MID to high single-digit returns are expected in most cities in the Asia-Pacific office sector over the next five years on the back of healthy demand and moderate supply, says Deutsche Asset Management in its regional report on the real estate outlook.
"Forecast five-year performance in highly volatile markets such as Hong Kong, Singapore and Perth are projected to come in relatively weaker, though good entry points should arise following the beginning of anticipated market recoveries occurring sometime around 2017-2018," it said.
This prognosis of the office sector echoes recent views of local analysts who are tipping that office rents in Singapore will find some support next year.
DBS property analysts said in a report this month that the healthy take-up of space in the upcoming Guoco Tower and Marina One, taking pre-lease commitments to over 70 per cent and 35 per cent respectively, and the ability to sign leases above S$10 per square foot "indicate that the office market could potentially be bottoming out".
This also allays fears over Grade-A office rents crashing to S$7 psf per month from S$9.50 currently and that new office supply will not be absorbed, DBS analysts said.
Tata Goeyardi, Religare's director of Asean sales, posited in a report that when the effective near-term supply starts to subside from the first half of 2017, the net-absorption-ratio could rise, lending support to rental levels.
But the leases inked for the new office projects here will entail relocation of tenants that are drawn to their higher-grade specifications. Deutsche Bank's Singapore property analysts had said in an earlier report that they expect downside to rents for the rest of this year.
The weak rental outlook for this year has not deterred investment activities here, with interest in prime office assets revitalised by mega deals led by Qatar Investment Authority's acquisition of Asia Square Tower 1 for S$3.4 billion as well as Indonesian tycoon Tahir's acquisitions of Straits Trading Building and 110 Robinson Road for S$560 million and S$45.1 million respectively.
Signalling major compression on cap rates or the rates of return, these purchase prices translate to net yields of below 3 per cent for Asia Square Tower 1 and Straits Trading Building and 1.4 per cent for 110 Robinson Road.
Deutsche Asset Management observed that cap rates in Singapore and Hong Kong have stayed tight while further tightening was seen in Japan, Australia and South Korea in line with interest rate cuts since February.
Recent cap rate compression has been driven by "structural factors" such as geographical diversification and an increase in capital available to invest, Deutsche said.
According to Preqin's data published in April, Asia-focused real estate funds have raised a total US$1.9 billion in the first quarter this year, following the US$11 billion raised in 2015.
The wave of capital chasing income-producing office assets was compounded by active investments by sovereign capital, pension funds and insurance firms. Deutsche noted that sizeable investment-grade assets in the retail sector remain tightly held by local developers and Reits in markets such as Hong Kong, Singapore and Australia, capping deal volumes.
"Cap rates are expected to remain at current tight levels in most markets for the remainder of 2016 before beginning to unwind in 2017 or 2018, with the anticipated impact of widening cap rates on capital values likely to be more strongly felt in the small and open economies of Hong Kong and Singapore over the next few years," Deutsche said.
On the whole, Deutsche favours markets with relatively good yield spreads and healthy leasing fundamentals to provide rental income growth.
Under the core or low-risk strategy with predictable cash flows, Deutsche recommends good-income producing office and retail assets in key gateway cities such as Tokyo, Osaka, Seoul, Sydney and Melbourne as well as prime logistics properties in key transportation hubs including Japan, Korea, Singapore and Australia. It also targets Brisbane office for the higher entry yields and potential for market-driven returns.
As for the moderate to medium-risk strategy, Deutsche recommends office and retail assets in Japan, Korea, Australia, Shanghai and Beijing; it also targets logistics or hotel assets in Japan and Korea as well as office assets in Singapore. Long-term growth in capital values of Singapore offices allow investors to look beyond cyclical volatility, it said.