney, where as the city’s street protests continue. One begins to diversify outside of Japan. similar cap rates. Australia’s a big place for offshore investors. RCA data show that average prime office yields are now less developer cited how the influx of new Some investors strike less positive notes, with a lot of land. Industrial has never really Australian investment volumes rose 3 per than 5 per cent. capital has resulted in a resurgence of Nonbank debt is featuring more and more however. Many of Australia’s prime generated rental growth above inflation, cent year-on-year in the first half of 2019, sales at some inner-city projects that had as a means to finance real estate deals in properties are tightly held by local REITs, and with the land supply available, I don’t making it the only one of the five busiest As one Australian fund manager said: “The previously been lagging. Australia, thanks to a partial withdrawal and the huge volumes of cash held by think 40-odd years of history is going markets in the Asia Pacific region to record office markets just continue to go from from the market by the large domestic Australian pension funds mean that to change too much. There’s also an an increase in transactions. strength to strength, particularly in Sydney Despite a significant pullback from banks, whose lending is hobbled by competition for assets in that market will obsolescence risk with industrial and and Melbourne, based on historically Chinese investors due to restrictions on increased regulatory pressures and always be tough. In addition, there is logistics.” According to one private-equity investor: strong occupational markets. Vacancy outbound capital, Australia continues to higher capital requirements. The funding little incentive for building owners to sell “Australia is pretty fully priced, but I think rates in Sydney and Melbourne are at attract global players. According to one opportunity is expected to grow to some because they may not be able to get back Overall, though, prospects remain positive; maybe late-cycle people gravitate towards historic lows.” fund manager: “A lot of the guys we are A$50 billion by 2023, according to Maxcap into the market if they do. 2019 marks the 27th year since the last Group, an Australia and New Zealand Australian recession.

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industries, as well as a contemporary Focus on the End User Some observers take a more philosophical LAST-MILE FULFILMENT is one DATA CENTRES are the favoured niche sector. But emerging markets also are retail mix. According to one architect, approach to this phenomenon. According emerging subcategory. According to one sector in this year’s Emerging Trends consuming ever-growing volumes of data, “Repositioning is not so glamorous, Today, real estate investors across the to one adviser, “There is no return on Singapore-based adviser, “There is clearly survey, driven by growing appetite for and investors from Jakarta to Manila but I think that is where a lot more Asia Pacific are taking an increasing capital anymore, so you look to make a need for urban logistics now, because if data by cloud computing providers and mentioned the sector as one with a high experimentation will actually occur.” interest in their end users—the shoppers money on the service component—you you are going to order online and expect a the impending advent of 5G mobile local growth trajectory. and office workers in their buildings—as want a bit of real estate in the densest man on a bike to arrive in 30 minutes, the technology. “There is huge demand for In China, one foreign opportunistic opposed to the companies that sign the location you can [find] where you can get centre must be within 30 minutes’ ride of data centres,” according to one adviser. China is an entirely separate market, investor spoke of repurposing tenancy agreements. the greatest number of people using your where you are sitting.” “It’s probably up with logistics as the and many investors prefer to stay away upscale malls to appeal to an edgier real estate and then make money through sector everybody wants to get into. The because of regulatory barriers and demographic: “We’re looking at a In the office sector, this manifests as an services to them. It is all about owning Enabling last-mile delivery is tricky, though, problem for the big investors is scalability, concerns over data security. However, strategy to reposition [assets] that increased focus on health and well-being, assets in dense urban locations.” because city-centre land is expensive because data centres are generally not it has huge potential and notable were built on the basis of being filled whether this means providing end-of-trip and logistics warehouses are rarely very big physically or even in value. So, if undersupply. A recent report from DBS with [stores like] Gucci. We’re going facilities for cyclists, health programmes, small. Investors are therefore thinking you’re going to invest, you need a lot of Bank found a huge mismatch in supply in and buying at discounted prices or clean air for tenants. “In China, there Nervous about Niche? creatively about using space. For example, them, and I think some of the big investors and demand in markets across the with the idea of re-tenanting it with is a very strong focus on indoor air as shopping centres lose business to will find that a little bit fiddly.” Mainland, with all the primary cities lacking For several years, higher returns offered entertainment, retail services, doctors’ quality, and this is a focus for workers e-commerce retailers, vacated capacity sufficient capacity. The prime challenges by alternate sectors created a favoured offices, better clinics–the kind of stuff and thus also for HR [human resources] can be leveraged as a fulfilment facility, as South Korea, Japan, and Australia are the for China data centres lie in finding land refuge for regional investors seeking that pays a very different rent, but departments. That translates into tenant can older, lower-grade industrial buildings, first Asia Pacific nations to begin the rollout in cities where demand exists and in to hit targeted returns. These remain if you buy at the right rent point in a stickiness,” said one investor. as long as they are accessible. Vacant of 5G services and, alongside Singapore, securing required supplies of power. popular today, although concerns are very good urban location, you’ve got floors in fringe office locations could also are the prime targets for investors in the emerging about niches that feature a a good asset. It’s a pretty interesting The concept of “space as a service” has be adapted as logistics space. heavy operating element. Sectors such opportunity.” until now been popularised mainly by as student housing, data centres, self- coworking companies, but real estate COLD-STORAGE FACILITIES are storage, and senior housing are high- For some, the current negativity investors—even if they have conventional another logistics spinoff, driven in this case maintenance plays, where investments are Exhibit 1-13 Niche Sectors in Which Investors Are Now Active or towards retailing is welcome. leases in place—are starting to see by evolution of the online grocery sector. often structured using separate operating Plan to Be Active in 2020 According to one Australian investment opportunities in providing more services Aggregate online sales of groceries in the companies. As one investor noted, manager, “I think this is going to for end users, including retail space within Asia Pacific are forecast to surge from “There are a lot of moving pieces that real present opportunities, because the offices, for example. US$80.7 billion in 2018 to US$260 billion in estate investors do not understand—it’s 2020 2019 fact that there is such a negative 2023, according to researchers Forrester. a different way of investing, where you’re attitude towards retail is going to lead The service component is increasingly important in retail spaces too, as omni- trying to capture more of the operating to mispricing. With all the noise around “Cold storage is interesting, just because 64% channel retailing begins to challenge profit and move up the value chain. It the sector, there is going to be an of the rise of the middle class, and the Data centres 46% is a lot more complicated, and running opportunity for the next 12 months the traditional landlord/tenant dynamic. consumption trends around frozen-food,” a business is very, very different from 54% or so, and what we’re starting to hear Whereas previously, retail landlords simply a private-equity investor commented. “And collecting rent. It is part of that continuum Shared/serviced offices 52% from the bigger global investors [is] that provided space for tenants and let them not just in China, but places like Australia between being a landlord and being they’re recognising it as well. They are focus on customers, they now have more [also] have pretty significant food exports, 52% an owner-occupier.” As a result, some Student housing actually seeking out a potential buying direct involvement, with an increasing so frozen-food growth is driving demand 46% focus on “programming,” i.e., the software investors are beginning to question opportunity for assets that very rarely, if for cold storage above and beyond what 51% of their spaces. According to one whether the investment required in an ever, trade.” you would expect in a developed market.” Business parks 43% developer, “I think the general investment operating company is actually diluting real into programming has had to increase estate returns. 51% CBRE research suggests that for the Senior housing significantly to keep people there. And Asia Pacific to build the same per capita 41% then working with some of the tech-related The industrial and logistics sector has cold-storage capacity as the United States 37% companies as they roll out new products proved one of the most popular with Affordable housing would require 411 million cubic metres 42% global real estate investors over the past and showrooms and display their products of new supply. It also said that yields for decade, with the bulk of investment dollars 34% in a different way. It’s all about trying to cold-storage facilities are 50 to 150 basis going to create modern logistics facilities. Self-storage 30% create a more unique experience.” points higher than for warehouses, with But with logistics now firmly established as tenants generally also taking longer leases 29% a core asset class, a range of subsectors of 10 to 25 years. Resorts 28% within the industry is drawing investor attention. 0% 20% 40% 60% 80% 100%

Source: Emerging Trends in Real Estate Asia Pacific 2020 survey.

16 Emerging Trends in Real Estate® Asia Pacific 2020 Emerging Trends in Real Estate® Asia Pacific 2020 17 Chapter 1: Defying Gravity?

says the chances are that over the next Exhibit 1-14 Prospects for Niche Property Types in 2020 Accounting for Climate Exhibit 1-16 Global Economic Losses by Peril Change 10 years the asset may be knocked offline six times by flooding and there are no A relatively new concept for real estate protections in place, well, nobody is going 2020 2019 investors is that of climate risk and to pay you for that building.” 80 2018 Average (2000–2017) Median (2000–2017) resilience—how exposed an asset or 72 a portfolio is to the various impacts Owners and investors are seeking to 70 66 Data centres 6.60 6.30 of climate change, including warmer harden assets against the risk of extreme temperatures, higher sea levels, and the weather events. They are also using 60 Senior housing 5.79 increased risk of extreme weather events. 6.11 energy efficiency and other mitigation 49 measures to reduce their risk and improve 50 5.76 41 As extreme weather events increase in 39 Student housing asset efficiency. For example, firms in 37 5.95 frequency, awareness of potential negative 40 36 Australia are using native landscaping to 31 5.59 impacts on long-term asset values is 28 28 Affordable housing absorb heat and reduce air-conditioning US$ billions (2018) 30 26 5.90 24 forcing owners and investors to change costs. 19 19 5.56 the way they underwrite investments. 20 17 Self-storage 13 5.44 According to one fund manager, “Most “We have to worry about what those 10 8 10 77 5.53 commercial properties tend to be around 4.2 3.9 models are going to say and make sure 3 2.3 Shared/serviced offices 1 0.8 6.00 water—close to either an ocean or a river, we have a mitigation plan in place,” the 0.3 0 Tropical Flooding Severe Drought Wildfire Winter Earthquake EU Others 5.51 because that’s where everybody is. So, fund manager continued. “In most cities, Business parks cyclone weather weather windstorm 5.61 if we have more severe weather events, we as individual asset owners should not there is potential for flooding, for example. 4.73 assume the government will take care of Resorts 4.79 I think the industry will move quickly on this for us.” Source: Aon. this, even more quickly than with regard to 123456789 carbon reduction.” Abysmal Fair Excellent One upcoming technological development “There’s a huge amount of climate Embracing Technology that will have a significant effect on real risk in sea-level rise in Greater China, While the real estate industry has estate in the near future is 5G mobile Source: Emerging Trends in Real Estate Asia Pacific 2020 survey. and [particularly] in the Greater Bay been a notoriously slow adopter of networks, which are already being rolled Area there’s lots of risk exposure,” one new technology, both awareness of out in South Korea, Japan, and Australia. interviewee stated. “For areas such as and investment in property technology According to one property advisor, “5G Miami, there is an emerging ecosystem (proptech) strategies are growing rapidly. will offer richer and more immediate data, around climate resilience, but I am not Exhibit 1-15 Reasons for Investing in Niche Sectors Several developers have launched their which can be used to adjust heating and sure that is the case in China.” own funds or incubators to gain exposure cooling, automate security, and improve to potentially game-changing applications. the performance of a building.” The real estate industry as a whole This has become necessary because has begun to develop more advanced most innovation in proptech now comes As dozens of cities in China, India, South strategies to recognise, understand, and Less competition from the technology industry rather than Korea, and Japan undertake smart-city from other investors manage risks, but still mainly relies on from real estate. initiatives, 5G devices will be crucial to insurance to cover the majority of the transmitting the big data required for 13% shorter-term climate change risk. However, Perhaps the simplest (and often the efficient processing of traffic, waste, water, Demographic while insurance has remained generally 27% demand drivers cheapest) way for landlords to use tech- and power. attainable in risk-prone areas, being nology is via software: retail landlords use Diversification insured does not protect investors from a 18% customer loyalty apps, which can also be Technology is not without controversy, reduction in asset liquidity. used for parking or food ordering, while however. Some observers believe larger office investors in the region are that data security will become a major In the words of one fund manager, “Pretty trialling apps allowing tenants to book governance issue for landlords as soon, the insurance industry is going to 22% Higher yields facilities and services. Apps can also be they deal with the thorny issue of data 20% reach a tipping point, where they don’t just Stable income return used, in tandem with sensors, to control collection and use. According to one look at historical events to try to determine or monitor different aspects of building advisor, “Data privacy is going to become the premium for a property, they are going functionality, including in particular a C-suite issue for real estate companies. to use modelling to see what potential air-conditioning and lighting systems. With smart cities, increasingly digitised future events might happen. So, they will Creating “smart” buildings reduces costs operations, and tenant data, it is on the Source: Emerging Trends in Real Estate Asia Pacific 2020 survey. model the risks for a building and charge and can provide crucial occupancy-related horizon.” accordingly. If a buyer gets a report that data that help boost efficiency.

