DESPITE a weak economic outlook, Asia Pacific continues to provide global real estate investors with attractive opportunities, DTZ, part of UGL Services, a division of UGL Limited, concluded in its latest Foresight Asia Pacific Q2 report.
The DTZ Fair Value Index, which offers investors insight into the relative attractiveness of current pricing in prime office, retail and industrial markets across Asia Pacific and classifies markets as Hot, Warm or Cold, saw 51 of the 61 markets it has been tracking rated as either Hot or Warm. The number of Hot markets increased from 24 to 32 in the second quarter of 2012.
The Asia Pacific index score, as a result, rose to 68 in the second quarter from 60 in the first three months of this year.
"The index score increase has reflected the resilience of the Asia Pacific property markets, with many markets forecast to see solid rental growth over the next few years, lifting expected returns," said Chua Chor Hoon, DTZ's head of Asia Pacific Research. "At the same time, whilst bond yields have fallen across the region, prime property yields have remained largely stable and this has made income returns associated with property increasingly attractive compared to other asset classes."
Across the region, Australia, India and China led markets recording upgrades. In fact, all but one of the Australian markets are now rated Hot, as the widening premium of property yields over bond yields is making Australian markets more attractive to investors, with Brisbane and Perth among the markets benefitting. The slowing global economy has affected sentiment in Australia and led to a lowering of interest rates, which has negative impacts on bond yields. The Australian five-year bond yield, for instance, fell to a low of 2.5 percent at the end of June while property yields still remain close to cyclical highs.
The emerging markets of China and India, meanwhile, are also offering investors good value, mainly driven by strong rental growth forecasts over the next five years, and in India, relatively high yields.
"We are forecasting strong rental growth for many Chinese markets over the next five years, and this underpins our fair value classifications," said David Ji, head of DTZ China Research. "Nine of the 17 Chinese markets in our coverage are classified as Hot, with Beijing offices topping the charts as the most attractive market in Asia Pacific on the back of strong rental and capital growth forecasts through 2016."
Many of the Indian markets are offering the potential to generate strong returns, particularly Delhi and Mumbai retail, which are forecast to deliver returns of more than 15 percent per annum over the next five years - the highest of all the Asia Pacific retail markets. Delhi is classified as Hot and Mumbai as Warm in the DTZ Fair Value Index, according to the report.
Notably, Jakarta offices leapt to the top of the Fair Value rankings in the second quarter, behind only Beijing, on the back of upgrades to forecast rental growth. Rental growth is being driven by strong leasing activity, as the upgrade of Indonesia's investment rating late last year and strong economic performance has jointly led to an increase in expansion and new entrants, particularly in the booming oil and gas, commodities and also consumer goods sectors. Household income levels have risen along with the economic growth. Over the next five years, DTZ has forecast total returns of as much as 25 percent per annum for the Jakarta office market.
In addition to Jakarta offices, many other Southeast Asian markets are providing good investment prospects, mainly driven by strong rental growth in line with the region's economic expansion. The majority of markets are rated as Hot or Warm, with upgrades to both Bangkok and Singapore retail in the second quarter. Only Singapore and Kuala Lumpur offices are currently classified as Cold, DTZ said.
Tokyo, meanwhile, offers investors the prospect of a recovery, with rents having fallen by a cumulative 37 percent over the past four years. Following a marginal increase in the second quarter of this year, DTZ forecasts a rebound in office rentals, along with some yield compression. This is driving a capital growth forecast of 6 percent per annum over the next five years and underpins the market's Hot rating.
There is also considerable divergence in market performance across the Asia Pacific region. While some markets offer investors strong growth prospects, more volatile and exposed markets such as China's Hong Kong and Singapore are feeling the impact of the economic downturn, with softening rents and capital values, DTZ said.