Asia Pacific investment markets were quiet in Q1 2014, but this was to be expected as the first quarter of the year is traditionally a subdued period. From Q2 2014 onwards CBRE expects activity to rebound, led by Japan and Australia: several major deals are expected to close shortly and a few sizable transactions were reported at the beginning of Q2 2014.
For Q1 2014, commercial real estate transaction volume totaled US$22.3 billion, a decline of 26% quarter-on-quarter, but up 1.9% year-on-year. Japan was the only standout market this quarter with transaction volume surging by 28% quarter-on-quarter to US$9.2 billion.
“Despite the quiet start to the year overall investor interest remains upbeat. The period saw continued strong interest in the region from foreign money but domestic capital is just as strong. The composition of cross-border buyers is shifting towards Asian investors and new institutional investors to the region. Asian buyers continue to seek investment opportunities within and outside the region,” said Greg Penn, Managing Director, Capital Markets, Asia at CBRE.
The quarter saw the entry of institutional investors from the Middle East whilst Asian institutional buyers continued to seek investment opportunities within and outside the region. J-REITs continued to expand their portfolios and S-REITs continued to look for opportunities offshore.
Investment activity and transaction volume is expected to increase as several large transactions in Japan, Australia and South Korea are close to completion. A number of major deals have already been completed in Q2 2014 and investors will continue to move up the risk curve and look for secondary assets, value-added or opportunistic deals.
“Interest in the Singapore office market is getting stronger on the back of the strengthening rental market. Rents are rising and vacancy rates are falling and this trend is expected to continue for the foreseeable future. I am expecting a few enbloc office deals to be signed this year and these will supplement the already active office strata market. For the latter, buyers are mostly end users and many of these are Chinese companies with a presence in Singapore already,” commented Mr Jeremy Lake, Executive Director, Investment Properties, CBRE Singapore.
Key trends witnessed in Q1 2014 included:
- Office capital values strengthened on the back of revival in office rental growth and improvement in office demand; with the CBRE Asia Pacific Office Capital Value Index increasing 2.2% quarter-on-quarter in Q1 2014, higher than the 1.3% quarter-on-quarter in Q4 2013.
- Greater China more likely to see yield decompression. Office prices in Hong Kong and Taiwan have seen a slowdown amid high asking prices and a considerable price gap between buyers and sellers, while the possibility of yield decompression in China is increasing amid the tighter lending market for real estate.
- The divergence between retail rents and capital values widened further. Retail capital values growth accelerated in Q1 2014, rising by 3.1% quarter-on-quarter compared to the 1.2% increase recorded last quarter.
- Industrial assets remain highly sought after due to comparatively better yields and strong occupier demand. Industrial capital values recorded stronger growth of 1.6% q-o-q in Q1 2014 - a figure well up on the 0.1% q-o-q in Q4 2013 - on the back of strong investment demand in a number of markets.
Opportunities for Non-bank Lenders
Banks tightened lending for real estate during the quarter in response to the United States Federal Reserve announcing that it would reduce bond purchases. Lenders in the region are exercising more stringent due diligence over the assets and markets they lend for, although lending rates remained low or unchanged. China saw a mild drop in loan-to-value ratios this quarter. The exception is Japan where lenders remain aggressive in terms of pricing and leverage as the Bank of Japan continues to implement monetary easing to achieve a 2.0% inflation target.
“Cheap financing will continue to be readily available in developed markets in Asia Pacific as the United States Federal Reserve will maintain low interest rates until there are signs of a sustainable economic recovery. However, lenders’ increasingly selective attitude is providing opportunities for non-bank lenders such as pension and insurance companies to step in and provide funding,” said Ada Choi, Senior Director, CBRE Research.
“Developers are also seeking equity investment partners whilst several Chinese and Indian developers are generating cash by disposing of non-core assets or forming joint venture partnerships with investors to develop projects. More platform deals and equity stake acquisitions are expected to be seen in forthcoming quarters,” said Ms Choi.
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Neither CBRE nor its affiliated companies make any warranties or claims on the implied accuracy of the information contained herein.
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CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world's largest commercial real estate services and investment firm (based on 2016 revenue). The company has more than 75,000 employees (excluding affiliates), and serves real estate investors and occupiers through approximately 450 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com.