18 Emerging Trends in Real Estate® Asia Pacific 2020 Emerging Trends in Real Estate® Asia Pacific 2020 19

Chapter 2: Real Estate Capital Flows

“The appetite for real estate inflows into Asia has tightened the last six to The main driver of Asian cross-border South Korea is another market exporting outflows remains the same: a huge surplus large amounts of money offshore, and nine months. Has it gone to zero? Certainly not. But a lot of investors have of investment capital held by regional was the only major market in Asia where institutions and sovereign wealth funds year-on-year outflows increased in the first been looking to take risk off the table, so their propensity to invest into that cannot be reinvested domestically half of 2019. Most South Korean money Asian real estate has diminished.” without creating asset price distortions. is heading out of the region, though, due Increasingly, too, investors are recognising to the dynamics of currency hedging, the value of diversification of asset bases with the focus switching from the United as a hedge against home-market risks. States to Europe. According to one Seoul- In the face of dwindling global trade billion—the lowest figure since the start of based consultant, “Nowadays, FX [foreign and growing geopolitical headwinds, 2012. At the same time, though, the value In 2019, the biggest exporter of capital exchange] hedging gives you a premium cross-border investors turned decidedly of cross-border deals involving capital regionally was Singapore, which was also for investments in Europe. So if we get a cautious in 2019. And with antiglobalist sourced from within the Asia Pacific region biggest last year. Although the current 6 per cent yield in, say, Paris, then after agendas now increasingly prominent in saw a substantial increase (i.e., up 23 dominance of Singaporean capital is FX hedging, we get an extra 1.5 per global politics, cross-border investment per cent year-on-year) to some US$7.76 due partly to slowing outflows from cent. In the U.S. market, though, it’s the in the Asia Pacific declined in the second billion. This suggests two things: first, China, Singapore’s outbound cross- opposite—we lose 100 to 150 basis points quarter of 2019 to some 30 per cent of antiglobalism is not as big an issue in border investment has been growing [bps].” Because South Korean investors total transactions, according to analysts the Asia Pacific as it is in the West, and at a consistent 12 per cent annual rate tend to focus on cash-on-cash returns, Real Capital Analytics (RCA), down from a second, the relentless exodus of Asian for the last five years. Often involving hedging costs have become a major record 41 per cent in the first quarter. capital into cross-border investments seen portfolio purchases, Singaporean outflows differentiator for investors, as are lower over the last five years shows no sign of comprise a mix of sovereign wealth fund interest rates available in the Eurozone. Unsurprisingly, this drop was due mainly abating. In fact, with intra-Asian deals money, investments by the city-state’s to declining activity by American and hitting record levels in the first half of 2019, various integrated developers, and also South Korean investors are targeting European investors, with such deals falling at just under US$17.3 billion, another new capital from Singapore’s large (and for assets mainly in Paris, Amsterdam, and a substantial 28 per cent year-on-year high-water mark is likely to be set for full- the most part very liquid) REIT sector, Frankfurt. In addition, interest is growing in the second quarter to just US$2.54 year transactions. which is forced to look overseas given the in further-flung destinations in Eastern relative shortage of suitable investment Europe. In part, this is because London, opportunities remaining in the domestic long a favourite of international capital, market. In addition, Singapore acts as an has somewhat lost its shine due to the Exhibit 2-1 Capital Flows, Share of Capital Source by Country/Territory, aggregator of capital from around South uncertainties created by Brexit. Beyond FY’18/H1’19 East Asia, packaging money into locally that, though, markets such as Poland, the based investment funds that is then Czech Republic, and Slovakia are now deployed internationally. drawing more attention from international investors due to tightening yields across Domestic Cross-border within APAC Cross-border from outside APAC China, meanwhile, continues to restrict Europe. One South Korean consortium, 100% capital outflows on policy grounds. This for example, recently purchased an office looks unlikely to change soon, but while building in Slovakia’s capital, Bratislava at Chinese flows to Western markets (in an acquisition yield of 5.75 per cent. This 79.8% 79.3% 80% particular the United States) have therefore migration of capital towards emerging ground to a halt, Chinese investments European markets is likely to continue. 63.1% 62.1% within Asia have remained stable, with

60% 56.4%

52.5% capital directed mainly to Hong Kong and In terms of the biggest regional recipients Singapore. This is because significant of cross-border flows, Australia and 40% amounts of Chinese capital are still in Singapore were the major winners in 2019. 35.2% 34.1% circulation that are beyond the reach of Perhaps surprisingly, given current trade

22.7% domestic export controls. According to tensions, China also featured strongly. This 18.5% 18.4% 20% 17.8%

15.2% one institutional fund manager based in is because, although many foreign funds 12.4% 12.3% 9.4%

7.7% Singapore, “You can definitely see there have put China strategies on hold due to

2.9% still is Chinese capital, particularly from the uncertainties caused by U.S.-China trade 0% FY'18 H1'19 FY'18 H1'19 FY'18 H1'19 FY'18 H1'19 FY'18 H1'19 FY'18 H1'19 large and well-funded [players]. It’s capital friction, substantial volumes of capital that Singapore Australia South Korea Japan Mainland China Hong Kong that’s already overseas—and even if you were already committed to China-facing SAR are just looking to rotate [that], you’re still funds are now being actively deployed. talking about massive amounts [invested] in real estate.” Note: Apartment, hotel, industrial, office, retail, and senior housing transactions included. Entity-level deals included. Development sites excluded. Source: Real Capital Analytics.

22 Emerging Trends in Real Estate® Asia Pacific 2020 Emerging Trends in Real Estate® Asia Pacific 2020 23 Chapter 2: Real Estate Capital Flows

Global Funds Under-Allocated Exhibit 2-2 Expected Change in Capital Flows into Asian Markets U.K. If you look at London, which has Exhibit 2-4 Regions Targeted by Private Real Estate Investors over the between Now and the End of 2020 one-third the population of Shanghai, it’s Next 12 Months, Q1 2018 vs. Q1 2019 While for the time being many real estate a very liquid market, turning over in its investors in the West are adopting a wait- entirety every five years. So even including and-see attitude, the last several years Japan and Australia, which are more liquid Q1 2018 Q1 2019 have seen strong increases in global markets, [Asia Pacific] transaction volumes allocations to Asia Pacific markets. This 61% Americas 5.40 are remarkably low, which means that— 59% is mainly an exercise in diversification, especially in relation to core-type assets— as fund managers seek to plug an you’re aiming at quite a small opportunity Asia-shaped gap in their portfolios. In Asia Pacific 6.63 set.” This is one reason why build-to-core 37% principle, therefore, although some may 36% 36% has become such a popular investment 30% question whether risk-adjusted returns strategy among institutional investors 26% are adequate, international investors across the region. Europe 5.52 need little convincing of the merits of an 13% Asia Pacific strategy. According to a fund 9% 5% 6% manager at the investment arm of a large 2% global insurer, “Both the demographics Middle East/Africa 5.30 and the urbanisation in Asia are strong Global trends relative to the other continents. Europe So, although historically a lot of our 123456789 Large Stay Large Asia Pacific

allocation was back in Europe, with more decline the same increase North America Rest of the world

transparency, a lot more information, and Emerging markets people travelling a lot more, there is clearly more confidence that real returns can be found [there].” Source: Emerging Trends in Real Estate Asia Pacific 2020 survey. Source: Preqin Pro.

One issue that has historically been a stumbling block for global investors has been in finding suitable assets. “If you Exhibit 2-3 Expected Change in Capital Flows into Asian Markets asked most of the large global investors, Over the Next Five Years they would like to invest more in Asia,” one Japan’s Slow-Motion Exodus “Japanese capital is active, but very offshore and are active in a number of local broker said. “It’s largely been lack focused on mature core markets—the markets across the region, again seeking of opportunity. They don’t have teams, Japanese institutional funds, such as United States, and to a much lesser extent out higher returns than can be found they don’t have the opportunities, they the US$1.4 trillion Government Pension the U.K. and Australia,” an investment in Japan, where borrowing costs are 6.07 don’t have the approval.” Since the global Americas Investment Fund, have been preparing to adviser said. As a result, according generally well under 100 basis points. financial crisis, they have gravitated to move a portion of their assets offshore to one Tokyo-based fund manager, In particular, Japanese developers are safer core plays, but prefer direct investing for several years, driven by shrinking “You’re starting to see a pickup in terms actively investing in South East Asia, often investment returns at home as well as to investments via funds, partly because Asia Pacific 6.87 of institutions getting asset managers in support of Japanese manufacturers as they prefer to retain control of investment the dwindling stock of Japanese 10-year and gatekeepers in place who can they set up new production facilities. allocations, partly to save fees, and partly government bonds (JGBs) left to buy after understand these markets and put more hoping to gain a better understanding of authorities bought up most JGB supply capital into play. We’ve been dealing with Infrastructure is another focus. According Europe the component parts of their portfolios. 6.2 as part of the government’s quantitative a couple different companies, and I’ve to one Manila-based developer, “You easing strategy. been relatively impressed by the fact that do have some [Japanese] state-backed However, direct investments present they are spending a lot of time trying to industrial investment that’s poking around So far, though, the migration out of Japan challenges in Asia because the stock of Middle East/Africa 5.82 understand the markets and see what fits the edges trying to find the right thing. big-ticket properties capable of moving has been a slow and spotty process, and what’s strategically the best bet long They’ve been very active in encouraging the meter is not extensive. In the words although progress can be hard to gauge term.” [Japanese outsourcing businesses] of one institutional fund manager, “Any 123456789 because Japanese allocations are often and with financing the big industrial analysis of transaction volumes shows Large Stay Large heading to funds of funds and pools, Until now, relatively little Japanese capital players to strike deals with the Philippine decline the same increase pretty starkly how illiquid Asian markets rather than into direct purchases. has been directed to Asia Pacific assets, government, especially around health are, relative to the U.S. and certainly the although Japanese banks are moving care/medical and smart city tech.”

Source: Emerging Trends in Real Estate Asia Pacific 2020 survey.

24 Emerging Trends in Real Estate® Asia Pacific 2020 Emerging Trends in Real Estate® Asia Pacific 2020 25 Chapter 2: Real Estate Capital Flows

Still, the unused capital held by Asia for-longer interest rates. First, vastly Japan is probably the poster child for Fundraising Slows Exhibit 2-5 Asia-Focused Real Estate Fundraising, 2009–2019 YTD Pacific funds is a far cry from what is increased levels of liquidity are now the the long-term, low-rate scenario. The After a record haul in 2018, when Asia currently piled up on the sidelines in the norm for both real estate markets and government is continuing its accommo- Pacific investment funds raised a record West, with US$208 billion in dry powder the global economy generally, meaning dative policy, though this has not pre- US$20.2 billion in real estate–related Aggregate capital raised Number of funds closed waiting for deployment in North America, that conventional laws of supply and vented Japanese interest rates drifting up capital, fundraising has fallen precipitously 50 25.0 as of September 2019, and some US$88 demand will tend to suppress borrowing marginally over the last year. According in 2019. According to analysts Preqin, billion held by European funds. European costs. Other factors are also in play. As a to one Japanese-based investor: “There 45 only US$6.7 billion was brought in during allocations have risen rapidly since 2012, recent paper published by fixed-income still continues to be a bit of tightening, and the first nine months of the year, implying 40 20.0 when they were roughly at the same levels investment manager Pimco argues: “The banks are much more selective on what a full-year figure of just US$9 billion—on 35 Asia-focused money is now. two most important secular drivers are they’ll lend on. So, for true nonrecourse pace for the slowest total since 2011. 30 15.0 demographics and technology. Rising [debt] with non-Japanese sponsorship, life expectancy increases desired saving, you’re still in the 80 to 90 bps area, and 25 Tighter Bank Lending The speed of the dropoff comes as a while new technologies are capital saving between 55 and 60 per cent LTVs [loan- surprise and does not bode well for 20 10.0 Raising finance from banks is certainly and are becoming cheaper—and thus to-values].” At these levels, interest rates funds holding roadshows in 2020. Fund 15 tougher in 2019. Slowing global trade reduce ex-ante demand for investment. have become one of the major draws for

managers have grown accustomed to Number of funds closed and economic growth have led to tighter 10 5.0 The resulting savings glut tends to push investors in Japan. Cap rates may be low, setting their sights on a target of, say, loan underwriting standards. As a result, the ‘natural’ rate of interest lower and but the spread over the cost of borrowing 5 Aggregate capital raised (US$ billion) US$500 million in assets, only to raise a flight-to-quality mentality has emerged lower.” means that returns are comparable to 0 0.0 US$250 million or less. among lenders, with rates drifting up and markets offering significantly higher yields. Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 YTD* loan tenures falling. “If you are a credit The rate at which funds have been provider, trade disputes do not give you Source: Preqin Global Real Estate Report. deploying capital has also fallen. Following a large appetite to advance riskier credit,” Exhibit 2-7 Expected Change in Availability of Debt and Equity Finance a record number of deals completed in * Through September 4. one debt specialist said. “Do you want the fourth quarter of 2017, when US$49.6 to lend into a recession? Or wait for a billion in assets changed hands, according available at the time of writing. The pace of investors have lost their appetite for recession and then, when there is blood in Equity for financing or 5.69 to RCA, the market has faded, with four deals seems set to slow further in 2020. placing capital. The likely explanation is the street, buy real estate, as they say?” new investment straight quarters of decline (on a rolling that funds have been unable to source Debt for refinancing or 5.70 12-month basis) experienced in the year A lack of deals does not imply lack of sufficient assets that meet their risk/return That said, banks remain by far the largest new investment to June 2019, the most recent figures liquidity, however, nor does it mean that profiles. provider of capital for Asian public and Debt for development 4.97 private deals, simply because they have such vast amounts to deploy. As a result, in most markets, financing is not hard to 123456789 find for high-quality assets. In the words Large Stay Large Dry Powder Builds Exhibit 2-6 Real Estate Dry Powder by Region, 2009–2019 decline the same increase of one Hong Kong–based broker: “There’s Although fundraising slowed dramatically no change at the top. We see easy access Source: Emerging Trends in Real Estate Asia Pacific 2020 survey. in 2019, considerable amounts of raised 250 for low-leveraged deals from good-quality capital are still looking for an investment sponsors—they have no problem raising home across the region. According to money because their track record is so Exhibit 2-8 Availability of Debt by Type of Lender Preqin, the US$34 billion in Asia-specific good.” mandates awaiting deployment as of 200 September 2019 is down only modestly In addition, even as banks become more Debt funds 6.15 from the US$37 billion on hand at the end wary of overall macroeconomic risk, of last year, which was the highest level 150 interest rates are again starting to sink, Nonbank institutions 6.13 since 2009. removing some of the stress in the system. (insurers or pension funds) In the second half of 2019, most major These large reserves of dry powder only Mezzanine lenders 6.03 100 Asian markets have seen the cost of debt reinforce the difficulty that global investors charged by banks decline by something have in getting money into the market. Sovereign wealth funds 5.80

Dry Powder (US$ billion) approaching 100 basis points for five- They also underline how hard it will be to year loans, in line with ongoing rate cuts Alternative lending platforms remedy their historical under-allocation to 50 5.47 introduced by the U.S. Federal Reserve. (e.g., peer-to-peer/crowdfunding) the region. As one Hong Kong–based fund As interest rates fall, banks also have the manager said, “European and American opportunity to widen spreads to address Banks 5.43 investors are still very underweight in 0 the perception of extra risk without Asia—at the end of the day, there is Dec ‘09 Dec ‘10 Dec ‘11 Dec ‘12 Dec ‘13 Dec ‘14 Dec ‘15 Dec ‘16 Dec ‘17 Dec ‘18 Sept ‘19 1234 56 789 increasing the real cost of capital. Large Stay Large potentially way more capital than there North America Europe Asia Rest of the World decline the same increase are suitable deals.” Beyond that, other secular drivers also Source: Preqin. militate towards an environment of lower- Source: Emerging Trends in Real Estate Asia Pacific 2020 survey.

