This article is from the Australian Property Journal archive
New office set-up by multinationals and expansions of existing firms has continued to drive Asia’s office markets. And the region’s industrial market is fast earning the status as the world’s key manufacturing base and logistics hub.
Asian Economies
Asia’s economies remained in an expansionary mode in the second quarter of 2006, driven by strong export growth and domestic consumption, despite upward inflationary pressure amid high oil prices. The region is projected to see annual GDP growth in 2006 of 7.2%, comparable to 2005’s 7.4% growth.
China’s economic growth pace remained brisk in 2Q06, driven by robust investments in factories and other fixed assets, which expanded by 30.3% year-on-year in the first five months of the year, faster than the 29.6% growth between January and April.
As a result of the strong growth in fixed-asset investment, demand for bank loans was high. Rapid credit growth prompted China’s central bank to announce that it would “take fine-tuning measures” to cool the economy. Already in April, the central bank raised the one-year interest rate to 5.85% from 5.58% – the first rate increase in 18 months.
In June, the central bank raised the amount of cash that banks must hold in reserve by 0.5 percentage points, another step to rein in investment and lending. Despite these initial credit-tightening measures, the economy expanded by 11.3% in 2Q06, a full percentage point higher than the 10.3% growth in the preceding quarter. China’s GDP grew by 10.9% in the first half of 2006, while full-year growth is projected to be 10%. Inflation is expected to rise by 1.3% in the first half and by 1.7% for the year.
Japan’s economy continued to expand in the second quarter, as corporate spending rose and the labor market saw further declines in the unemployment rate, which stood at 4.0% in May, the lowest since March 1998. The Bank of Japan’s (BOJ) latest tankan survey shows that Japanese companies were more optimistic about business conditions in June than in March. In addition, they expected conditions to improve further by the next survey in September.
Companies surveyed responded that they planned to spend 6.3% more on plants and equipment compared with a year ago. In contrast, the expectation in March was a 1.3% contraction in spending.
In July, the BOJ increased interest rates by 25 basis points (bps), the first such rise in six years.
The central bank’s previous policy to target zero percent interest was introduced in 2001 to tackle deflation and stimulate growth. Because Japan’s economy continues to show improvement, and consumer prices have started to rise, the interest rate increase was widely expected.
South Korea’s economy is estimated to have expanded by 5.5% in the second quarter, lower than 1Q06’s growth of 6.1% but the second-highest quarterly growth since 2Q04. Private consumption moderated somewhat in the second quarter in light of the gradual interest-rate rise (100 bps) since September 2005 and initial signs of inflation, which rose 2.38% year-on-year in May, the highest increase since January of this year. The Bank of Korea projected an annual GDP growth for 2006 of 5.1% but cautioned that high oil prices are causing upward inflationary pressure. At the same time, domestic demand is likely to slow in the second half, and second-half GDP will likely grow 4.4% year-on-year, slower than the first half’s 5.8% growth. However, capital investments are forecasted to expand by 6.3% in 2006, higher than the 5.1% growth in the previous year. The higher growth stems from an increase in machinery orders and expansion in the service industry.
Hong Kong’s economy continued to improve in the second quarter, judging from the labor market, which saw the unemployment rate fall to 4.8% in May, which is lower than the 5.0% in March and the lowest since July 2001. The business sector remained positive about its prospects.
Based on the government’s Quarterly Business Tendency Survey for 2Q06, significantly more respondents in the manufacturing, trading, communications, real estate and banking sectors expected to see more business opportunities in 2Q06 over 1Q06.
These sectors also expect their business volume to rise in 2Q06. Overall, employers plan to expand their work forces over the next three months. While economic growth in the second quarter is expected to be strong, the government maintained its full-year GDP forecast of 4% to 5%, in light of a growth slowdown in the second half. However, private-sector economists were more optimistic, revising their 2006 annual GDP forecasts up to 6% to 7%.
