Tech boom, competition for talent to support Asia-Pacific's prime office rental growth

THERE are attractive prospects for the real estate market in the Asia-Pacific region, with improving structural and early economic upcycle drivers, and Asia-Pacific GDP expected to grow by 4.6 per cent year-on-year in 2018.

The office markets in key developed Asia-Pacific cities - Australia, Hong Kong, Japan, Singapore and South Korea - are expected to benefit from business growth in the medium term, particularly from technology, finance and business services.

The ongoing boom in the technology sector is expected to continue in the near term and serve as a key occupier demand driver for most markets.

This is backed by further expansion of more established tech firms, an increase in start-ups, and the opening of new regional headquarters by foreign firms.

At the same time, persistent tight labour market conditions in the region are set to continue to drive competition for talent among corporates.

Logistics market recovery

As office location and building quality are key to attracting and retaining talent, prime office locations that are close to public transport infrastructure and multiple amenities - retail, gyms, parks and others - stand to benefit.

As such, prime rents in major gateway cities in the region, such as Hong Kong, Melbourne, Seoul and Sydney, are expected to grow, on average, in the range of around two to five per cent per year from 2018 to 2020.

Relatively lower rents in the fringe submarkets of these cities are expected to attract more cost-conscious tenants and capture some rental uplift.

Singapore's prime office market is expected to outperform the region in 2018 and continue to do so until 2020.

This is partly due to a limited supply of Grade A office space in the Central Business District over the medium term and the recovery of traditional larger occupiers such as financial institutions, and oil and gas companies.

Logistics take-up is expected to remain robust as e-commerce continues to grow in the region. Evidencing this, parcel delivery is one of the fastest growing segments of the logistics industry, according to Colliers International.

Australia and Seoul are expected to be the best performing Asia-Pacific logistics markets with average total returns of between 8 per cent and 12 per cent per year over the next three years, according to recent analysis by M&G Real Estate.

With new supply expected to taper from 2018 onwards, Singapore's logistics market is likely to recover by year-end and grow on average by around 1.6 per cent a year over the next three years.

Tight supply and rising construction costs in some markets are also likely to support rental growth, such as the Tokyo Bay area.

There are, however, potential limitations to the upsides for the logistics market in the next three to five years.

In response to rising demand, there has been more speculative development, particularly in markets where land is more readily available.

The Japanese city of Osaka exemplifies a market where new supply is currently outpacing demand, which is expected to continue until 2019.

Among logistics providers, there is a growing shift from business to consumer delivery to capture e-commerce growth.

High competition in this segment places pressure on occupiers to keep costs lean due to the difficulty in passing costs on to consumers.

Labour shortage

Furthermore, persistent low unemployment levels could dampen expansion plans in key Asia-Pacific cities, as the logistics business is currently labour intensive and there is a shortage in appropriately skilled manpower.

As such, rental growth should perform in line with inflation for most markets.

The Asia-Pacific real estate market is forecasted to deliver a total return of around 9 per cent in 2018, driven by expected yield compression in Australia and South Korea alongside stable rental growth in the five developed markets across most sectors.

After factoring in five to 10 basis points of cap rate (yield) expansion on the back of interest rates in the region rising from 2019, this could mean flat to negative capital values growth for select market-sectors over the near term.

This places increasing importance on the stability and defensiveness of income from property, which can be strengthened using effectively applied active asset management.

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