26 Emerging Trends in Real Estate® Asia Pacific 2020 Emerging Trends in Real Estate® Asia Pacific 2020 27 Chapter 2: Real Estate Capital Flows

or seven years, or struggle to do 60 per there is no shortage of new debt funds Another problem in setting up Asia-based Exhibit 2-9 Typical Commercial Lending Terms (Up to Five–Year Swap) cent loan-to-value, or struggle to do the being set up, the popularity of this type debt funds is that setting up a debt team offshore component with an onshore bank of finance may already have peaked. is quite difficult. Usually, debt funds are that’s not them.” In addition, by some Globally, the level of dry powder held by set up by carving them out of existing estimates, approximately US$70 billion real estate debt funds increased to US$61 equity fund teams, but the equity side will Market LTV (%) Base reference rate Spread (bps) Financing cost (bps) worth of commercial real estate loans is billion as of March 2019, according to usually still be favoured because of the due to be refinanced over the next five Preqin, from a low of $12 billion in 2012. relative lack of return. According to one Australia 50–50% 5–year swap Rate: 1.40% 140–190 280–330 years. Lending to distress situations in Fundraising for debt funds has also adviser: “There’s no upside in debt—if you China 50–60% 1– to 5–year base lending: 4.75% 200–500 675–975 China is also a possibility, as discussed dropped sharply in both 2018 and 2019. have 6 per cent IRR from a debt deal, but in Chapter One, although this type of get 12 per cent from an equity deal, your Japan 50–60% JPY swap rate + TL spread: 0.2% 40–60 60–80 opportunity has not historically proven In Asia, debt funds have for several years resources are going to be focused on the South Korea 50–60% 4–year swap rate: 2% 120–180 320–380 fruitful for foreign investors in that market. been touted as an emerging investment 12 per cent IRR trades. It’s not fair to say Singapore 50–60% 5–year KTB: 1.6% 150–200 310–360 sector that would soon find a niche. In you can have people toggle between debt Indian banks, meanwhile, have flatlined reality, however, managers have struggled and equity in the same teams.” their exposure to commercial real estate to deploy capital when the market is over the last two years, due partly to already flush with liquidity. Banks enjoy Debt’s lack of upside vis-à-vis equity deals Source: DWS, Bloomberg, as at June 2019. regulatory tightening and partly the need deeper lending relationships and lower is only worsening as interest rates begin to minimise their exposure to a sizeable capital costs—key differentiators when to retrench. So, while cap rates in Asia portfolio of nonperforming loans issued to lending margins are already so thin. are certainly low, they can still provide a local developers. Indian nonbank financial According to one specialist in Asian debt good spread for private equity players companies (NBFCs) originally stepped into capital: “The number of [Asian] debt funds over the cost of bank lending. In Australia, this void, but have since run into financial in the last 12 months has not increased for example, debt funds will make a 3 per loans, too. Although domestic banks rarely More (and bigger) deals are now in the Nonbank Lending Picks Up . . . problems themselves and are therefore no significantly—I hear about lots of people cent return on three-to-five-year loans. provide loan tenures lasting more than five pipeline, with expected demand from longer in the mix. Opportunities for foreign wanting to do it, but I don’t see people But “why would an equity fund pivot out of In some markets, however, regulatory years, institutional funds are more willing Australian real estate borrowers for funds to offer senior debt to stressed actually doing it.” equity to a 3 per cent yield with no upside? pressure is cutting—sometimes to offer longer-tenure loans. nonbank debt rising to an estimated A$50 developers are therefore very much in the They can get that through rental growth drastically—the availability of bank finance. billion by the end of 2023, according to an frame. One reason for this is that margins and yield compression. My prediction is At the same time, there are growing A variety of new players are participating. estimate from one such lender. are generally low, apart arguably for that the next wave of debt funds will look numbers of investors who are either In general, Australian superannuation mezzanine debt. “The appetite from banks for lower coupon where they can genuinely seeking out better returns than can be funds have been slow to react, leaving While large and creditworthy Australian . . . But Appetite Remains Low [to lend] may not be there [today], but that compete with the banks for the deals the found in the bond markets or who prefer more opportunities for foreign banks to developers will have no trouble sourcing doesn’t translate into a huge dislocation banks don’t want to do.” collateralised deals that will offer better pick up business. However, as rates fall, nonbank debt, there is a long-term trend Despite the opportunities surfacing in in price,” continued the debt specialist. protection should the real estate cycle superannuation players are being pushed militating against lending for riskier deals, Australia, China, and India, however, “Just because a bank won’t go to 65 per turn. to look for higher-yielding investments, such as with tier-2 developers, high- demand for nonbank debt remains low in cent LTV on senior debt doesn’t mean a often using managers to provide a lending leverage plays, or transitional product with most Asian markets. With interest rates nonbank can come in and charge 2 per As a result, there is a market on both the vehicle. short weighted average lease expiries now again in decline, and banks opting cent more than normal on that type of demand and supply sides for nonbank (WALEs), which continue to be affected to absorb some of the impact (i.e., by asset.” lenders such as offshore banks, private- In July 2019, for example, one major by government guidelines. For example, tightening spreads) even when they were equity players, and debt funds to step domestic developer obtained finance nowadays “there’s almost no credit rising, the amount of nonbank finance In addition, both debt funds’ and nonbank in, providing anything from distress debt from an Australian superannuation available for retail [assets],” according to issued has not been as high as expected. lenders’ lack of expertise in assessing to mezzanine funding (with the latter fund for A$360 million in senior debt for one Asia debt specialist. As one investor said: “There is nonbank credit risk has created problems. “probably generating the best [debt] redevelopment of a large office building in money [available], but I’m not sure there’s “Some got their fingers burned,” one returns,” according to one investor). Brisbane anchored by a blue-chip tenant. China is another market where the a lot of appetite for the price. There’s just Singapore-based investor said. “Assets The transaction was described at the central bank has curtailed domestic bank not enough nonbank money out there that were overcapitalised, or revenue streams In Australia, regulators are compelling time as Australia’s single largest nonbank lending to the property sector, which is realistic compared to where rates are.” weren’t there, or there were systemic domestic banks to adopt more rigorous senior debt facility. Banks would normally has therefore been deprived of funding problems with the borrower, or the ‘KYC’ underwriting standards for both have structured it as a club deal, but to buy and/or develop real estate and One type of nonbank finance that has [know your customer] may not have commercial and consumer borrowers. the borrower wanted a single financier, land. This is providing opportunities for risen in popularity in the West over the last been done quite as well.” A handful of Capitalisation requirements were hiked according to a consultant specialising in offshore platforms offering mezzanine few years is that offered by debt funds, established nonbank players now have a further in July 2019. As a result, the Big the field: “The reason it got done is that lending by well-capitalised institutional which create pools of private equity capital better track record in this respect and will Four domestic banks are unable to satisfy transaction risk was low because there clients. According to one investor: “There that are then provided to borrowers as probably continue to dominate the market demand via the usual combination of was a single lender. That tells you there is is nonbank capital available for this type senior or mezzanine debt. However, while for this type of finance. bilateral or club loans. Nonbank financing nonbank capital [available] at a price for of sponsor in markets like China, where therefore is increasingly filling the gap for institutional assets.” banks might struggle to do five years construction and land-acquisition deals, and occasionally for core investment

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yields, and cap rates for investable thinking was nothing but a pipe dream REITs on the Rise Exhibit 2-11 Index Performance of REITs by Country Australia assets in many Asia Pacific markets have because unsolicited takeovers in Japan Share prices in Asia Pacific REITs compressed below the distribution yield have rarely been successful. The Australia listed property universe strengthened in 2019 as interest rates in is the Asia Pacific region’s oldest. It 500 currently payable by Singapore REITs. This the United States began to decline. Many is why Australia, with its relatively high cap The landscape may slowly be changing, used also to be the largest, by some REITs in the region, and especially in rates, has become a favoured destination. however, following the hostile takeover distance. After consolidation whittled Singapore, are now on acquisition sprees 400 As one S-REIT manager commented, in September 2019 of a US$570 million the number of listings from 49 down to to take advantage of the lower cost of “Singapore REITs are making a bigger J-REIT with assets located mainly in and 40 in the last five years, Australia has capital for new purchases, as well as an almost the same number (38) of listed 300 foray into Australia than Australian long- around Tokyo. According to one Tokyo- anticipated upswing in investor interest term funds are.” based fund manager, “It’s long overdue for A-REITs as Singapore. The REIT sector is in yield-bearing stocks. In particular, someone to do an unsolicited takeover of significantly larger in Australia, however, institutional investors are rumoured this 200 Japan is another option for S-REITs, a REIT that was basically going nowhere. I with a combined market capitalisation of year to be more interested in investing although yields there are usually tight. As think we will start to see more of this now, US$61.9 billion in Singapore versus the in regional REITs as opposed to direct US$82.3 billion down under. 100 one fund manager observed, “I like the so that these REITs that have no reason to asset purchases, because both REITs story because it allows them to diversify live are going to be taken over, and they 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 are by nature more liquid, and because some of their capital, but when you’re know they can’t sit there and say, ‘Sorry, Given the scarcity of investable assets on high-quality standalone properties are J-REIT US-REIT A-REIT S-REIT looking at the disparity between the we’re not interested.’ Hopefully, it will start Australian markets, buying an A-REIT is an increasingly thin on the ground. Nikko dividend yields between the two markets, to change the REIT market and start to appealing way for international investors Asset Management’s Singapore-listed to get instant exposure to Australian Source: DWS, Bloomberg, as of August 2019. I’m not sure how it works. You’re talking change perspectives, so that they are exchange-traded fund tracking Asia ex- of going from 3.5 per cent [in Japan] to managed for the unit holders and will start property. One large office REIT was Japan REITs—basically a fund of funds Japan REITs (J-REITs) also performed well, rival the roughly 5 to 6 per cent return almost 6 per cent [in Singapore]. [But] you to pay out dividends.” purchased by a Canadian investor in 2018, for REITs outside Japan—was looking at a with the Tokyo Stock Exchange REIT index offered by Singapore REITs, but negative might see some of the Singapore REITs and more merger activity involving both 14.6 per cent equity return for the first nine up 22.8 per cent for the first nine months yields of Japanese 10-year government coming up here to try to merge—that Consolidation of the J-REIT market, foreign and Australian buyers seems likely. months of 2019, with an average 3.7 per of 2019. That brought J-REIT shares to bonds still provide a spread of 400 bps, a might work, especially if you look at some whether by hostile takeovers or cent dividend yield. their highest point since the 2007 crisis. figure comparable with that in Singapore. of the larger sponsors in Singapore that do otherwise, would be healthy not just from Although the sector has been dwindling An average yield of 3.8 per cent may not have some credibility here.” a corporate governance perspective, in size, Australia’s REITs should be but also because it will create a bigger particularly attractive to investors looking for exposure to niche segments of the real Japan group of REITs that qualify to join the government’s asset-purchasing scheme. estate market. At a time when investors J-REITs continue to dominate transactions As part of its quantitative easing policy, are looking for specialty-sector exposure, Singapore Exhibit 2-12 Major Asia Pacific REIT Market Capitalisation in Japan’s commercial property markets, the Japanese central bank pledged to listed funds make a lot of sense as by Country/Territory accounting for about 38 per cent of all buy as much as 90 billion yen (US$840 vehicles that can offer a broad portfolio The very success of the Singapore REIT commercial real estate transactions in million) worth of J-REIT shares annually, managed by experts in any given niche industry has to a great extent defined Tokyo for the year ending March 2019. depending on market conditions. But asset class. its path going forward. With some 38 J-REIT dominance is one reason that because of minimum capitalisation and REITs and property trusts now listed in a Japan Australia Singapore Hong Kong SAR Total foreign buyers represented just 13 per liquidity requirements, less than half of city with such a relatively small stock of (US$ billion) (# of REITS) India 300 60 cent of this year’s total transactions, Japan’s 60-odd REITs qualify to join the investable assets, competition between according to Deutsche Bank, the lowest programme, meaning that the buying is It took five years to make it to market, REITs is driving two major trends. First, level of foreign participation of any Asia concentrated in a limited number of REITs. amid many a false start, but India has consolidation among the smaller players 250 50 Pacific country apart from Hong Kong As a result, since the programme began finally introduced its first REIT. Comprising becomes inevitable; larger REITs trade SAR and maninland China. in 2010, persistent buying has left the a portfolio featuring seven office parks and more often because they have a higher 200 40 Bank of Japan holding more than 5 per four office buildings, and offering an initial free float, attract more analyst coverage, While the US$110 billion J-REIT market cent of a dozen large J-REITs, creating a distribution yield of around 8.25 per cent, and are more likely to be included in major 150 30 is huge, however, it is often equally self-fulfilling prophecy of upwardly mobile the Embassy Office Park REIT’s share indices. In addition, a merged REIT will inefficient, featuring numerous entities that share prices. Consolidation of the market price shot up some 34 per cent in its first be able to obtain more funding because it are small, poorly managed, and trade well would potentially expand the number six months, shrinking the implied yield to has a bigger asset base and will usually be 100 20 below net asset value. In principle, these of qualifying REITs significantly and less than 6 per cent—a remarkably low seen by lenders as a better credit risk. REITs would make attractive takeover therefore reduce the distorting effect of the level for a market where risk is perceived 50 10 targets for larger investors looking to invest government’s asset purchase programme. to be high. One interviewee suggested Second, REITs must move offshore in at the portfolio level, especially when the that, given higher taxes and currency order to find assets to buy. Currently, 0 0 number of assets available to purchase volatility, Indian REITs ought to trade at a about 40 per cent of all S-REITs’ holdings 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 on the Tokyo market is currently at a low yield of some 12 per cent to 13 per cent are located outside Singapore, a figure ebb. However, while the market is badly in to be comparable on a risk/return basis to that can be expected to rise in the future. Source: DWS Investments. need of consolidation, until recently, such the region’s major REIT markets. Buying offshore can be problematic, however, because REITs must generally buy assets that are accretive to their

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“Logically, it shouldn’t be priced there,” observed one locally based consultant, who offered two reasons why the shares had been bid up. First, the REIT passed an initial hurdle when it was able to provide investors a first-quarter dividend, providing confidence to a sceptical market that the story was actually solid. In addition, ongoing capital appreciation in the Indian office sector (partly, it has to be said, caused by the Embassy listing in itself) has further boosted sentiment.