Advance estimates by the government of Singapore show that 2Q06 GDP grew by 7.5% year on year, slower than first quarter’s 10.7% growth. Growth in the manufacturing sector decelerated to about 10.2% in the second quarter, from 20.2% in 1Q06. The slower growth was mainly due to lower output from the biomedical-manufacturing cluster. The services producing industries expanded by 6.8% in 2Q06, also lower than the 8.2% expansion in the first quarter. Almost all service sectors experienced the slowdown. The construction sector was estimated to have contracted by 0.3% in 2Q06, slightly better than the 0.8% contraction in the first quarter.
Based on the Monetary Authority of Singapore’s June survey of professional forecasters, 2006’s annual GDP is projected to grow by 6.7%, higher than the 5.9% growth projected in the March survey.
The upward revision was backed by the view that the economic prospects of Singapore remain sanguine, supported by favorable external conditions and resilience in domestic consumer sentiment. The 6.7% growth forecast is within the official growth projection of 5% to 7%.
Following GDP growth of 5.3% in the first quarter, Malaysia’s economy should see healthy growth in the second, as exports remained robust – 13% growth year-on year in May, much higher than April’s 5% growth. The central bank expects 2006 annual GDP growth to be about 6%, better than last year’s 5.3%. Overseas demand for electronics and commodities, and increased activity in agriculture and construction, will drive growth, which will likely benefit from the government’s plan to invest 200 billion ringgit (US$55.3 billion) in development over the next five years. The central bank also believes that expanding economic capacity and increased competition are not causing consumer prices to rise. Inflation is expected to grow by 3.5% to 4% this year, partly because the government raised gasoline prices and electricity tariffs in March.
Capital Markets REITs
In the second quarter, the Asian REIT market expanded in Japan, Hong Kong, Singapore and Malaysia. On the other hand, Hong Kong and Singapore saw the postponement of several REIT IPOs, primarily due to soft market sentiment in light of the equity market correction between May and June. At the end of June, total market capitalization of Asian REITs was estimated to be about US$45.7 billion, of which about 66% were J-REITs.
Japan had 36 REITs at the end of June, with a total market cap of about US$30 billion. In 2Q06, four new J-REITs were listed, totaling eight in the first half of this year, compared with 12 in 2005.
It is likely that 2006 will see a record number of J-REIT listings. (J-REITs first appeared in 2001, when two REITs were listed). By the end of 2Q06, the average dividend yield of JREITs was about 3.87%, higher than the 3.56% in March. This was mainly due to the price corrections in mid-June triggered by ORIX REIT, which was penalized for failing to perform adequate due diligence during its property acquisitions. The 3.87% yield represented a premium of about 194 bps over the 10-year Japanese government bond yield of 1.93%. In view of the 25- bp interest-rate increase in July, the spread between J-REIT yields and bond yields could narrow, which may cause concern among investors.
In 2Q06, the number of listed REITs in Hong Kong rose from three to four. The newest REIT is Great Eagle Holdings’ Champion REIT, which was listed in May. The IPO offered 1.23 billion units priced at HK$5.10 per unit, which was at the lower end of the indicative price range of HK$5.00-$5.75 per unit. The HK$5.10 per unit represented an annual dividend yield of 5.46%.
Champion REIT has a single-asset portfolio – Citibank Plaza, a grade-A office property in Admiralty with a total floor area of 1.49 million square feet, which is valued at HK$22.7 billion. The total market cap of HK-REITs at the end of June was about US$6.3 billion, and the average dividend yield was about 5.7%, 87 bps above the 10-year Exchange Funds bond yield of 4.83%.
The global equity market correction in May led to the postponement of two REIT listings in Hong Kong, namely Sunlight REIT by Henderson Land and Sun Millennium REIT by Sun Hung Kai Properties.
In the second quarter, the Singapore REIT market saw the listing of K-REIT by Keppel Land. KREIT’s portfolio comprises four commercial properties with a total valuation of S$630.7 million.
Including K-REIT, the total market cap of the 10 S-REITs at the end of June was about US$8.2 billion. The market cap would have been larger if Cambridge REIT’s listing had not been delayed.
