March 1, 2018

While respective Asia-Pacific markets are at different points in the property cycle, most markets appear to be fully priced in, with yields at historical lows and with modest rental outlooks.


Retail Industrial Office sector leasing activity has been mixed across the region’s diversity of cities and markets. Overall office occupancy levels have been increasing since last year, led by the developed markets of Australia and Japan. In contrast, vacancy rates in China and Malaysia are rising and expected to face further headwinds as supply risk mounts over the next 12-18 months.

The office tenant profile is also changing across the region. Technology and coworking operators have been expanding their footprint, overshadowing the traditional finance and business services segments. We expect this to continue into 2018 as cost-conscious tenants look to upgrade before rental growth momentum accelerates further.


An improving economic outlook, low interest rates, low inflation, positive consumer sentiment and a buoyant tourism sector are supporting retail sales in parts of the region, particularly Japan. Rising retail spending in Asia is linked to growing income and wealth. This trend is likely to continue: the United Nations projects that the Asia-Pacific region’s share of the global middle class should rise to 60% by 2030. Asian consumers have also benefitted from rising house prices, a key component of household wealth.

Nonetheless, the region is also facing structural challenges from e-commerce. Online retail in the Asia-Pacific is on the rise and set to overtake America’s steadily increasing share as a proportion of total retail sales. Retailers are now more cautious about expanding their brick-and-mortar presence, instead looking to optimise their portfolios by closing non-performing stores and focusing on experiential retailing.


Against a backdrop of global export uplift and rising e-commerce, manufacturers, retailers and 3PL firms are seeking logistics space. While market conditions have improved alongside leasing demand in the region, rental growth was modest owing to a wave of new supply across key markets such as Tokyo, Shanghai and Beijing. Major e-commerce retailers such as Alibaba and JD are developing their own logistics facilities, amplifying concerns of speculative supply risk. However, in our view, structural trends stemming from online retail sales growth coupled with rising incomes should lead to stronger demand for logistics space.

Supply risks a concern for developing markets

Strong leasing performance, still-low interest rates and anticipation of a pickup in the global economy are driving developers to acquire land. Supply risks are mounting across the region: 9 out of 15 Asia-Pacific office markets monitored by PMA are expected to record a rise in new completions from 2017. According to PMA, China and Malaysia are the most vulnerable to further rental declines in response to new office completions in 2018.

Similarly, PMA reports that shopping centre supply risks are higher in suburban locations in China and Malaysia, where the rapid growth in shopping centre stock per capita may push up vacancy rates in 2018, representing development risk. Levels of new supply should moderate in most other markets, including Tokyo, in the year ahead, while supply constrained markets such as Sydney and Melbourne should continue to see gradually improving rental performance.

High domestic and global investor interest is funding a wave of new supply. However, the lack of modern logistics facilities is giving rise not only to obsolescence risk but also potential for refurbishment or build-to-suit opportunities as e-commerce continues to grow.

Moving up the risk curve

Investor sentiment surveys as well as data from CBRE and Real Capital Analytics (RCA) demonstrate that in 2017, investors remained positive about the region’s long-term prospects, buoyed by domestic and intra-regional capital. According to RCA, Asia-Pacific commercial real estate transaction activity was strengthened by a surge in the multifamily apartment sector in Q3 2017, especially in Japan: JLL reports that Japan has more traded multifamily real estate than the rest of the Asia-Pacific region combined, and Tokyo is the most traded multifamily city in the world outside the US.

Artificially low-interest rates, ease of access to financing and lack of available stock continue to exert downwards pressure on yields across the region. Nevertheless, lack of available stock may hamper investment volumes in Australia and Japan—the largest and most institutionalised investment markets in the region – and drive investors to take on more risk, consider core-plus/value-add strategies or secondary regional markets such as Osaka or Brisbane.

With interest rates set to rise in most markets, we recommend that investors capitalise on local property dynamics in order to rebalance their portfolio, and review their hurdle rate of returns in a new-normal growth environment. Nevertheless, there remain opportunities to acquire core assets, albeit with lower return expectations than before. In Osaka, for example, supply risk is considerably lower relative to Tokyo or Singapore, where a broader recovery is taking shape.


Recent official indicators, including exports and GDP growth performance, point towards an improvement in Singapore’s economic momentum in line with stronger global trade. The services sector is also showing signs of further strengthening that, in turn, supports office demand. Vacancy rates for CBD offices are likely to ease after a supply peak in 2017. After two-and-a-half years of decline, CBD office rents have bottomed out and should accelerate through 2021 as tenants capitalise on low rents and move to newer and better-quality buildings. Amid improving economic backdrop and business sentiment, a moderating supply cycle as well as further interest rate hikes, prime yields should remain stable in 2018 as rents recover. Investor demand for prime assets remains robust.


Despite a broader recovery in Singapore’s economy, the country’s increasing interest rate environment, elevated household debt and rising inflation mean consumers are likely to spend cautiously. On a positive note, according to the Singapore Tourism Board, tourism growth helped boost retail sales in H1 2017. Structural headwinds from e-commerce, foreign labour restrictions and high operating costs are forcing retailers to re-examine their strategies and close underperforming stores, driving up vacancy rates. Occupier demand, however, should remain, especially for well-managed regional shopping centres near or integrated with subway stations. Shopping centres in secondary locations and strata titled shopping centres – where ownership is divided into individual units – will likely continue to suffer, underpinning further rental declines in 2018.


Despite an uplift in the country’s export growth, Singapore logistics market weakness lingers. Demand for space has lagged behind supply growth over the past few years as firms have consolidated or downsized their space requirements in order to save costs. However, this trend should reverse from 2018 as the development pipeline eases. Logistics demand also hinges on the strength of the global export uplift. In line with a broader economic and office market recovery, rents should bottom out in late 2018, while the outlook for yields remains stable.