“The analyst community is what’s driving the share price, not the retail buyer,” continued the adviser. “The general view is that if you start discounting the value of this portfolio using cap rates at the same levels of other recent transactions, then clearly the market deserves to give these guys a higher price. Whether you think those cap rates are justifiable is another matter.”

At the end of the day, therefore, and unlike REITs in most other markets, “it’s really not a yield story, because the larger IT occupier community in India wants to stick to a US$1 per square foot per month rent, and the weighted average rentals for the Embassy portfolio are not too far from that. So it’s not about rent appreciation, it’s the cap rate compression story that’s driving the value appreciation.”

Unsurprisingly, the Embassy REIT experience is seen as a positive omen for future Indian REIT listings. Other domestic developers, including several in South India and in Mumbai, are now looking at listing portfolios of their own, with two or three new REITs likely to come to the market in 2020.

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These are the leading buy/hold/sell “I tell investors, you should come to Asia for medium- to long-term growth and Exhibit 3-3 Historical Investment Prospect Rankings recommendations for the various asset diversification, not for a premium to your home market; it is not sustainable to classes: expect that through the cycle.” 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 Office Singapore 12321119 73115 As the end of the current real estate cycle make it into the top 10 for development. for investment and development. Both Tokyo 247121 1113 16 12 7 approaches, investors in Asia Pacific real With fears of recession looming in the southern cities may be benefitting from Buy Ho Chi Minh City and Singapore estate are doubling down on large, liquid, United States, investors will always be the integration of the Greater Bay Area, Sell Kuala Lumpur and Hong Kong Ho Chi Minh City 37545131918101113 defensive markets. Emerging economies— wary of emerging markets—experience which has seen massive infrastructure Sydney 43192454366 with one notable exception—are on the proves that when economic strife arrives, investment that is improving connectivity Retail Melbourne 512163 513107 99 wane. their illiquidity and currency volatility make across the Pearl River Delta. Beijing, Buy Ho Chi Minh City and Manila Shenzhen 686518 19 10 16 ––– them especially unsafe. meanwhile, tends to be a difficult place Sell Taipei and Auckland Shanghai 76469622221 This year, Singapore, Tokyo, Sydney, and for foreign funds to place capital given it Osaka 8510 15 43922211918 Melbourne—all liquid and transparent That said, investors continue to warm remains dominated by well-heeled state- Residential Guangzhou 910 8102020615 6812 markets—are four of the top five cities towards India as a long-term investment owned enterprises that buy at a premium Buy Ho Chi Minh City and Bangkok Seoul 10 9 19 17 7715 14 19 16 4 ranked by investment prospects. All also destination. “It is moving from, ‘I’ll never and then hold indefinitely. appeared among the top five cities in our do it again,’ towards, ‘I have to be there’,” Sell Kuala Lumpur and Hong Kong Bangkok 11 11 16 8191611614 17 19 2019 report, when concerns about an as one investor put it. Although positive Hong Kong, meanwhile, has plunged to Mumbai 12 13 12 213112220153 8 approaching downturn were first aired. sentiment is not reflected in the city the bottom of both the investment and Industrial/distribution Beijing 13 12 11 11 14 10 87573 The rest of the top 10 cities for investment rankings, this is probably because India development rankings. Months of street Buy Ho Chi Minh and Guangzhou Taipei 14 21 22 22 17 18 16 9813 11 are similarly large and liquid. is heavily favoured by a few larger players protests in the city have been a huge drag Sell Hong Kong and Taipei New Delhi 15 17 20 13 16 14 21 21 12 510 rather than a large cross-section of the on tourist arrivals, with serious knock-on Bangalore 16 16 15 1121720199 10 14 The outlier among 2020’s favoured investment community. consequences for local retail and hotel Hotels Manila 17 19 18 388412 18 20 20 markets is Ho Chi Minh City. A destination sectors. At the same time, however, Buy Ho Chi Minh City and Tokyo that has been rising up the investment China’s second-tier cities continue to be brokers say that while office vacancies are Jakarta 18 15 14 76231111417 rankings for the past five years, it is now unpopular, as does Beijing, despite its slightly up from historical levels, so few Sell Mumbai and Manila Auckland 19 20 91410151717201816 rated the region’s top city for development being a larger and more liquid market than transactions have taken place in recent China–second-tier cities 20 18 17 20 22 22 12 8– –– and third for investment. Remarkably, it both Shenzhen and Guangzhou, which months that pricing on CBD properties Kuala Lumpur 21 22 21 19 21 12 14 5 17 15 15 is also ranked as top in our buy/hold/sell ranked well ahead of the Chinese capital has seen little to no movement. Hong Kong SAR 22 14 13 18 15 21 18 11 13 42 tables for all asset classes.

Vietnam offers strong economic growth, Exhibit 3-1 City Investment Exhibit 3-2 City Development Source: Emerging Trends in Real Estate Asia Pacific 2020 survey. Prospects, 2020 Prospects, 2020 Note: – = no data. a positive demographic profile, and,— perhaps most important—is seen as the biggest beneficiary of the slow migration Generally poor Fair Generally good Generally poor Fair Generally good in the first half of 2019, with most activity liquidity. Office yields, at 3.6 per cent, of manufacturing capacity away from 1 Singapore 6.31 1 Ho Chi Minh City 5.96 Top Investment Cities driven by cross-border capital. The are some of the lowest in the region, and China. Transparency remains a weak 2 Tokyo 6.11 2 Singapore 5.77 Singapore (first in investment, second US$4.9 billion in deals was an increase prices remain high by global standards. point, although it is improving. 3 Ho Chi Minh City 6.06 3 Sydney 5.71 in development). Until recently, the Lion 4 Sydney 5.99 4 Tokyo 5.64 of 73 per cent year-on-year, according Rentals, meanwhile, driven by takeup from City had experienced several subpar Nonetheless, the problem for real estate 5 Melbourne 5.95 5 Melbourne 5.56 to Real Capital Analytics (RCA), although coworking operators, have been strong. years across all property sectors in a investors is that Ho Chi Minh City remains 6 Shenzhen 5.86 6 Shenzhen 5.35 growth came from a low base. The slowdown that was out of kilter with the a market with relatively few investable 7 Shanghai 5.73 7 Shanghai 5.32 only other country even close to being Although most analysts see little prospect upward trajectory of the rest of the region, assets and where risks are high. Indeed, 8 Osaka 5.69 8 Osaka 5.28 positive was Australia, where volume of Hong Kong suffering a large exodus as economic woes and a glut of high-end a number of interviewees commented 9 Guangzhou 5.36 9 Mumbai 5.21 rose 3 per cent to US$11.9 billion. In of businesses as a result of recent street supply saw vacancies surge and capital that too much capital was already being 10 Seoul 5.29 10 Bangkok 5.10 particular, Singapore has benefitted from protests in the city, there has been a 11 Bangkok 5.11 values and rents decline. As recently funnelled into the wrong places. As one 11 Manila 5.08 an uptick in interest from investors who steady flow of Hong Kong capital migrating 12 Mumbai 5.07 as our 2017 report, Singapore placed investment manager said: “Vietnam needs 12 Seoul 5.07 are currently avoiding mainland China and to Singapore in 2019 in search of a safe 13 Beijing 4.97 just 21st in our investment rankings, truly affordable middle-income housing, 13 Guangzhou 5.06 Hong Kong SAR, both of which are seen haven. This has benefitted the luxury 14 Taipei 4.95 14 Bangalore 5.04 underlining how quickly the tides can but people are building too high-end.” as geopolitical flashpoints. Transaction housing market, and to a degree has 15 New Delhi 4.93 15 New Delhi 5.03 shift. Today, the office sector has largely volumes in the second half of the year are also boosted office occupancy. “Private 16 Bangalore 4.90 16 China–second-tier cities 4.91 absorbed the oversupply, and with Investor interest in Asia’s other growth also expected to be strong. banking is a source of demand here in 17 Manila 4.87 17 Jakarta 4.86 vacancies at an all-time low and limited markets is muted: Jakarta and Manila Singapore,” said one locally based fund 18 Jakarta 4.86 18 Auckland 4.82 supply in the pipeline, confidence in remain marooned in the bottom quarter of Many of this year’s investments were big- manager. “Landlords and agents are 19 Auckland 4.83 19 Taipei 4.76 medium-term prospects has returned. ticket deals, with six acquisitions worth looking like crazy for space as private the investment table, while—aside from 20 China–second-tier cities 4.77 20 Kuala Lumpur 4.71 US$300 million or more in the first half banking accounts [in Singapore] have Ho Chi Minh City—only Mumbai and 21 Kuala Lumpur 4.73 21 Beijing 4.63 Singapore was one of the few markets of the year. Landlord willingness to sell swollen.” Bangkok among emerging–market cities 22 Hong Kong SAR 3.93 22 Hong Kong SAR 3.96 regionally to see a surge in transactions into the stronger market also has helped Source: Emerging Trends in Real Estate Source: Emerging Trends in Real Estate Asia Pacific 2020 survey. Asia Pacific 2020 survey.

34 Emerging Trends in Real Estate® Asia Pacific 2020 Emerging Trends in Real Estate® Asia Pacific 2020 35 Chapter 3: Markets and Sectors to Watch Top Five

The city has always been the first choice “Absolute returns are fantastic, and the Ho Chi Minh City (third in investment, as an offshore destination for capital from risk-adjusted returns are even better, if not first in development). Vietnam’s financial Markets South East Asia. Investors from Thailand the best in the world.” capital has seen a surge of popularity in have recently joined Indonesians as active the past five years, featuring close to the players, with Thai asset-management Investment Development top for both investment and development companies recently greenlighted to invest prospects prospects rankings. overseas. 8 GOOD 2 7 “Ho Chi Minh is not institutionalised, but Investment Development hopefully it will go down the path of a Tier TOKYO prospects prospects 6 6.11 1 Chinese city—the demographics look 8 GOOD 5 good,” one Hong Kong–based head of For years, Tokyo markets have 7 Asia real estate for a major private-equity 6.31 4 FAIR 5.64 offered some of the best returns in 6 house said. “There are enough investors the region. With domestic interest 3 Tokyo who have invested in it for more than a rates remaining at rock-bottom levels, 5 2 decade that have more experience, so investors continue to flock there, 5.77 4 FAIRAIR 1 you have local operators who are more although competition from local POOR 3 experienced not just with real estate, but buyers means the market is tight. 0 Singapore ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 ’20 also with institutional investors and the 2 governance they need,” he continued. “I 1 do feel Ho Chi Minh has a better chance POOR However, with office yields standing at 3 0 than some of the other emerging markets.” ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 ’20 between 3 and 3.5 per cent, pricing HO CHI MINH CITY remains rich. According to one locally However, confidence about the city’s based fund manager, “People are hesitant Tokyo (second in investment, fourth prospects has not been matched by Vietnam is now the preferred emerging market to sell because there’s still a lot of capital in development). The Japanese capital the scale of foreign investment, mainly destination in Asia, with manufacturers migrating in the market. There’s certainly no remains dominated by local players, who because the small size of the market to set up factories as an alternative to China. shortage of buyers and when stuff does 1 accounted for 80 per cent of deals in the means that investable assets are hard to Risk is high, however, and good investment go out to bid, it’s really competitive.” At first half of 2019. Foreign money still has find. As one investment manager said: “If SINGAPORE opportunities can be hard to pin down. these levels, though, many investors are opportunity in one of Asia’s most liquid a billion-dollar fund decides to allocate baulking. Tokyo saw a 19 per cent decline markets, though. Both Hong Kong and 10 per cent or 20 per cent to Vietnam—a Having absorbed a glut in office in transaction volume for the first half of South Korean capital has become more meaningful allocation—that is a pretty supply, sentiment for Singaporean 2019, according to RCA. active in 2019, while U.S. purchases have significant percentage of the annual assets has now rebounded from the sunk to their lowest level since the post– international real estate volume in that lows of 2017. With vacancies now With the office sector languishing and Lehman Brothers days in 2009. market.” minimal, confidence has returned. cap rates in multifamily residential now Foreign investors are leading the Record-low Japanese bond rates mean compressed to unattractive levels (i.e., a charge as buying activity surges. little over 3 per cent), many investors are Investment Development that borrowing costs remain the lowest in prospects prospects looking to other sectors. Retail is seen as the Asia Pacific region, creating a good 8 GOOD spread over the cost of debt despite problematic at the moment given a recent increase in the consumption tax, and 7 Tokyo’s compressed cap rates. Leverage 6.06 4 is also easily available, although loan- declining visitor arrival numbers caused 6 by bilateral tensions with South Korea and 5.96 to-value (LTV) ratios these days tend to 5 SYDNEY (potentially) with China too. As usual, the peak at the 60 per cent range rather than 4 FAIR the lofty (and frankly nonsensical) rates logistics sector is seen as a go-to option. 3 A long-time favourite that continues to deliver. of 90 per cent–plus seen some years With the Olympics due to take place next Sydney offers a liquid, stable, high-return market ago. In addition, the city is an easy sell 2 Ho Chi Minh City with low vacancies and good prospects for summer, many investors are forecasting to investment committees—no one loses 1 growth going forward. Depressed valuation of the 5 the usual hangover effect once the Games POOR their job allocating to Tokyo. Australian dollar only adds to the appeal. are over, especially in the hospitality 0 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 ’20 MELBOURNE “From a macro standpoint, economists industry, where oversupply and poor have loved to hate Japan for decades, but management of newly opened facilities is Melbourne continues to be popular over the last 10 years it’s been one of the already creating problems. Opportunities with investors for the same reasons best markets for returns,” the Asia head of for distressed investing may therefore as Sydney. Office assets are a little real estate for a private-equity house said. become more common. more than half the price, though, giving the city particular appeal for Asian buyers with an eye for long- term capital appreciation.