This industrial REIT was scheduled to list in the second quarter but was postponed due to the unfavorable market sentiment stemming from May’s equity market correction. The average dividend yield of S-REITs at the end of June was about 5.6%, higher than the 5.1% three months before, representing a premium of about 200 bps above the 10-year Singapore government bond yield.
In Malaysia, Tower REIT successfully listed in the second quarter, the fourth listed M-REIT. A total of 201.87 million units were sold at 1.07 ringgit per unit, raising 216 million ringgit of equity funds. At the end of June, the total market cap of M-REITs was US$492 million, while the average dividend yield was 7.4%, a premium of 240 bps over the 10-year Malaysian government bond yield of about 5%.
In South Korea, no new REITs listed during the quarter, keeping the number there at seven, with a market cap of about US$720 million and an average dividend yield of about 8.5%, 346 bps above the five-year Treasury bond yield of 5.04%.
Debt Market
In 2Q06, the U.S. Federal Reserve raised the federal-funds rate by another 50 bps, totaling 300 bps in the past 18 months. While some private-sector economists still expect U.S. interest rates to peak in the second half, inflationary pressure remained a key concern in the first half, with no signs of receding in the short term. Benchmark interest rates in China, South Korea and Malaysia rose in the second quarter, in a bid to hold inflation stable. Interest rates in Japan grew by 25 bps in July, the first increase in six years, signaling the end of 15 years of deflation.
Based on data from Commercial Mortgage Alert, five commercial mortgage-backed securities (CMBS) issues are in the pipeline in Asia in the second half of 2006, amounting to about US$1.37 billion, three of which originated in Japan (US$622 million), with one each from Singapore (US$625 million) and China (US$125 million).
China is seen as the largest potential market for securitization in Asia, although all the various regulations have somewhat hindered market development. An integrated securitization instrument with the flexibility to cover all asset classes is needed to transform market potential into reality. (Chinese investors seem to have more confidence in the concept of asset-backed securities, in view of the relatively low transparency of the credit information market.)
A special-purpose trust (SPT), set up by a trust and investment company, issues a standard Chinese securitization product using a typical securitization structure, i.e., one backed by assets as collateral and publicly issued security paper. The People’s Bank of China (PBOC) and the China Banking Regulatory Commission (CBRC) jointly oversee the traditional securitization market.
At the end of 2005, the China Development Bank and the China Construction Bank launched two pilot securitization programs – Collateralized Loan Obligation (CLO) and Residential Mortgage-Backed Securities (RMBS), respectively. In April 2006, PBOC and CBRC submitted a comprehensive assessment report to China’s State Council, in which they took a positive stance on developing the products further. Whether the State Council will approve more experimental transactions and monitor the activities will obviously have a strong bearing on the continued development of the traditional securitization market.
Property Markets
Office
In the second quarter, corporate expansions continued to underpin Tokyo’s office space demand. Buoyed by the improving economy, capital expenditure among corporations continued to grow in the first three months of the year, the 12th consecutive quarter of growth, according to the Finance Ministry. Average grade-A office vacancy fell for 12 consecutive quarters to about 0.7% at the end of June, below the previous low of 0.8% in 1Q01. While new office supply in 2006 of about 4.6 million square feet is the highest since 2003 (and will likely be that high for the next five years) more than 95% of it was precommitted by the end of June.
Market sentiment in the Hong Kong office sector remained positive in the second quarter. Demand for grade-A office space continued to stem from robust growth in investment banks, fund houses and legal firms that service financial institutions. As vacancy reached frictional levels across all submarkets, new leasing stemmed predominantly from office users with small to medium-sized space requirements.
Grade-A office effective rent in Central rose by 9.8% on average in the quarter, more than the 4.6% increase in the first quarter. As office rents in Central and other CBD areas continued to rise, some cost-sensitive companies with smaller space requirements relocated to decentralized areas, such as Island East, to save on rental cost, even though vacancy levels in submarkets are at their lowest since December 2000. The office investment market was active in 2Q06, with several en bloc buildings acquired by foreign investors. Grade-A office rents are projected to rise by 15% to 20% in 2006, supported by limited new supply and robust demand, driven by economic growth.
