The region's property markets continued to show mixed trends in 2Q13, with a sharp divergence between leasing and investment activity. Expansion by corporate occupiers remains subdued and retail leasing has also slowed in a number of markets over the last year. Conversely, investment activity continues to strengthen, with commercial transaction volumes showing a strong year-on-year increase in 2Q.
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Consistent with these trends, we've seen yields holding firm or compressing further in most markets as capital values have outpaced rents. Slow leasing activity on the back of ongoing corporate caution During 2Q13, Grade A office supply additions in the region's Tier I markets were up 15 percent y-o-y to 1.5 million sqm, with roughly 40 percent of the total in India, 20 percent in China and the rest mostly in emerging Southeast Asia and Australia.
For the quarter, aggregate net absorption declined 26 percent y-o-y and was around 20 percent below the 3-year quarterly average. China and India accounted for nearly 80 percent of the
total take-up. Financial centres remain weak, with limited take-up in Hong Kong and Singapore mainly coming from small non-financial occupiers.
Take-up in Tokyo turned slightly negative in 2Q due to some major tenants contracting into better quality buildings. China saw slow leasing activity from MNCs, although domestic firms continued to commit to space in Shanghai while less CBD space has been returned than expected in Asia Pacific Property Market
Slow leasing, investment strengthens further Beijing. In India, slow expansion by MNCs was largely offset by steady demand from IT/ITES firms. Generally steady take-up was seen in emerging Southeast Asia. Most Australian markets experienced limited or negative net absorption on the back of corporate cost savings.
Rents grow modestly in most cities. Falls in Beijing, Australia During 2Q13, net effective rents were flat or grew slightly in most AP markets. Jakarta continued to see the largest rental increase (9.8 percent q-o-q) due to strong underlying demand and a lack of quality space.
Rents rose in Hong Kong for the first time since 2Q11 (1.5 percent q-o-q) and edged up in Singapore for the first time since 3Q11 (0.6 percent q-o-q) due to limited leasing options in both cities. Rents rose by 1.2 percent q-o-q in Tokyo, while small rental increases were also seen in Seoul, Shanghai, Bangkok and Manila.
Rents in Beijing declined further (1.6 percent q-o-q) on weak demand, albeit easing from a drop of 3.7 percent q-o-q in 1Q. Rents fell in most Australian cities, with the largest quarterly fall in Melbourne (6.4 percent), followed by Sydney, Brisbane and Perth (3 to 3.5 percent).
Over the last twelve months, Jakarta has been the clear regional outperformer with annual rental growth of 37 percent while most other markets have seen single-digit increases. Hong Kong and Singapore registered rental declines of 34 percent over the last year, while Melbourne recorded the largest annual decline across the region of 10.6 percent.
We expect 2013 regional net absorption to be around 1015 percent below 2012 levels as a result of ongoing corporate caution, and to pick up moderately in 2014. Over the short term, rental growth is likely to be limited in most markets, while Beijing and most Australian markets including Sydney and Melbourne should see small declines. Single digit rental growth is generally expected for the full year 2013, with the strongest growth in Jakarta.
Retailer demand healthy, although some signs of slowing in 2Q13, consumer confidence was generally buoyant in emerging Asia and improving in advanced countries. Retailers are still expanding in Greater China (although slower expansion by some luxury brands) and emerging Southeast Asia is increasingly on their radar screens.
Rents grew more slowly across the region in 2Q (0.5 to 2.5 percent q-o-q) with the exceptions of India, Singapore and Australia, which saw mostly flat rents (marginal declines in Sydney and Melbourne). Rental growth was the strongest in Jakarta (2.5 percent q-o-q), followed by Beijing and Hong Kong. In 2H13, retailer demand for space is likely to remain relatively healthy in most locations, and most markets are expected to see further growth in rents, albeit moderate.
Residential leasing demand in linewith the office sector In 2Q13, leasing demand moderated in China and remained subdued in Hong Kong and Singapore, but was stronger in the Southeast Asian markets of Jakarta and Manila. Rents in most markets either remained flat or rose moderately (0.5 to 4 percent q-o-q). Residential takeup should remain generally in line with trends in the office sector, with mostly flat rents or small increases in most markets.
Retailers continued to drive leasing demand for industrial space, while the export-related segment remained subdued as manufacturing activity remains weak in major markets. Rental growth continued at a moderate pace (0.5 to 3.0 percent q-o-q) in most markets, with the largest quarterly growth seen in Beijing (2.8 percent q-o-q).
Moderate rental growth is projected for most centres this year. A strong quarter for investment activity In 2Q13, regional investment activity reached USD 33 billion, up 18 percent year-on-year, with Japan, Australia and China accounting for the bulk of activity. In 1H13, volumes totalled USD 60 billion, up 21 percent on 1H12.
Japan again led the way and accounted for close to one-third of regional activity in USD terms. Volumes were up 78 percent y-o-y, the strongest growth recorded for any of the major investment markets globally. Around 85 percent of purchases in the quarter were by domestic buyers and activity was boosted by a resurgence in IPO activity by J-REITs. In Australia, volumes were up 28 percent y-o-y with continued demand from both offshore and domestic institutional investors and pension funds.
China bounced back from a slower first quarter, up 65 percent q-o-q. Volumes in Hong Kong were down about 50 percent (q-o-q and y-o-y) after the imposition of higher stamp duty in February, and volumes in Singapore also eased 18 percent on a yearly basis.
Capital values continued to increase moderately in most AP markets during 2Q13, although Beijing and some Australian markets saw small quarterly declines (0.5 to 2.0 percent) on the back of falling rents. Jakarta again recorded the largest q-o-q and y-o-y increases (10.2 percent and 46 percent respectively). Capital values were largely flat in Hong Kong but edged up by 1.9 percent q-o-q in Singapore, supported largely by local investors.
Rents and capital values still increasing, but slower growth
Corporates are likely to remain cautious in the short-term due to cost concerns, although leasing activity should begin to strengthen next year in line with improving economic conditions. Investor sentiment should remain buoyant over the short term despite some jitters about higher global interest rates.
However, some of the larger markets could slow from their strong 1H13 results. As a result, we maintain a conservative 2013 forecast of USD 110 billion for regional investment volumes, with the potential for upside.
In most markets and sectors, we expect generally limited increases in rents and capital values for 2H13, and growth rates of typically less than 10 percent in 2014. Further moderate yield compression is likely. The office and retail sectors should generally deliver higher returns than the residential sector, which should continue to see cooling measures by various governments.