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A limited number of private-equity players Sydney’s historically high office yields buying opportunities in office, residential, With favourable demographics and a Kong and Guangzhou, that has been Shenzhen also features some of have made platform investments in continue to compress, reaching 4.9 per industrial, and hotels. The exception is diverse local economy, office rents should earmarked by the central government as China’s priciest residential property. Vietnam, but most of the real estate capital cent in mid-2019, down from north of retail, where there would be more sellers continue to trend upwards over the an area for accelerated economic growth. Its enormously volatile market is now going into Ho Chi Minh City has been on 8.0 per cent five years ago. For the best than buyers at the moment. next five years, according to investment amongst the five most expensive in the the development side, targeted especially properties, yields have fallen to as low bank Credit Suisse, providing scope to According to one Shanghai-based fund world, according to recent study by CBRE. at the residential sector. This has led to as 4.5 per cent. Rentals continue to be For the last two years, residential prices in reposition some of the city’s older building manager: “[The GBA] is now more popular problems with overbuilding. Land values strong, and with vacancies remaining low, Sydney have been falling. While signs of a stock. Construction of the Melbourne because of the government policy and all Shanghai (seventh in investment, and rents have also risen sharply across rents promise to continue rising (albeit at a bottom were emerging in late 2019, home Airport rail link, which is set to begin in the improvements in infrastructure. And for seventh in development). China’s the board. According to one interviewee, more measured pace) for the foreseeable prices remain high by any standards, with 2022, should also serve to open up new Shenzhen, because its GDP is now bigger financial capital remains the favoured “Retail space in Ho Chi Minh City is now future. Falling domestic bond yields also the city now third behind Vancouver and areas for both commercial and residential than Hong Kong’s, people are more and destination for foreign investors and three times or more the rent of similarly suggest that cap rates will continue to perennial first-place Hong Kong in the development. more positive. But closing deals there is accounts for the majority of cross-border located retail space in Manila.” track lower. least affordable cities rankings, according not easy. Prices are not cheap, and there deals in the Mainland. This year, in a to Demographia. Logistics space is in high demand in and is also an oversupply issue, especially context of slowing economic growth Still, the government has taken steps Investment Development around Melbourne. Build-to-core and as far as office is concerned, so if you’re caused by the U.S.-China trade friction, to try to address some of the ongoing prospects prospects Melbourne (fifth in investment, fifth build-to-let development also is attracting going to do a deal, you need to take a together with an ongoing regulatory problems. An anticorruption campaign 8 GOOD in development). Melbourne’s moment interest, and with vacancies remaining medium- to long-term view, rather than crackdown on domestic bank and is underway, targeted in particular at 7 of outpacing rival Sydney in terms of so low these seem relatively low-risk a three- to five-year view.” Another factor nonbank lending that has suppressed property developers. In addition, after the 5.99 potential, as it did in our rankings last strategies. By and large, Australian in Shenzhen is that many large office buying sentiment from local purchasers, 6 latest oversupply problems arose in the year, was short-lived. However, the capital retailers have been slow to adapt to buildings in the city have been sold off foreign funds are finding that prices are residential sector, authorities intervened. 5 5.71 of the state of Victoria remains one of changes being forced on the industry piecemeal and are now held on a strata- lower and assets more available. According to one opportunistic investor 4 FAIR the first names on the list of the region’s by the evolution of online retailing, so title basis, leaving relatively few en bloc active in Vietnam: “There have been no institutional investors when they are investors are assessing the viability of assets available for purchase. This is a sharp reversal from the situation 3 approvals out of Ho Chi Min for, I think, Sydney looking to place capital. retail assets carefully, favouring either in place until only a few years ago, when at least 18 months, so the demand is just 2 large, dominant regional malls or very foreign funds could not compete with Investment Development backing up and there’s no supply. We 1 Cap rates continue to compress. They specific high street locations, and avoiding prospects prospects domestic capital that viewed the local have a project that just launched, and POOR remain slightly behind Sydney, but not by suburban malls. market through a different prism from 0 8 GOOD they sold 200 units in one afternoon.” In ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 ’20 much. Melbourne office vacancies are the a risk/reward perspective. In both 2018 general, demand is higher for affordable lowest in Australia, although they are set to Melbourne residential real estate is 7 and 2019, however, the majority of prime 5.86 and mid-market housing than for high- also at unaffordable levels, featuring More than 25 per cent of Australian trend upwards over the next year as new 6 commercial property deals in the city have end units where oversupply problems are fourth globally behind Sydney in the involved a foreign buyer. residential development sites were bought supply comes onto the market. Capital 5 worst. Demographia ratings. It currently costs 5.35 by Chinese developers in each of the last values, meanwhile, are slightly more than 11.7 times median income to buy a Sydney 4 FAIAIR five years up to the end of 2018, according half those in Sydney’s, making them Although Asia Pacific investors who South Korean and Japanese companies home; the figure is 9.7 times in Melbourne. to brokers Knight Frank, and while especially appealing to Asian buyers who 3 are not already active in China may be are especially active in Vietnam, mainly in are generally more focused on price per Still, two years of falling residential prices shying away from entering into Mainland Chinese capital is now less evident due 2 support of manufacturing businesses from in both Melbourne and Sydney have to the impact of Chinese export controls, square foot than on yield. deals for the time being, money that is their home countries, and buildout of local removed some heat from the market. 1 Shenzhen already committed to China-facing funds Sydney has been the subject of many POOR industrial capacity is proceeding quickly, is being actively deployed. Given that deals in recent years involving conversion Investment Development 0 as more factories opt to move their ’13 ’14 ’15 ’16 ’17 ’18 ’19 ’20 of downtown grade B office assets to prospects prospects Shenzhen (sixth in investment, sixth in Shanghai is now regarded as a gateway operations outside China. Good logistics luxury residential facilities. The fall in 8 GOOD development). One of the most dynamic city by international investors, a significant facilities, however, remain in short supply amount of capital has recently been lined residential prices over the last two years 7 cities in the world, Shenzhen is constantly In 2019, the office sector continues to see means that some of these developers 5.95 reinventing itself, having morphed from significant amounts of new supply, with 15 up for deployment. Transaction volumes in Sydney (fourth in investment, third in 6 new grade A office towers scheduled for the first half of 2019 were therefore almost may be forced to offload their sites at 5.56 its historic role as a textile manufacturing development). Australia’s longstanding 5 a loss, especially if they face difficulties centre into hardware and now to delivery in 2019. This has driven vacancies unchanged on a year-on-year basis, with appeal as a focus for both domestic in securing funding to complete their 4 FAIR software and finance. With improved to a record high of 16.6 per cent, accor- a good pipeline of deals expected in the and international capital continues for projects. Meanwhile, Chinese developers transport links to other cities in the area, ding to CBRE, equivalent to some two second half of the year, according to RCA. all the usual reasons: a relatively liquid 3 are beginning to diversify their investments Shenzhen continues to be the preferred years of new demand. The problem has and mature market featuring numerous 2 been aggravated by the U.S.-China trade Lower prices for Shanghai offices are to include office and lower-density Melbourne headquarters location for Fortune 500 high-quality assets, a stable economy, 1 friction, which has hit businesses in the largely the result of uncertainty caused by residential projects—an indication they are POOR companies in southern China. and higher cap rates than can be found the trade friction, which has caused many there for the long haul. 0 tech-focused city especially hard. Many elsewhere in the Asia Pacific. At some ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 ’20 While Shanghai remains the most have moved out of rented offices and into firms—both domestic and international— 50 per cent of total transactions, the Demand for all asset classes in Sydney important Mainland investment coworking facilities to cut costs. Half of the to put expansion plans on hold. This number of cross-border deals in Australia is strong, with a little more than one- destination, Shenzhen ranks above it in vacant space is located in the Nanshan has coincided with a glut of new supply is rivalled only in Singapore (55 per cent). third of those surveyed on the hunt for this year’s survey. This is most likely a district, home to tech heavyweights such coming to market over the past two However, reluctance of owners to sell their reflection of the city’s importance within as ZTE, Tencent, and drone makers DJI. years. As a result, rents have fallen and properties remains a problem. the Greater Bay Area (GBA), a megalopolis vacancies have shot up, jumping 4.4 consisting of 11 cities in China’s southern percentage points to a decade-high 18 Pearl River Delta area, including Hong

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per cent in the middle of 2019, according The Osaka office market is viewed as a 50 to 75 bps and potentially a 100-bps investor: “We closed a deal in Guangzhou Investment Development Bangkok (11th in investment, 10th in to CBRE. Just 140,000 square metres of more amenable to deals by overseas differential, depending on the asset. So, recently and are looking at another couple prospects prospects development). The Thai capital is one new office space was taken up, just 20 per buyers, with a little less off-market dealing cap rates have come down a bit from of deals, too. Guangzhou is actually quite 8 GOOD of the region’s most dynamic cities and a cent of the amount absorbed in the same between insiders. At under 3 per cent, where [they] used to be, but the difference positive because vacancy rates are quite 7 popular tourist destination. It is currently period in 2018. office vacancies in Osaka are the lowest is still there.” tight relative to Shenzhen.” also one of its better-performing real 6 5.29 in Asia, along with prefectural capitals estate markets, with steady office rental The shortage of available land in or Sapporo, Fukuoka, and Nagoya. Whereas retail space is popular in Tokyo’s The key submarket over the next few years 5 growth and capital price appreciation 5.07 near Shanghai’s city centre has created central wards, several interviewees will be Pazhou, a new office district that 4 FAIR over the past five years. The residential obstacles for new development. Rege- According to one Tokyo-based investor, expressed concern over retail assets offers more development opportunities for 3 market has also seen healthy growth. neration—either of individual assets or “All the secondary cities—Osaka and outside the Japanese capital. On this front, developers and lower rents for occupiers. Seoul Bangkok continues to add substantial 2 on a neighbourhood level—has therefore Nagoya and Fukuoka—have gone out Japanese demographics are unfavourable. The technology, media, and telecoms public transport infrastructure, which is and repositioned themselves after the sector continues to be the major driver of 1 expected to open up new areas of the city become the name of the game. In addi- Since one major department store POOR tion, investors are increasingly willing to financial crisis to expand their economic normally anchors mall space in smaller the office market. 0 for investment. look to suburban parts of the city, where bases, so they actually now have their cities, there is a risk of nonrenewal of ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 ’20 most new development projects are taking own independent liquidity. It’s not just leases; also, exit strategies for retail assets Seoul (10th in investment, 12th in Political instability—despite its place. a matter of saying, ‘O.K., I want higher aren’t obvious. development). Until 2015, transaction Until recently, most foreigners active in the demonstrable failure to affect day-to-day yields, so I’ll go to Osaka’—it’s, ‘I’m going volumes in Seoul were less than US$5 Seoul market were opportunistic players, living conditions—continues to put off Investment Development to Osaka because I like what’s going on Guangzhou (ninth in investment, billion annually, but have since doubled but there are now increasing numbers of some international investors, especially prospects prospects there. I like the office space, I like tourism 13th in development). With integration after a number of sizeable new buildings core-plus and value-add investors, too. those reliant on the approval of investment 8 there, it has a 24-hour airport, the cost of helped by new high-speed rail links to came onto the market. The South Korean Recent missile testing in North Korea has committees in the United States or 7 doing business is substantially cheaper.’ Hong Kong to the south and to Beijing capital was the third-most-active city deterred some funds from entering the Europe. For real estate players based in And when you look at transitioning to a market. According to one Seoul-based the Asia Pacific, a lack of transparency 6 5.73 and Shanghai to the north, Guangzhou for deal volume in the first half of 2019, service-based economy, Osaka is really is expected to be a major beneficiary of behind Hong Kong and Tokyo. Deals advisor: “They are having a hard time and the difficulty of doing business in 5 5.32 well positioned, because the cost of living the buildout of the Greater Bay Area. “The worth US$12 billion are expected to have getting their investment committees to Thailand are more serious impediments 4 FAIRIR is so much cheaper—people can buy a improved connectivity within the GBA been completed for the whole of the year, approve Korean acquisitions. But other to investing in Bangkok. According to one condo down there, whereas in Tokyo they investors come in because they are sitting investor, “Thailand is a tricky place to do 3 ShanghaiShanghai has already made a difference, so we are according to Colliers. can’t afford it.” seeing the benefits of all that infrastructure on money and they have no options other business. A lot of shifting sands, a lot of 2 investment,” one investment advisor said. Historically, the investment market has than Japan or Australia. In China, you have uncertainties— and we have ended up 1 been dominated by large domestic different dynamics, it is a very speculative spending a huge amount on legal fees.” POOR Investment Development prospects prospects market, while Singapore is very pricey 0 Investment Development corporate players, but foreign investor Investment Development 8 GOOD prospects prospects these days, and Hong Kong, too. So, they ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 ’20 participation has been increasing steadily prospects prospects 8 GOOD in recent years. In the first half of 2019, look to get some exposure in Korea—not 7 8 GOOD 7 cross-border acquisitions accounted too much, but just an acceptable limit.” Osaka (eighth in investment, eighth 6 5.69 for 33 per cent of the dollar value of 7 in development). Japan’s second city 6 5 5.36 deals, double the rate of international Value-add options are also available in a 6 outshines Tokyo at the moment in terms 5.28 5.11 5 participation in Tokyo and triple that of market that suffers generally from a lack of the appeal of its office market. In all, 39 4 FAIR 5.06 5 per cent of respondents indicated a buy 4 FAAIR Hong Kong. of diversity. One typical play has been to 5.10 3 convert small or medium-sized offices 4 FAIR Bangkok signal for Osaka office, a level of popularity Osaka 3 outdone only by Ho Chi Minh City and 2 Office sector cap rates for grade A in areas with strong retail demand into 3 2 Singapore. 1 Guangzhou properties have been slowly compressing mixed-use facilities that bring higher- POOR 2 1 in line with falling interest rates and gro- paying retail tenants into lower floors of 0 POOR ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 ’20 wing liquidity in the market. They stood at buildings. 1 Hotel space is also a buy for 36 per cent 0 POOR of respondents, which makes it the fifth- ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 ’20 slightly over 4 per cent in the third quarter 0 Another option, according to one foreign ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 ’20 hottest city in Asia behind Ho Chi Minh Still, the growing popularity of Japanese of 2019. For years, vacancy rates have ranged between 10 and 15 per cent, but opportunistic investor, is to convert “really City, Tokyo, Singapore, and Bangkok. cities such as Osaka has also meant that Concerns over U.S.-China trade friction But the overall improvement in office they declined rapidly in 2019 to some crummy, strata-titled, old office stock to The rise in tourism from both China and investors are more willing to chase yields, seem to have hit Guangzhou real estate and residential stock has now crossed 6.7 per cent. Even at that level, though, efficient, large-floor-plate, high-lift capacity South Korea, together with an increasingly so while they remain less expensive than more quickly than other Chinese cities. a threshold, with more businesses now both rents and capital values remain for back office [uses]. Everywhere else wealthy South East Asia, is likely to sustain Tokyo, the differential has narrowed. However, new office supply was limited willing to consider it as a candidate for significantly lower than in other gateway around the world has that option, but strong interest in the city from international According to the same fund manager, in 2019 and is expected to remain muted regional headquarters. Office vacancy cities in the region. Seoul didn’t, so we delivered a million tourists well past the 2020 Tokyo Olympic “Osaka now is 3.5 per cent for both office through 2023, which should be positive rates have recently hit a low of 5.7 per square feet at a basis that allows us Games. However, signs of oversupply in and retail, sub–4 per cent for sure. Nagoya for income-producing assets. Meanwhile, cent, according to JLL, while rents rose to undercut CBD rents by 50 per cent, the hotel sector have left some investors is probably around 4 per cent for both. both domestic and international investors 7.9 per cent year-on-year in mid-2019. providing grade A space as we spec’ed scouting for potentially distressed assets Fukuoka is the same, probably 4 per cent are actively looking for properties with Both rents and values are expected to the building up.” in the Osaka area, an opportunity that for office, sub–4 per cent for residential. scope for value-add opportunities, seeking continue to rise. will probably last for at least the next two So, if you’re thinking Tokyo is a 3 per cent, to leverage the city’s copious supply of years. 3.5 per cent for office, you still end up with older office space. In the words of another