In Beijing, office demand in the second quarter came mainly from expansions of foreign financial institutions, as China continues to deregulate its banking sector in line with its obligation to the WTO. Demand mostly concentrated in the CBD and Finance Street submarkets, primarily because of their favorable incentives, including monetary subsidies for both office acquisitions and leases. Against this background, grade-A office rents remained stable during the quarter. New office supply over the next five years is estimated to be about 7.1 million square feet per annum, higher than projected new demand of about 5.7 million square feet per year.
While downward pressure on rents will occur in the overall market, those for grade-A office buildings are likely to hold steady due to the scarcity of high-quality properties. In Shanghai, office effective rents rose by 2.6% on average in the quarter, higher than the first quarter’s 0.2% rise.
Demand from multinational corporations and broad-based service groups, such as accounting, law and the media, supported rental growth. New office supply over the next five years is likely to see healthy demand. As such, office rents in Shanghai are expected to see a gradual increase.
In 2Q06, Singapore’s office market continued to benefit from the economy’s broad-based growth, driven by the financial services sector, and from positive business sentiment. Demand for office space, especially grade-A, came mainly from financial institutions and banks.
Grade-A office space vacancy declined further, from 4.9% in 1Q06 to about 2.7% in 2Q, the lowest rate since first-quarter 2001. Supported by low vacancy, grade-A effective rents rose by 13.3% on average in the quarter and by 20.2% in the first six months. However, rentals are still some 30% below the peak levels seen in 1997.
One Raffles Quay, the only grade-A office project this year, has seen a rising precommitment rate since the start of the year. Interestingly, the three anchor tenants have increased their original space requirements. From the second half of 2006 to 2010, new supply of office space will be 0.6 million square feet per annum on average.
Office demand this year is projected to be above two million square feet and is expected to remain strong.
Coupled with limited supply in the next five years, occupiers’ space expansion plans could be affected. Tenants may have to compromise on their choice of location and may face higher rents across all office grades.
South Korea’s relatively stable economy has translated to a continuing decline in the unemployment rate, which fell to 3.2% in May from 3.9% in March. Many traditional occupiers of grade-A office space have raised their head counts, which has increased their physical space requirements.
Grade-A office effective rents rose by 0.7% on average in the second quarter, faster than the 0.1% rental increase in the preceding quarter, supported by the further decline in vacancy to below 3% at the end of June. Looking ahead, employment growth in the service sector is expected to outpace other economic sectors as the economy moves up the value chain.
As economic diversification from pure manufacturing activities continues, demand for office space is likely to remain sustainable.
Grade-A office rents in Malaysia’s Kuala Lumpur City Center (KLCC) remained stable in the second quarter, while vacancy continued its downward trend and hovered at about 13% at the end of June. Demand for office space stemmed from foreign multinational corporations, which are increasingly establishing call centers and shared service centers for their global operations.
Looking ahead, new office supply in KLCC will remain tight, and rents will see further upside. In the decentralized areas, occupancy is expected to be healthy, as new supply will mostly be owner-occupied.
Residential
In April, Japan’s nationwide housing starts rose by 15.0% year-on-year, totaling 111,260 units. The contract ratio (between units contracted and units marketed) in April and May was 79.5%, lower than the 81.2% registered in the same period a year ago. The total number of units sold in April and May was 8,629, lower than the 10,176 sold in the same period 12 months ago. The average condominium unit price rose by 6% month-on-month in April but declined by 8% in May.
The correction in the equity market in May has dampened market sentiment and could have a spillover effect on the residential market. However, the effect is likely only temporary, and with the economy still improving, demand for residential units should be sustainable, despite the potential interest-rate increase.
In China, the National Development and Reform Commission reported that residential prices in 70 large and midsize Chinese cities rose 5.8% year-on-year in May, slightly more than April’s 5.6% increase. On May 29, the State Council announced measures aimed at stabilizing residential prices.
