18 November, 2010
Asia Pacific continues to offer attractive returns to investors, with the latest all-property DTZ Fair Value Index™ (FVI) Q3 2010 for Asia Pacific standing at 65. This compares to a global FVI Q3 score of 63 and a score of 67 for Asia Pacific last quarter. The DTZ Fair Value Index™ measures the attractiveness of commercial real estate markets around the world and was launched in Q2 2010.
The biggest change from the previous quarter is in the Hong Kong office, retail and industrial markets, which have seen a significant uplift in capital values over the last quarter. The retail market saw a dramatic change during Q3 with the yield falling to a very low 2.0%.
David Green-Morgan, DTZ Head of Asia Pacific Research, comments: “At the current price level, Hong Kong markets look over-valued and all three commercial property sectors – office, retail and industrial - are now classified as COLD. In contrast, among other major markets, Singapore retains a HOT market in all three property sectors.”
While the overall index score has not moved significantly, classifications for ten markets have changed. A number of markets have become less attractive to investors. As well as the three Hong Kong markets moving from HOT to COLD, Tokyo offices has moved from HOT to WARM and Sydney retail has moved from WARM to COLD. However, a number of markets are now more attractive to investors. Sydney industrials and Chennai offices have moved from WARM to HOT and Auckland offices and industrial, together with Guangzhou offices, have moved from COLD to WARM (see Figure 1 below).
The industrial sector becomes more attractive than the retail sector
There has been a slight shift in investment prospects across the sectors. The industrial sector, with a score of 65, buoyed by the strong recovery in exports, now offers more opportunities than the retail sector, which has an index score of 58. This is a reversal of last quarter’s position. However, offices remain the most attractive sector in Asia Pacific with an unchanged score of 70 (see Table 1 below).
The office sector remains the most attractive sector, despite some markets becoming COLD
The outlook for the Asia Pacific office sector in Q3 has improved markedly in key locations such as Singapore and Bengaluru as the rapid economic revival continues to push up prime rents. Average prime rents are forecast to increase by 9% in 2010 and between 6 to 8% from 2011 to 2014. However, capital value growth in Taiwan and Hong Kong is forecast to be modest in coming years due to a recent strong uplift in capital values. Returns in these locations will therefore be driven primarily by income growth.
Recent price changes move some retail markets to COLD
In the forecast period 2010 to 2014, consumer spending in China and India is predicted to increase by 8 to 10%. On the back of this, we forecast rental growth of 5 to 7% for 2010 to 2014. Hong Kong and Shanghai are dragging down the retail sector score. Despite positive rental prospects, the recent dramatic rise in capital values is forecast to have a significant adverse impact on return performance.
Strong export recovery lifts rental returns in industrial markets
Exports from Asia Pacific have bounced back strongly with China, Japan and Taiwan posting export growth rates between 30% and 40% in the first half of 2010. As a consequence, Hong Kong and Singapore are forecast to have the strongest rental growth in the 2010 to 2014 period. The Australian markets of Melbourne and Perth are also expected to outperform in the forecast period. Yields in Hong Kong and Taipei are at historically low levels. This impacts heavily on expected total returns, with both markets classified as COLD.
Tony McGough, Global Head of DTZ Forecasting & Strategy Research, said: “Strong economic growth is feeding in to solid forecast rental growth in most markets. This implies a strong income led opportunity which contrasts sharply with most Western markets where we expect capital value recovery with weaker rental growth. Several Asian markets have recently seen rapid repricing and some overshooting of yield compression. However, overall the Asia Pacific region remains attractively priced with a FVI score of 65.”