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Bangkok suffers from a lack of affordable placed to pick up the slack as more Investment Development Investment Development in the mid-tier—are starving for cash. Bangalore (16th in investment, 14th in housing, poor construction quality, and traditional areas of the city run out of room prospects prospects prospects prospects Defaults have become commonplace and development). While Bangalore has been inadequate management of its existing to absorb new capacity. 8 GOOD 8 GOOD many more developers are likely to fail undeniably the big success story of India’s stock. This should provide an opportunity 7 7 over the next 12 months, according to one IT park and business process outsourcing for overseas investors; however, market Capital values continue to trend upwards, interviewee. (BPO) sector, growth in the city has 6 6 opacity and difficulties in gaining con- driven by rising rents, and both foreign 4.97 4.95 been so strong for so long that many are 5 struction finance both act as barriers to and domestic players are actively bidding 5 Beijing At the same time, on the commercial side, wondering whether the peak has been 4.76 entry for foreign players. for good assets whenever they come to 4 FAIRR 4.63 4 FAIAIR the market can do no wrong. Takeup of reached. Surprisingly, however, the city’s market. While cap rates are already at new office space is rising by around 30 commercial office sector continues to 3 3 Mumbai (12th in investment, ninth questionable levels, the current strength Taipei per cent annually, according to one Delhi- expand at a breakneck pace. Absorption 2 in development). The commercial real in the commercial markets suggests that 2 based advisor, and is especially strong grew some 30 to 35 per cent year-on- they may still have room to run. 1 1 in Noida, a satellite city to Delhi’s south year in the first half of 2019, rentals have estate story continues to go from strength POOR POOR east, where absorption of grade A office continued to rise, and large pools of to strength in Mumbai. Demand for office 0 0 space continues to be very strong. In The residential sector, however, is ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 ’20 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 ’20 space shot up to some 3.5 million square capital are available for further investment. 2019, one foreign investor paid US$100 as weak as the commercial side is feet in 2018 from a historical average of 1 According to one consultant, “Bangalore million per acre for a prime three-acre site strong, especially among the mid-tier rise to 15.1 per cent by the end of 2019), In part, this new demand for space is due million to 1.2 million square feet annually. will this year again be one of the world’s in the Bandra-Kurla Complex, a planned development community, which is according to brokers Colliers. Admittedly, to the fact that Taiwan has been luring Noida offers cheaper office facilities and largest commercial office and IT space business district in the north of Mumbai desperately short on capital. Further Beijing has in the past been able to ride “reshoring” business back to the island has benefitted as rental costs elsewhere markets.” that is today the city’s prime financial consolidation among developers therefore out similar supply surges without much and away from mainland China. The in Delhi have risen. “The primary driver district. This was an all-time high price for seems likely. difficulty, as supply has been soaked up reshoring tends to be in capital-intensive, was that in Gurgaon [another subdistrict of Doubts as to the sustainability of this any land parcel in India and underscores by state-owned enterprises and regional high-value, robotized manufacturing, and Delhi], office rental prices have gone up to growth probably explain why it ranks confidence in market conditions. Beijing (13th in investment, 21st in government offices that continue to has already added 0.4 per cent to the as much as $1.50 or even $2 per square lowest of the Indian cities in this year’s development). A shortage of land, migrate to the capital to open offices. island’s GDP. South East Asia is the top foot per month, which no longer makes survey, despite there being little sign of a According to one local consultant, “Real combined with a slowing economy and destination for Taiwanese companies sense for IT occupiers.” slowdown. estate and large developers who have growing concern over the U.S.-China The municipal government has released expanding away from mainland China, but the backing of big foreign investors trade friction, has seen Beijing slide down a planning draft intended to reshape the moving back home is the second choice. Another sector that is booming in Delhi is One consequence of the rapid expansion are continuing to go long and pick up the survey rankings for development Beijing retail sector, which should favour The Taiwanese government has initiated logistics. According to one interviewee, of Bangalore’s multitude of IT parks, aggressively priced assets where they feel prospects this year. For investment retail projects in the Wangfujing and a three-year action plan to welcome “You’ve seen properties that are 100 acres which now employ more than 2 million there is active market demand and they purposes it still places in mid-table, but the Tongzhu areas over the long term. returning businesses, and help them find in size being committed to the extent of IT workers, is that the city has outgrown can go into a redevelopment story.” city remains the least favoured of China’s land at concessionary rates. This has 60 per cent even before the properties are available infrastructure. Traffic is even first-tier cities. Both rents and capital benefitted not only the industrial market, ready for occupation—that’s how strong more chaotic than usual in India. Taipei (14th in investment, 19th in Investment Development values have been in decline in 2019. but also the high-end residential sector the underlying demand in north India is.” Meanwhile, the metro is poorly planned, prospects prospects development). Taipei is probably the least as reshoring business owners return to While finding a good development partner although in certain pockets where metro 8 GOOD liquid of the Asia Pacific’s major markets, Although foreign investors completed Taiwan. in northern India remains a challenge, the connectivity is available, things are not as mainly because a high proportion of 7 a number of office acquisitions in the demand for logistics and warehousing bad as they once were. Provision of basic investable assets are held in the portfolios first half of 2019, the Beijing market has As usual, domestic capital held by local facilities appears “endless” and buying utilities, from internet to electricity to water, 6 5.07 of local institutions and insurance traditionally been dominated by domestic institutions continues to dominate the land at reasonable prices is not generally is also patchy, while pollution is a growing 5 companies and therefore do not trade. 5.21 purchasers able to outbid foreign players, market in Taiwan. Since it is not as price a problem. problem. That said, there has been reasonable 4 FAIR and the status quo seems unlikely to sensitive as foreign capital, the prospects rental growth in 2019, which has resulted change. for international investors are expected to 3 Mumbai in cap rates widening at the midpoint of Investment Development Investment Development remain limited. prospects prospects prospects prospects 2 the year. According to one investor, “There isn’t a 8 GOOD 8 GOOD 1 lot of supply within the 5th Ring Road, so New Delhi (15th in investment, 15th in POOR Takeup was triggered mainly by a wave of 7 New Delhi 7 0 if you can find an asset at the right pricing development). New Delhi has traditionally office relocation from aging buildings to 6 6 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 ’20 in Beijing within that 5th Ring Road, it’s been focused more on residential Shinyi District, Taipei’s CBD. Meanwhile, 5.03 5.04 fantastic. If you can find an asset in one of development, so the downturn in the 5 5 Authorities continue to build out transport international coworking space operators 4.93 4.90 the business parks which are dominated residential market nationally is probably FAIR infrastructure, improving connectivity have also aggressively occupied new 4 FAIR 4 by local technology companies, that’s felt more keenly here than in other parts of to new areas such as Navi Mumbai, space. 3 3 O.K., too.” the country. Oversupply in the sector has which houses many new IT parks. While been growing since 2013, and conditions 2 2 Bangalore a potential oversupply situation may Concerns have surfaced over an incoming worsened following the government’s 2016 1 1 be brewing over the coming three-year POOR glut of office supply just as demand from demonetisation campaign, together with POOR period, these new facilities have better 0 0 tech companies, which have been the tighter regulation of the industry. Now that ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 ’20 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 ’20 access to manpower as well as a lower biggest marginal source of demand over both the banking and the nonbank finance cost of living. They are therefore well the last few years, is cooling. As of mid- sectors in India have dried up as a source 2019, vacancies had risen to an eight- of capital, many developers—especially year high of 11.5 per cent (expected to

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Manila (17th in investment, 11th in Investment Development That said, the Jakarta office market behind Bangkok, in people’s minds in according to Deutsche Bank, cap rate either office or retail because supply has development). Despite apparently healthy prospects prospects continues to be plagued by oversupply. terms of development quality. But maybe compression can be expected to stabilise been enormous. And there’s a lack of real estate markets, Manila continues to 8 GOOD With little relief in sight, rents look set to in these pockets, some industry watchers going forward. liquidity for takeout capital at the end of languish near the foot of the investment 7 Manila continue on a downward track as vacancy are saying it now exceeds Bangkok in a project.” sentiment tables this year, far removed rates touch some 35 per cent in 2019. certain quarters, though as a city it still 6 Investment Development from the third-place ranking in our 2017 5.03 On the residential side, Jakarta continues struggles.” prospects prospects Some opportunities may still be available 5 survey. Ongoing restrictions on foreign 4.87 to see too much supply aimed at the top 8 GOOD for adventurous investors, however. majority ownership of domestic real 4 FAIR end of the market, especially given the Otherwise, opportunities exist for private- According to one locally based fund 7 Auckland estate assets probably play a role in this, 3 relatively small number of expat workers equity investors to exploit a multitude of manager, “Shopping malls may be O.K.— given that office-sector vacancies remain living in the country. localised inefficiencies. Value-add plays 6 if the demographics are positive, they 2 4.82 low, rents are rising, and capital values are a definite prospect, with some local 5 may survive in Tier 2 destinations. Then, continue to grind upwards (climbing 1.8 1 The recent announcement that the developers now prioritising introduction of 4.83 logistics is everywhere, and in terms of POOR 4 FAIR per cent quarter-on-quarter alone in the 0 government intends to move its capital smart building technologies as a way to residential, some of the Tier 2 cities are second quarter of the 2019, according ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 ’20 (together with some 180,000 civil servants cut running expenses. Beyond that, the 3 still positive and selling well. Although the to JLL). and their families) away from Jakarta to many office buildings suffering chronically 2 market is slowing, you can still sell. The offices trade at cap rates (i.e., some 5.9 a new base in Kalimantan has raised high vacancy rates, as well as some 1 volume is still there, although the latest Over the last several years, the main per cent, according to Knight Frank) concerns that vacancy rates in the city residential complexes, have become POOR statistics show that prices in the top 30 0 catalyst for Manila’s office sector has that are probably hard for international may worsen. However, if authorities potential targets for conversion to hotels or ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 ’20 cities have recently come down by 2 to 3 been demand from Philippine offshore investors to justify on a risk/return basis. proceed with plans to demolish newly co-living facilities. per cent.” gaming operators (POGOs), an industry vacated government buildings and As in other markets, the logistics sector providing online gambling services, mainly turn them into green spaces, the move In addition, several large private-equity The appeal of development plays has also is booming in Auckland. Industrial land Investment Development to gamblers in Mainland China. Demand may lead to interesting opportunities to investors have considered investing in prospects prospects been boosted by the government’s “Build values have risen an average 10 per cent from POGOs represents almost 40 per regenerate parts of Jakarta’s chronically outlying transit-oriented developments 8 GOOD Build Build” infrastructure construction annually over the last five years, and with cent of new office takeup in the city. There congested inner city. (TODs) that have been earmarked for programme, now in its third year. This most industrial sites fully occupied, rents 7 have been complaints, both domestically construction along the new LRT lines, is focused, amongst other things, on are expected to continue to rise going and from the Chinese government, that though so far none has taken the plunge. 6 opening up satellite locations outside Investment Development forward. 4.91 the industry has come too far too fast, Manila as a way to relieve stress on a prospects prospects Finally, the logistics sector continues 5 but it remains too important to cut loose 8 GOOD to draw attention, although in practice chronically overpopulated city centre. New Zealand’s housing market has seen 4 FAIRR 4.77 at this point. According to one locally investing remains problematic given the China – second-tier cities Government projects dominate to the 7 demand outstrip supply for at least the last based interviewee, “There are a lot of local high cost of land and the profusion of 3 north, while to the south, according to one 10 years, and with additional pressure also people who are entrenched in both the 6 mom-and-pop operators who are unlikely locally based planner, “a lot of private- 4.86 coming from foreign buyers, home prices 2 real estate and the construction industries sector players are quietly developing 5 to lease expensive new high-tech facilities. reached the point where the government 1 that don’t want to lose those big Chinese 4.86 POOR massive land banks, maybe 500 to 4 FAIRR felt compelled to introduce restrictions players—as long as that’s the case, at Auckland (19th in investment, 18th in 0 2,000 hectares in size, to build quasi- on international purchasers in 2018. The ’13 ’14 ’15 ’16 ’17 ’18 ’19 ’20 least for the next year or so, I don’t see a 3 Jakarta development). Offshore investors on the cities based on horizontal infrastructure house market softened in 2019, following significant change.” hunt for higher yields discovered Auckland and the creation of new broadband 2 Australia’s example, but appears to have several years ago, their arrival triggering Hangzhou, Chengdu, and Suzhou are connections. You do see the private toll 1 rebounded towards the end of the year. The BPO sector remains the largest operators connecting roadways down POOR a bidding war for commercial assets that the most popular secondary cities with 0 office sector tenant. It continues to grow, south, and that’s going to open up a lot of saw values rise steeply and cap rates investors due to their strong technology ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 ’20 China’s second-tier cities (20th in although at a slower pace. So far, it has new communities.” New tax policies may rapidly compress. Prime yields currently and education sectors. Meanwhile, investment, 16th in development). been able to fend off the threat posed by also encourage the translocation of BPO stand at some 5.6 per cent, with turnover smaller cities west of the Greater Bay To a certain extent, this has already Overseas investors have largely withdrawn the evolution of artificial intelligence–based providers to these satellite locations. reaching almost US$2 billion in 2018, Area are expected to see relatively greater happened in some areas, thanks in from China’s second-tier cities in favour solutions, and has recently received a according to CBRE. benefits from the integration of that area. particular to the ongoing buildout of the of more mature markets, in particular boost from growing interest in “captive Jakarta (18th in investment, 17th in city’s Light Rail Transit (LRT) system. In Shanghai and Beijing. With China’s centres,” involving the offshoring of While the low-hanging fruit has now According to one investment manager, the development). Economic growth in particular, buildings on main roads with economy slowing, investors are concerned corporate in-house services such as been digested, transactions remained GBA story is “all about the ‘West Bank,’ Indonesia continued at a robust pace good LRT access enjoy strong occupancy. about liquidity in less developed cities. human resources, finance, and IT. at a healthy level in 2019, with offshore not about Shenzhen and Guangzhou— of 5.2 per cent in the first half of 2019. According to one interviewee, “The Furthermore, China’s secondary cities institutional investors (especially from they are already big enough and there’s a The recent reelection of President Joko tactical urban renewal around the stations tend to be plagued by oversupply, Meanwhile, survey sentiment towards Australia, the United States, Singapore, lot of supply and activity. They don’t need Widodo has also created confidence has taken a lot of people by surprise; especially in the office sector. development plays was significantly help. But the smaller cities could see a lot that the overall environment will remain they come back to a Jakarta they don’t and China) continuing to be a major stronger this year than that for investment. influence. However, significant levels of of change. We are looking at residential stable and that government infrastructure recognise. Parts of it are walkable, and “A lot of foreign capital has been burned in To some extent, this reflects the reality incoming supply have seen rental growth and development that supports residential, investment programmes will continue. there are new downtown districts that are the Tier 2, Tier 3 cities,” one fund manager across most emerging markets, where plateau, and with a modest 2.1 per cent such as education and health care.” gleaming. Jakarta had always sat between said. “Outside of the residential sector, stabilised assets are generally in short annual growth expected until 2023, Kuala Lumpur and Manila, maybe a little there has been no real rent growth in supply. Another reason is that Manila