They included
1) raising the minimum mortgage down payment ratio to 30%, from 20% previously, for all buyers except first-timers purchasing apartments that are 969 square feet or smaller for owner-occupation;
2) a 5.5% business tax levy on the sales price for homes held less than five years;
3) requiring all local governments to ensure that 70% of units constructed are no larger than 969 square feet;
and 4) confiscating land-use rights from developers who fail to begin construction two years after a project’s start date, as stated in the land-use rights contract. These measures are likely to reduce the speculative activities that have been driving up prices to levels unsustainable in the long term, and transaction volumes will likely shrink over the next three to six months.
In Hong Kong, monthly residential sales and purchase (S&P) agreements fell from 7,456 units in March to 6,849 in April, but rebounded to 7,812 in May, before declining again to 7,150 in June. (The numbers represent the sales activity in the preceding month, as it takes about six to eight weeks to conclude S&P agreements.) Total transaction value in April and May rose by 2.0% and 15.5%, respectively, month-on-month but sagged by 17% in June.
The decline in June reflected the soft market sentiment caused by the equity market correction in May. Year-on-year, the number of S&P fell by 42%, while total transaction value declined by 45%. In the leasing market, demand for high-end properties remained strong in the quarter, supported by the expanding corporate sector and by expatriates.
Housing prices in Seoul rose by 3.9% in 2Q compared with the previous quarter, based on Kookmin Bank’s housing-price index. Year-on-year, the increase was 9.7%. The government expressed concern about the continued rise of residential prices and decided to raise interest rates by 25 bps in June, totaling 50 bps in the first half.
This has prompted private banks to increase interest rates for mortgage loans. In June, the Financial Supervisory Service ordered banks to keep the amount of new mortgages in June to below 50% of those approved in May, while signaling that it would introduce further steps to limit mortgage growth.
According to the Bank of Korea, money lent for house purchases rose by 3.2 trillion won in April from the previous month, the largest increase in 10 months. Mortgage loans rose by 291 billion won in January, 608 billion won in February and 1.19 trillion won in March.
A key highlight of Singapore’s residential market in the second quarter was the launch of St. Regis Residence, a luxury residential project that achieved price benchmarks at more than S$3,000 per square foot, some 25% higher than the previous record of S$2,400 per square foot reached in 1997.
In the primary market, about 2,200 new units were launched in the second quarter, similar to the previous quarter. Roughly 1,800 to 2,000 units sold in the quarter, also similar to the previous quarter. The government’s flash estimate shows that private residential prices in 2Q06 rose by about 2% from the first quarter, or 6.3% year-on-year and 8.9% since it bottomed out in 1Q04. Prices for luxury properties rose by about 7.7% in 2Q06.
Looking ahead, sales volume in the third quarter is projected to be 1,800 to 2,200 units, backed by healthy GDP growth and sustainable demand for new private residential units. Residential prices are poised to see more upside in the second half.
Retail
China’s retail sales grew by 14.2% in May, higher than April’s 13.6%, and the fastest pace since January of this year (15.5%). Total retail sales in May stood at 617.6 billion yuan (US$77 billion), boosted by the Golden Week holiday that began on May 1. For the first five months of the year, China’s retail sales rose 13.2% year-on-year to 3.039 trillion yuan (US$379 billion).
Retail sales growth in 2006 is projected to be about 12%, similar to last year’s growth.
In Beijing, total retail sales in April and May rose 12% year-on-year. In the retailing market, bigbox retailers continued to do well and accelerated their expansion plans. For example, IKEA opened its largest store (outside of Stockholm) in northern Beijing. Food and beverage companies are another prime source of retail space demand; they will continue to compete for existing retail space and will absorb new supply.
Prime retail rents in Beijing remained stable in the second quarter. In the investment market, CapitaLand, a Singaporean developer, acquired the retail component of Xihuan Plaza in Beijing for 1.32 billion yuan. The six-story commercial complex has a total gross floor area of 2.8 million square feet and will open in 2007.
