The latest report by Urban Land Institute (ULI) and PwC, on “Emerging Trends in Real Estate Asia Pacific 2019”, has concluded that Melbourne is the best prospect in the region for real estate investment in 2019. The report includes development trends, outlook on the Asia Pacific real estate investment, finance, and capital markets, and trends by property sector and metropolitan area. According to the report, the top five markets for real estate investments and development in 2019 are Melbourne, Singapore, Sydney, Tokyo, and Osaka.
The reasons Melbourne is the top real estate investment market in Asia Pacific include its constrained office supply pipeline, yield over the cost of debt and sovereign bonds, a deep and liquid core market, and good prospects for rental growth. Research has found out that Melbourne’s rental growth has been significant, with yields running around 4.5% for prime office and retail and 5.5% for industrial space. Price is another factor, being slightly more reasonable compared to Sydney, and therefore seeing a shift to the centre of attention during 2018.
Although Singapore did not take out the top spot, the lion city has actually climbed from third to second place. According to ULI director Pauline Oh, “The improvement in Singapore’s office market has seen the city-state comprehensively reiterated by respondents, after falling to 21st place in our 2017 report.” PwC has observed that a number of major office deals were sealed in the past 12 months, with domestic investors amongst the highest buyers. At the same time, due to the Central Business District (CBD) not seeing any supply until 2020, there will be more new office openings in the decentralised office markets in 2019. According to PwC, Singapore’s residential market has managed to recover with solid economic growth, significant number of visitors supporting rents and yields from prime retail spaces during 2018.
The report also highlighted that Singapore is the largest source of APAC outbound real estate investments in the first half of 2018 where US$9.06 billion of capital has been deployed. Starved of yield and opportunities at home, Singapore real estate investment trusts (REITs) and developers have been buying overseas, especially in Australia, Southeast Asia, and Europe.
Sydney has ranked third in investment and also third in development. The factors positioning Sydney in the top rankings are similar to those giving Melbourne the top spot. Due to relatively high returns and being seen as a “safe” play, Sydney has become a favourite city for global investors. Competition for assets has helped to sustain high pricing, while low vacancies and growing demand for space has suggested that the rents will continue to increase in the future.
It’s a surprise that Tokyo managed to rank in fourth position after last year’s drop. Its jump in the rankings can be attributed to institutional buyers taking advantage of cheap finance, attractive leverage, a good spread over interest rates, and lastly a large stock of investments-grade assets.
Since there is lack of reasonably priced core assets in the capital, this has led investors to look elsewhere in Japan, where local economies are now progressively more stable. Supply is tight in both residential and office sectors, making Osaka the best market outside Tokyo.
APAC will continue to grow in the coming years, with economic growth well in excess of rates seen in the United States and Europe. Australia should continue to outperform in the core office and logistics markets, and Japan is expected to post high-single-digit levered returns due to the low cost of finance and improving economic prospects. Lastly, Singapore will once again to poised for a cyclical recovery due to improving global economic trade.