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Kuala Lumpur (21st in investment, Hong Kong SAR (22nd in investment, While the retail sector—especially at the Property Types in Perspective Singapore’s office market was one of the investor interest to Japanese provincial 20th in development). On the face of 22nd in development). Its reputation high end—may be subject to longer-term last in the region to recover from the global cities. Tokyo’s ranking has slipped a little, it, serially unloved Kuala Lumpur should as the priciest real estate market in the negative repercussions, it has always OFFICE financial crisis, and prime rents there are but it is clearly still seen as a defensive be more attractive to international real world has guaranteed Hong Kong a been a volatile sector and seems likely The office sector continues to be the most still well below their 2008 peak. Since play by investors: its sell rating dropped to estate investors. Malaysia’s GDP per place in the lower half of our investment to recover much of the ground it has lost popular amongst investors in the Asia then, the city has expanded and upgraded 11 per cent from 14 per cent. capita is the second highest in South East rankings survey almost every year since once the situation stabilises. Most local Pacific region, and in most markets has its CBD office stock, as well as opening up Asia—four times higher than investors’ its inception—not only do grade A assets investors see the threat from the U.S.- continued to perform. Despite widespread a number of decentralised office districts. Only two cities or city groups saw a favourite, Vietnam—and its developed rarely trade, but capital values are so high China trade friction to be a much more concerns about pricing and a general Rents are rising sharply. dramatic rise in their sell ratings, and for financial markets, including real estate and cap rates so low that many foreign serious potential drag on the economy. consensus that yields may have bottomed, rather different reasons. China’s second- investment trusts should provide appeal investors see little prospect of further a number of markets continue to see yield Ho Chi Minh City continues to be tier cities saw their sell rating rise to 43 per to institutional investors. In addition, incremental gains. This year, however, Residential values, meanwhile, have also compression. extremely popular from a top-down cent, from 32 per cent. These locations Malaysia is seeing the arrival of significant the city has woes of a different kind to started to experience declines, though perspective due to Vietnam’s excellent tend to be oversupplied with office space, amounts of investment from Chinese contend with. Months of street protests prices at the end of October 2019 were Overall, however, the office sector has demographic and growth prospects and something that will hit returns as China’s tech manufacturers as they move some have seriously damaged the tourism and still higher than they were at the beginning become marginally less popular with also because it has seen strong rental economy slows. operations offshore. retail sectors and raised doubts about the of the year. Given the extent of home price investors: 84 per cent are or plan to be growth. However, overseas investment in city’s long-term investment prospects. increases experienced in recent years, few invested in it, compared with 86 per the city’s office sector is minimal. Hong Kong saw the sharpest rise in the However, significant oversupply in the As a result, the city finished dead last in owners are currently in negative equity and cent in 2019. Investors rate its prospects percentage of investors who would be office and retail sectors has again cast a our investment prospects survey, with the the supply/demand equation still militates marginally lower than in our 2019 report, The resurgence of Osaka, boosted by sellers of its office market. More than half cloud over local markets. Office vacancy lowest score seen in years. in favour of sustained upward pressure on and now expect the industrial/logistics almost a decade without significant office (52 per cent) are now sellers, spooked by rates exceeded 18 per cent in mid- private home values. sector to be the best-performing asset supply, is part of a wider refocusing of ongoing political protests. 2019, according to JLL, and with more That said, much of the damage is more Investment Development class. than 3 million square feet of new supply apparent than real. Although retail sales prospects prospects arriving in 2019, vacancies are expected fell 23 per cent year-on-year in August 8 GOOD The huge lot sizes in Asia Pacific markets Exhibit 3-4 Office Assets Buy–Hold–Sell Recommendations for to ex-ceed 25 per cent by the end of the 2019 (with same-store sales in some 7 mean that more properties are being sold 2020–by City year. Unsurprisingly, capital values and locations declining over 50 per cent) and to joint ventures or investment clubs. The rents are in retreat. The retail sector has hotel occupancy dropped to just half after 6 3.93 abundance of institutional capital that Buy Hold Sell seen the greatest involvement by foreign tourist arrivals fell 40 per cent in August 5 continues to find its way into regional developers, and some have also been compared to the previous year, there FAAIR markets looking to buy core properties Ho Chi Minh City 57 35 8 involved in residential-led mixed-use has so far been little impact on property 4 3.96 guarantees that office assets will remain in Singapore 49 40 11 projects in Kuala Lumpur. values—investors scouting for deals on 3 demand. Osaka 39 53 8 a distress basis have been disappointed 2 In recent years, foreign investment—mainly as owners opt to sit tight and wait out the Sydney 36 49 15 1 Hong Kong SAR Demand for coworking space continues Chinese—has been focused on building storm. This is perhaps unsurprising given POOR to be very strong in most Asia Pacific Tokyo 35 54 11 0 residential projects in the Iskandar region that Hong Kong has always been a tightly ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 ’20 markets (in particular in China), and Shenzhen 34 44 22 of southern Malaysia, although this has held market, and owners are generally not while developers and landlords are often Melbourne 33 56 11 now dried up to a great extent due to highly leveraged or short of capital. sceptical about the sustainability of the Mumbai 33 54 13 Chinese capital export restrictions. conventional coworking business model, Bangalore 31 49 20 In particular, the city’s CBD, which is the industry has become entrenched Investment Development located in a confined geographical area Bangkok 30 55 15 prospects prospects so quickly that there is no question that that guarantees prime space will always Guangzhou 8 GOOD flexible space will remain in growth mode 29 48 23 be in short supply, has seen relatively little for the foreseeable future. China–second-tier cities 28 29 43 7 negative impact. Rents fell 2.2 per cent New Delhi 28 59 13 6 quarter-on-quarter in the third quarter of Expected best bets: Most city office 2019 since peaking in June, according to markets are regarded in much the same Shanghai 27 51 22 5 4.73 JLL, and while new lettings fell by 72 per light as they were a year ago, which is Manila 25 52 23 4.714.7 4 FAIRR cent month-on-month during August, CBD broadly positive; observers would usually Seoul 25 63 13 grade A vacancies stood at a mere 5.5 3 buy or hold in most markets. However, a Jakarta 23 57 20 per cent—high for Hong Kong, but hardly small number of them have seen dramatic 2 Kuala Lumpur Beijing 21 51 28 exceptional by international standards. changes in popularity, either upwards or 1 Auckland 17 67 16 POOR At the same time, however, few tenants downwards. 0 signed CBD leases in October 2019, Taipei 15 63 22 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 ’20 and those that did often benefitted from For example, Ho Chi Minh City and Kuala Lumpur 13 62 25 significant rent-free periods that mask the Singapore have seen their buy rating Hong Kong SAR 6 42 52 true level of rental declines. increase by more than 10 percentage points, while Osaka has seen its grow by 0% 20% 40% 60% 80% 100% five percentage points. Source: Emerging Trends in Real Estate Asia Pacific 2020 survey.

46 Emerging Trends in Real Estate® Asia Pacific 2020 Emerging Trends in Real Estate® Asia Pacific 2020 47 Chapter 3: Markets and Sectors to Watch

RETAIL Expected best bets: There are only While some second-tier cities in China RESIDENTIAL prospects for investors and developers Again, investors have very mixed feelings eight cities where investors would are relatively undersupplied with modern are constrained by the city’s residential about second-tier cities in China, many The retail sector continues to be out The residential sector remains broadly rather buy retail than sell it, and the only shopping centres, others have seen a cooling measures, which impose onerous of which have strong growth prospects of favour with investors in the Asia popular with investors in the Asia Pacific, city with a clear majority in favour of huge wave of supply, often ill-conceived stamp duty on non-Singaporean buyers. but also a big pipeline of new supply Pacific, largely due to the growing threat with both multifamily residential and for- buying retail is Ho Chi Minh City, where and rarely well managed. Furthermore, the city’s anti-immigration and localised cooling measures that from e-commerce sales. It was the sale residential being higher rated this year the sector is relatively undeveloped, stance is also working to constrain reduce profitability. As China growth only property type to see a fall in the than in our 2019 report. although undermanaged retail podiums in Thanks to the attractiveness of the Ginza demand for new apartments. slows, overseas investors are increasingly percentage of investors who plan to invest residential developments have been tipped shopping district in Tokyo, the Japanese focused on first-tier cities. in the sector. However, there are clearly a few dissenting as a value-add proposition. capital’s retail property sector remains Sydney remains popular. The city now voices, with residential assets in some relatively popular with investors. However, looks more attractive after two years of Hong Kong again props up the bottom That said, retail remains a core real cities attracting relatively high sell According to CBRE, the supply outlook for Osaka retail has not gained the same falling prices and also interest rate cuts of the table. More investors (59 per cent) estate asset class, and there is a growing ratings from investors due to historically Ho Chi Minh City is better than expected popularity with investors as its office sector that look set to send the market on an rate Hong Kong residential as a sell than conviction among investors that if existing high prices and the risk of government after a number of projects were delayed. has. Retail sales in Japan are under threat, upswing. Australia continues to see high any other city/sector combination. Several facilities are well located and can be intervention. According to one investor, “I however, from the prospect of declining rates of immigration, which are boosting months of street protests have damaged adapted in ways that satisfy consumer do think residential for sale is teetering on There is also optimism about retail in fast- tourist arrivals from South Korea and demand for new homes. sentiment in the city. However, price expectations in terms of ‘experiential’ the brink at the moment.” growing emerging markets such as India China in the wake of existing or potential declines have been minimal as of the end services, they will continue to thrive, albeit and Manila. Opinion about the prospects disputes with those countries. There also is interest in Tokyo, which is of October, and the fundamental lack of possibly at lower profit levels than in In Hong Kong SAR and Australia in for retail in China’s second-tier cities is still growing due to migration from the rest supply in the city will probably be sufficient previous years. Investors rate its prospects particular, house price growth has leaped sharply divided, possibly a reflection of Sentiment towards retail in Hong Kong of Japan. The stable income prospects to prop prices up going forward. lower than other core sectors, however, ahead of income growth, which is not the how different each city’s prospects are, retail, meanwhile, has been hit by the wave of multifamily there remain attractive, but and worse than in 2019. case for mainland China and Singapore, which is down to supply factors. of protests in the second half of 2019 that pricing is tight. even though prices have risen in all these has seen tourist arrivals drop precipitously. However, the retail sector seems to markets. be relatively more popular in the Asia Exhibit 3-6 Residential Assets Buy–Hold–Sell Recommendations for Pacific region than elsewhere in the A number of interviewees expressed an 2020–by City Exhibit 3-5 Retail Assets Buy–Hold–Sell Recommendations for world. According to RCA, global retail interest in the multifamily residential sector 2020–by City transactions in the first half of 2019 were across the Asia Pacific, but also said that Buy Hold Sell only slightly higher than in the industrial opportunities are limited since the sector and logistics sector, while in the Asia Buy Hold Sell is underdeveloped compared with the Ho Chi Minh City 58 36 5 Pacific, retail sales volumes were more Ho Chi Minh City 54 39 7 United States and Europe. Japan remains Bangkok 35 50 15 than twice those of industrial and logistics the only market with a large proportion of Manila 31 48 21 Singapore 35 50 15 assets. While retail property sales in the multifamily residential property, although Guangzhou 30 42 28 Shenzhen Asia Pacific fell 7 per cent year-on-year in the sector is growing in both Australia and 34 48 18 the first half of 2019, globally they fell 35 Shenzhen 28 50 22 China, with the latter expected to evolve Sydney 34 49 17 per cent. This gives some support to the New Delhi 27 57 16 into a major component of total residential Tokyo 33 50 17 Tokyo thesis that Asia Pacific retail is adapting 27 49 24 assets. Melbourne 32 51 17 better to the growth of e-commerce, or China–second-tier cities 26 36 38 Osaka 31 50 19 anyway that it is suffering less due to lower Jakarta 26 54 20 Expected best bets: Ho Chi Minh per capita retail space in most cities. City tops the table again. In this case, Guangzhou 29 42 29 Mumbai 26 60 14 however, there has been a reasonable China–second-tier cities 26 39 34 Bangalore 25 49 25 In 2018 and the first half of 2019, a number amount of overseas investment in local Manila 26 53 21 of global investors allocated substantial Bangkok 24 51 25 residential assets. Foreign developers Jakarta 25 58 17 capital to retail in Vietnam, India, and Shanghai 22 51 27 and private-equity players have both Mumbai 25 57 18 Greater China, suggesting at least Melbourne 21 54 25 invested in condominium developments New Delhi 25 55 21 localised faith in the sector. Sydney 20 55 25 and developed a number of new luxury apartment blocks. Shanghai 23 56 21 Beijing 19 49 32 Overall, in the Asia Pacific region, the Taipei Osaka 19 58 23 23 56 21 retail sector attracts more sell ratings However, anecdotal evidence suggests Auckland 20 54 27 from investors than any other asset class, Seoul 19 57 25 that concern is growing about Vietnam’s with 13 cities having a higher percentage Singapore 17 61 21 land prices and about how many luxury Bangalore 20 50 30 of investors saying they would sell retail Kuala Lumpur 13 60 26 apartments can be absorbed. Tellingly, Beijing 17 56 27 rather than buy it. Hong Kong SAR 9 38 53 many of the new blocks have been heavily Seoul 17 65 18 marketed in Hong Kong and Singapore, Taipei 9 60 31 Kuala Lumpur 14 60 26 where they have proved popular with Auckland 7 58 35 Hong Kong SAR 9 59 investors priced out of their home markets. 33 0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100% Singapore residential assets have also Source: Emerging Trends in Real Estate Asia Pacific 2020 survey. increased in popularity; however, the Source: Emerging Trends in Real Estate Asia Pacific 2020 survey.

