Sydney and Melbourne dominate the list of investors’ favourite real estate markets in Asia Pacific, while the region’s biggest buyers of property rekindle a romance with Singapore, according to a recent survey of industry experts.
The Emerging Trends in Real Estate Asia Pacific report, jointly published by the Urban Land Institute (ULI) and PwC, found that surging rents in the pair of Australian cities, combined with limited supply, have earned Sydney and Melbourne the first and second place, respectively, in a ranking of 22 Asian cities by their perceived investment prospects for 2018.
The survey of the investment intentions of over 600 investors, developers and other real estate specialists also revealed that Singapore is hot, leaping to third place from second-to-last in the previous survey – reflecting a vote of confidence that the city-state’s office market has bottomed out after two years of sinking rents. Commercial sales in Singapore surged 50 percent year-on-year in the first half of 2017, crowned by the sale of Asia Square Tower 2 for $1.5 billion in September, which marked the second-largest office deal in Asia Pacific this year.
Shanghai, Hong Kong Are Up
Shanghai earned a respectable fourth place in the ranking – rising from sixth place last year – with investors betting on capital appreciation and rental growth in the mainland financial hub. Transaction volume rose 43 percent year-on-year in the first half of 2017, as China’s clampdown on capital outflows triggered a surge in demand from domestic buyers. Wealthy foreign core funds are also vying with domestic players for a limited set of assets, squeezing yields to below four percent in some cases.
Mainland China is well represented on the list, with southern mega-cities Shenzhen and Guangzhou also taking top-ten slots. Investors are bullish on the prospects for future demand in Shenzhen, with vast urban and infrastructure projects in the works, while Guangzhou is notable for its strong grade A office rental growth, as well as booming development activity in outlying districts.
Although a lack of investment opportunity relegated Hong Kong to a lower ranking, the city climbed from 18th to 13th place this year on the back of a pickup in transaction activity. A series of huge land purchases, many by mainland developers, helped Hong Kong take the crown for Asia’s biggest investment destination in the first half of 2017. The report also flags renewed interest in value-add opportunities among international core fund managers; a possible bottoming-out of the retail market; and the emergence of the East Kowloon business district as positive signs.
Developing a taste for niche sectors
Excess liquidity is a key force in Asia’s capital markets, as a growing tide of capital from the region’s sovereign and institutional funds chases a limited set of assets. The glut of cash washing over Asia’s core markets is keeping yields compressed (investors’ most commonly voiced complaint), while driving outbound investment from the region to $45.2 billion – nearly doubling year-on-year, according to brokerage CBRE.
The intensifying competition for assets is also pushing investors into niche property types in search of return. Logistics is a favourite, while data centres, rental housing projects and “co-living” facilities are also gaining traction. Even the more exotic asset classes are getting competitive, though, with one fund manager citing single-digit development yields for student housing in Australia.
Co-working also plays a starring role in this year’s survey, with shared office operators having risen from near-total obscurity two years ago to become the biggest source of new office demand in many cities across the region. “Such is the pace of change that both landlords and investors are having trouble coming to terms with it,” the reports finds.