In Shanghai, total retail sales in April and May grew by 13.8% year-on-year. Prime retail effective rents rose by 10.5% in the second quarter, supported by strong economic growth, retail sales growth, limited new supply and an influx of new retailers. The same factors are likely to sustain prime retail rental growth in the second half of the year.
Hong Kong’s retail sales in April rose by 9.4% year-on-year, the highest increase since February 2005. Sales of luxury items remained robust in April, with sales of jewelry, watches, clocks and valuable gifts expanding by 17% year-on-year and motor vehicle sales rising 15%. Tourist arrivals in April rose by 9.5% year-on-year, with the number of mainland Chinese visitors increasing by 12.4%. During May’s Golden Week holiday, an estimated 415,400 Chinese visitors arrived in Hong Kong, in line with earlier forecasts. The retail property market in Hong Kong generally remained positive in the second quarter, as some retailers continued to expand.
On the other hand, tenant resistance to current rental levels seems to be rising, which could moderate demand going forward.
In South Korea, the overall retail sales index in April and May rose by 5.5% year-on-year, reflecting a robust retailing market in the second quarter. For the first five months of this year, the retail sales index rose by 4.9% year-on-year. The growth of the department store sales index in April and May was even greater; it expanded by 8% year-on-year.
Further, the labor market continued to improve in the second quarter, as the unemployment rate fell to 3.2% in May from 3.9% in March. On the other hand, consumer sentiment throughout the second quarter seemed to moderate somewhat, as reflected by the 2.9% drop in the consumer expectation index, compared with the preceding quarter.
The soft sentiment could partly be due to the rise in interest rates – 50 bps since the end of 2005 and the highest level since April 2003. In the retailing market, Wal-Mart announced in late May the sale of all 16 Wal-Mart stores to Shinsegae Co. for 825 billion won (US$882 million). Shinseage plans to rebrand all 16 stores as E-Marts. (Wal-Mart entered the Korean retail market in 1998 after acquiring stores from Makro, the Dutch wholesale store.)
New retail supply in Seoul will concentrate in the Dongdaemun area, including Fashion TV (427,000 square feet) and Ramodo (320,500 square feet).
Singapore’s retail market in the second quarter continued to witness healthy leasing demand and robust retail sales, which grew by 4.6% year-on-year in April. Of the various new projects that will open in the second half of the year, most have already been more than 80% leased. Prime rent on Orchard Road and in suburban areas rose by about 1% each in 2Q06.
The Great Singapore Sale, an island-wide retail event that started on May 26 and will end on July 23, was a key highlight for the Republic’s retail sector. Target sales for the year are S$5.2 billion, 4% higher than last year. Tourist arrivals also saw positive growth in the second quarter – 815,000 in April, representing 16.0% growth over the same period a year ago. This is the first time that visitor arrivals for April have surpassed 800,000.
In May, Singapore’s government awarded the Marina Bay Integrated Resort project to the Las Vegas Sands Corp. About 1.3 million square feet of retail space, to be named Marina Bay Shoppes, will enter the market by 2009.
Going forward, no major new supply is expected until 2008-09, and with strong tenant demand, retail rents are poised to see further growth in the second half of this year and probably next year.
Prime retail rents in Malaysia’s KLCC area remained stable in the second quarter, supported by the robust economy and healthy private consumption. Total tourist arrivals in 2006 are expected to be about 17.5 million, rising to 20.1 million in 2007. Tourism spending per capita is projected to increase to 2,400 ringgit this year from 2,000 ringgit last year. Landlords remain cautiously optimistic about the outlook of the retail property sector, which has become more challenging and competitive. As always, location and infrastructure are two crucial factors, and popular shopping centers will continue to see high occupancy rates and double-digit rentals.
Industrial
According to BOJ’s 2Q06 tankan survey, more large Japanese manufacturers were optimistic about business prospects than in the previous survey. The labor market is tightening, and factories have limited space for expansion to increase production. The trend to outsource distribution functions continued in the first half of the year, especially among large retailers, who are adopting this strategy to enhance operational efficiency.