48 Emerging Trends in Real Estate® Asia Pacific 2020 Emerging Trends in Real Estate® Asia Pacific 2020 49 Chapter 3: Markets and Sectors to Watch

INDUSTRIAL/LOGISTICS Then there is the domestic attraction. In China, there is an increasing stock of those markets, mainly for investors willing HOTEL Bangkok drew 22.8 million overnight “Putting aside the trade war, Vietnam is high-end space that may ultimately be to pony up long-term capital for years of international visitors in 2018, 19.3 per Although industrial, warehouse, and As they do with office space, investors early on in its evolution, so it’s a great sold by developers into the secondary development. cent more than second-place Paris. In logistics space would logically be the favour Asia’s most developed markets for opportunity for serious global developers market. Guangzhou (number 2) and particular, it is the destination of choice for sector hardest hit by the slowdown in hospitality plays. As an asset class, hotels in retail logistics. It’s got a huge and Shenzhen (number 4) rate particularly One asset manager said that he is seeing travellers from mainland China, who are trade due to higher tariffs and slowing are of middling interest overall when our growing middle class,” one fund manager highly in terms of buy interest in our huge interest from clients in logistics now outdone globally only by Americans economic growth, the asset class remains survey respondents identify sectors for noted. survey, ahead of Tier 2 Chinese cities space in South Korea. This is not reflected in terms of international-traveller volume. a favourite play amongst institutional growth in 2020. But hospitality tends to be (number 8) as well as China’s biggest in the survey results, where Seoul ranks Chinese tourists, who make up 37.3 per investors, who rate it the top sector for a specialist sector, of great interest only to There is one major problem for institutional commercial markets, Shanghai (number in the bottom five least attractive markets cent of overseas arrivals in Bangkok, also investment prospects in this year’s report. those with expertise and a track record in investors looking to buy existing logistics 10) and Beijing (number 12). for a buy on distribution assets. Korean target Seoul and Tokyo, in that order. the field in Asia. space that meets international standards exports of cars and computer chips Rising consumer spending and the growth in Vietnam, and that is the almost When emerging market and frontier have been hurt by global trade tensions Expected best bets: Singapore (number of e-commerce across Asia are driving Bangkok (number 4 for buy interest in complete absence of available assets. So cities top the survey responses in terms and also a spat with Japan over wartime 3) also scores high in our survey as a the need for high-spec, tech-driven hotels) is the world’s most visited tourist Ho Chi Minh City, together with cities in of interest, it is often the case that the reparations. market for hotel buys. It is the second- warehouse space, an asset class that is destination. It has been the top city India (in particular Mumbai (number 5), and markets that appear attractive at a macro busiest city in Asia for international hugely undersupplied across the region, globally for international visitors for six New Delhi (number 6)) score high in our level and in terms of demographics offer Yet even though South Korea is one of tourists, according to Mastercard, just with the arguable exception of Australia. of the last seven years, according to survey and have now become developing little opportunity for actual investment. It Asia’s most export-oriented nations, it still ahead of Kuala Lumpur. Both Singapore E-commerce also intensifies the need for Mastercard’s Global Destination Cities markets for warehouse specialists. requires a strong local partner to penetrate lacks high-grade logistics space to serve and Kuala Lumpur drew more overseas well-located facilities that are far more Index. both exporters and the local market. That visitors last year, at around 14 million, than than “sheds,” able to distribute goods at may justify greater attention to the market. the lightning speeds now required. That dynamic is still very favourable in most “I’ve got great hopes for South Korea,” the Exhibit 3-8 Hotel Assets Buy–Hold–Sell Recommendations for developing Asian markets, where the size Exhibit 3-7 Industrial–Distribution Assets Buy–Hold–Sell asset manager said. “They’ve got a much 2020–by City of the middle class is rapidly rising. Recommendations for 2020–by City bigger population than, say, Australia, and you’ve got freehold assets, which is our “Industrial warehouses at the low end have Buy Hold Sell Buy Hold Sell ambition, to wean ourselves off leasehold been affected by the trade war. But they properties. They really haven’t had that Ho Chi Minh City 47 46 7 haven’t been the major assets favoured Ho Chi Minh City 64 33 3 much institutional trade of assets.” Tokyo 47 41 12 by institutional investors,” the head of Asia Guangzhou 44 46 10 research at a commercial brokerage said. Singapore 46 40 14 Bangalore 42 49 8 The same manager said that you “can’t If anything, tariffs and economic pressure Bangkok 42 43 14 take your eyes off” logistics in China. may push the adoption of higher-end Shenzhen 41 46 13 Major overseas players continue to Osaka 36 49 15 warehousing that can offset any higher Mumbai 40 45 15 build huge amounts of new space. They Seoul 34 49 16 trading costs through greater efficiency. New Delhi 39 50 11 will ultimately need to monetize those Sydney 34 49 17 Tokyo 39 55 7 assets, either through portfolio sales or Emerging Asia tends to set pulses racing Shenzhen 25 60 15 China–second-tier cities 38 46 15 securitisation. most when it comes to logistics. The top Auckland 23 62 14 cities for buy interest are all in Vietnam, Bangkok 37 57 6 The industrial sector is a favourite target Beijing 23 55 22 China, or India, all of which are chronically Shanghai 36 51 13 for investors in Japan. But it is not always Melbourne undersupplied, or benefit from government 23 60 17 Singapore 36 55 10 easy for international investors to identify policies that boost buildout of logistics Shanghai 23 61 16 Beijing 35 55 10 good deals. For the most part, Japan infrastructure, or both. Tokyo is the only Bangalore 20 58 23 remains a developer play for modern developed market that features among the Sydney 35 52 13 warehouse space, rather than an asset Guangzhou 20 58 22 top 10 target cities. Manila 34 50 16 class where a large fund or institution can Jakarta 18 67 15 32 63 5 Osaka buy stabilised properties. Expected best bets: Ho Chi Minh City China–second-tier cities 17 52 30 Jakarta 29 60 10 (number 1 for buy interest) is the most New Delhi 17 64 19 28 62 9 Investing in industrial J-REITs is a way attractive target destination for industrial, Melbourne for investors to find easy liquidity and Taipei 16 67 16 followed by Malaysia and then the rest of Seoul 28 58 14 an entry to the industry. They trade at a Hong Kong SAR 13 46 42 South East Asia. All of these areas benefit Auckland 25 58 17 24 per cent premium to net asset value from a gradual migration of manufacturing Kuala Lumpur 13 67 19 Kuala Lumpur 22 64 13 (NAV), demonstrating there is more money capacity away from China. In particular, Mumbai 13 71 16 Hong Kong SAR 18 45 38 keen to get into the industry than there is the pro-business administration in Vietnam Manila 65 23 free float of J-REIT shares. Likewise, the 12 is very accommodating to foreign investors Taipei 16 70 13 premium to NAV on office J-REITs is 29 0% 20% 40% 60% 80% 100% and manufacturers looking to increase 0% 20% 40% 60% 80% 100% per cent. their presence. Source: Emerging Trends in Real Estate Asia Pacific 2020 survey. Source: Emerging Trends in Real Estate Asia Pacific 2020 survey.

50 Emerging Trends in Real Estate® Asia Pacific 2020 Emerging Trends in Real Estate® Asia Pacific 2020 51 Chapter 3: Markets and Sectors to Watch Interviewees

New York City. Singapore draws sizeable However, hospitality J-REITs show a Dougie Chrichton Dexus Mitsui Fudoson Investment Advisors Darren Steinberg Shuji Tomikawa visitation not only from China but also minimal premium over their net asset 151 Property from India, putting its hotel industry in a value, suggesting that concerns over Chris Chapple DWS Investments Japan Moelis Australia particularly sweet spot. pricing are mounting. Unlike industrial and Koichiro (Ko) Obu Ben Boyd Accord Group Holdings office J-REITs, which trade at significant Richard Price ESR Mori Building Kuala Lumpur’s low ranking in our survey premiums, there is a minimal 2 per cent Stuart Dawes Hiroo Mori Actis (number 20, third from the bottom for premium on hotel REITs, and a –0.6 per Brian Chinappi Fife Capital NAB Healthcare hotel buy rating) is therefore shockingly cent discount on retail J-REITs. Allan Fife Georgina Switkowski AECOM low. Only 13 per cent of investors would Sylvester Wong Frasers Nuveen be looking to buy Kuala Lumpur hotels, “It’s quite a clear indication of investors’ Rod Fehring Nick Evans ALE Property Group suggesting that bargain hunters may be preference,” the Tokyo-based head of Andrew Wilkinson Frasers Property Australia Ooedo Onsen Reit Investment Corporation able to find deals. Malaysia, like Vietnam, research for an investment-bank asset Chamoun Malki Fuminori Imanishi also is a beneficiary of trade tensions, manager said. “I don’t know if they are Allianz Real Estate Rushabh Desai GenReal Property Advisers PAG Investment Management which should boost the domestic right, but this is a reflection of the market Anckur Srivasttava Naoya Nakata economy. Kuala Lumpur gains from an response.” AMP Capital Tim Nation GPT Group Pamfleet increase in Chinese travellers, now a Bob Johnston Andrew Moore top source at 20.6 per cent of arrivals, Once again, Ho Chi Minh City tops the list, Angelo, Gordon International Nick Harris Jon Tanaka Chris Barnett PAYCE and also from the significant growth in as it does with every other asset class, Will Morgan tourism out of South East Asia. Thais and the issue being whether investors can find ANZ Grosvenor Asia Pacific John Hudson Benjamin Cha PGIM Real Estate Indonesians each account for just under hotel stock that trades. Benett Theseira 12 per cent of overseas arrivals in Kuala Aoyama Realty Advisors ISPT Super Property Haruyuki Shinya Darryl Browning PGIM Real Estate (Australia) Lumpur. Steve Bulloch Arrow Capital Partners Hulic Co. Ltd. Mastercard also projects particularly Kurt Wilkinson Yoshito Nishikawa Portwood Capital Peter Churchouse strong 9.9 per cent growth in tourist Australian Unity ITOCHU REIT Management arrivals in the Malaysian capital. That is Mark Pratt Junichi Shoji Professional Property Services Nicholas Brooke outstripped only by the 10.0 per cent AXA Real Estate Investment Managers Japan Japan Post Bank Co., Ltd. advance in visitors to Tokyo. Yoshihiko Hayafuji Hiroyuki Tanaka Property Council of Australia Yuki Ogawa Ken Morrison Blackstone Group The growth in Tokyo will boost the ranks of Christopher Heady Jerde Partnership Samurai Capital the 12.9 million visitors who came calling Kimmo Tammela Tetsuya Karasawa Ken Aoyama on the Japanese capital in the last full Brookfield Asset Management JLL Savills Niel Thassim Stuart Crow Christopher Marriott year’s figures. Japan has been a prime Tim Graham target for hotel investors, buoyed by the Cache Logistics Trust Fergal Harris SCA Property Group short-term benefit from the Rugby World Daniel Cerf Megan Walters Anthony Mellowes Cup, and the 2020 Olympic Games in Capbridge Investors JPMorgan Asset Management (Japan)）Ltd. Starr International Investment Advisors (Asia) Tokyo. But the greater driver has been a Ken Fridley Tetsuya Karasawa Alison Cooke rapid increase in tourist arrivals in recent CapitaLand Limited KaiLong Stockland years. The fast growth of the Japanese Andrew Lim Hei Ming Cheng Mike Davis hotel sector may come back to haunt it, CBRE Keppel Land Limited Swire Properties though. Signs of overbuilding have already Henry Chin Tan Swee Yiow Ashley Hegland emerged, while there is also a threat to CBRE Global Investors Kenedix Telstra Super tourist arrivals arising out of actual or Tetsuya Fujita Takahiro Uchida Andrew Bambrook potential bilateral tensions involving South Hikaru Teramoto Centuria Capital Tishman Speyer Korea and China. Once the Olympics are John McBain LaSalle Investment Management Ryan Botjer over, many analysts are expecting the Simon Howard Charter Hall Tom Miller Tokyu Land Capital Management sector may retrench. David Harrison Yutaro Tanaka Mapletree Investments Pte Ltd Hiew Yoon Khong Tokyo (number 2) and Osaka (number 5) Colliers International Touchstone Capital Management David Faulkner Norihiro Matsushita Fred Uruma both feature near the top of our survey in John Kenny terms of buy interest on hospitality assets. Kichoon Jung Metropolitan Real Estate UBS John So Grant McCasker CRE REIT Advisers Tsuyoshi Ito Mitsubishi Corp.-UBS Realty Vicinity Centres Katsuji Okamoto Justin Mills Daiwa House Industry Co., Ltd. Carolyn Viney Tetsuo Suzuki Mitsubishi Jisho Investment Advisors Naoki Kuwabara Wing Tai Holdings Limited Deutsche Bank Toshiyuki Arai Cheng Wai Keung Hugh McDonald Eriko Kato

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