DTZ

23 November, 2011

• All-property DTZ Fair Value Index^TM score for Q3 2011 is 58, representing a decrease from Q2 2011 when the score stood at 70
• However, many markets in Asia Pacific still offer excellent investment prospects, with 47 of the 59 markets covered by the index rated HOT or WARM
• Asia Pacific region still compares favourably with other global regions.

The Asia Pacific all-property DTZ Fair Value Index^TM (FVI), which offers insight into the relative attractiveness of current pricing in commercial property markets, decreased to 58 in Q3 2011 from 70 in Q2 2011. The score remains above 50, indicating that Asia Pacific markets are holding up, but the outlook has become more challenging this quarter, with fewer attractive opportunities in Asia Pacific. The drop in the score reflects the impact of a softening of the global economic outlook, largely driven by the ongoing European debt crisis. The decrease is a result of changes in all sectors, with offices decreasing from 69 in Q2 2011 to 57 in Q3 2011, retail from 70 to 60 and industrial from 72 to 61.

While the index score has fallen, the research indicates that the majority of markets in Asia Pacific still offer excellent prospects. This is indicated by the fact that 47 of the 59 markets covered are either HOT or WARM. Investors in the region taking a medium to long term view can access several high yielding and high growth markets at a discount, relative to pricing elsewhere.

There are currently 22 HOT markets, down from 31 in Q2 2011. The number of COLD markets has risen from 8 to 12. Six of the downgrades occurred in China, including the Shenzhen and Shenyang office markets where very strong interest from investors has resulted in continued yield compression, driving up capital values. In total, 11 office markets have been downgraded, with average rental growth for 2011 revised down from 11.3% in Q2 to 10.4% in Q3. Despite this, the research suggests that China and the major countries across the region continue to offer attractive markets.

In Australia, markets are yet to be significantly impacted by the weaker economic outlook. They offer attractive income returns and solid rental growth prospects over the medium term, not withstanding that rents have been broadly flat this year. Other areas of strength include the Beijing and Tokyo office markets, both of which are rated HOT in Q3.

Chua Chor Hoon, Head of Asia Pacific Research at DTZ said: “The market outlook has become more challenging this quarter with the drop in the Fair Value Index score reflecting the impact of the ongoing European debt crisis. However, the Asia Pacific region continues to compare favourably with other global regions. Investors are set to benefit from stronger rental growth associated with a more positive economic backdrop than in the United States and Europe. Asia Pacific all-property rental growth is expected to outperform global rental growth in 2011, although forecast growth of 6.3% this year is slightly down from last year’s figure of 6.8%. This is still comfortably above the global growth figure of 2.7%.”

Tony McGough, Global Head of Forecasting & Strategy Research at DTZ said: “While Asia Pacific continues to perform well, the region would be hit by an escalation in the financial turmoil, as many of the region’s economies are reliant on export demand from European and US markets. The worsening global backdrop is feeding through to our real estate market outlook via our forecasts for rental growth, which have been downgraded in some markets this quarter. This in turn has resulted in lower expected returns and a reassessment of market pricing relative to fair value. In addition, the troubled economic climate and increased probability of financial instability associated with the debt crisis means investors are demanding a higher risk premium across a range of asset classes, raising our required return estimates this quarter.”

To download a copy of the report, visit the DTZ Research homepage here