The demand for third-party logistics (3PL) has created business opportunities for major logistics and distribution operators, which in turn have translated into an increase in demand for large-scale, high-specification distribution centers, a phenomenon that is adding a new dimension to the Japanese industrial market.
A major transaction in the investment market was Japan Logistics Fund’s acquisition of seven properties in the Chiba and Kanagawa areas for a total of 39.2 billion yen.
In China, the number of industrial enterprises expanded by 61% between 1998 and 2005, while industrial productivity increased by almost 3.5 times in the same period to 108.5 billion yuan (US$13.6 billion) in 2005. As the world’s largest manufacturing base, China continues to attract substantial overseas direct investment, and a growing number of existing developers have initiated the second phase of their China investment programs, boosting demand for industrial property.
At the same time, these overseas companies are showing greater interest in exploring investment opportunities beyond the first-tier cities of Beijing, Shanghai and Guangzhou.
In Hong Kong, the total value of exports rose 9.4% year-on-year in April, on the back of robust exports from mainland China and increased trade activities within Asia. Total re-export value grew by 15.4% year-on-year in April, and re-exports to mainland China accounted for 49% of total re-export value, a strong indication of Hong Kong’s dependence on China’s huge import market. Container traffic grew by a strong 10.8% year-on-year to 1.30 million TEUs in April. In the first four months, cargo traffic rose by 7.0% year-on-year.
The industrial property market remained robust in the second quarter. Demand for industrial space came from overseas logistics companies wanting to tap business opportunities in China. At the same time, the number of new industrial and purpose-built industrial developments grew. In the investment market, investors’ interest in warehouses has shifted to more en bloc transactions. For instance, the largest new supply of warehouses in 2006 was sold en bloc to a fund for HK$186 million.
In Singapore, total manufacturing output grew by 14.7% year-on-year in the first five months of 2006. The industrial market saw stable rents and prices in the second quarter. In the high-tech industrial segment, more companies set up R&D centers, and average vacancy fell to 9.9% at the end of June, from 11.9% three months ago. Although the manufacturing sector is expected to grow at a slower pace in the second half, industrial rents are likely to rise further by 1.0% to 1.5% by year’s end, supported by the government’s higher 2006 annual GDP growth projections of 5% to 7%.
Conclusion
Asian economies remained robust in the first half of 2006, driven by strong exports and healthy domestic consumption. FDI continued to pour into the region, and economic prospects in the second half should remain positive, despite the moderation expected in view of the global economic slowdown.
The continued set-up of new offices by multinational corporations, together with the expansions of existing companies, both local and foreign, remain a key demand driver of the region’s office markets. Such expansions are in turn driven by the region’s robust economy. Strong demand for quality office space from multinational companies, especially financial institutions and banks, should continue to bode well for grade-A office markets across the region in the second half of 2006.
Strong domestic consumption in China and Japan will continue to lead the region’s retail markets. Other supporting factors include rising household income, low unemployment rates and relatively mild inflation. While various Asian central banks increased interest rates in the first half, the pace and magnitudes were moderate, not seriously dampening consumer sentiment.
Going forward, positive economic prospects should be able to sustain consumer demand and mitigate any negative impact from any future interest rate increases.
First-half performance of regional residential markets was somewhat mixed. The continued upward price spiral in Korea and China has prompted their respective governments to introduce new policies to cool overheated markets, so that prices can remain affordable, and any future price appreciation will be in tandem with the growth of the economy. In Hong Kong, the rising interest-rate environment weakened market sentiment in the first half, and transaction volume dwindled.
Residential investments in the second half will likely moderate, as investors will remain cautious, adopting a wait-and-see attitude. In Singapore, residential market performance was robust in the first six months, as both foreign and local investors remained positive about the city-state’s housing market. Such sentiment is likely to prevail in the second half, when there should be more price upside potential.
The region’s industrial market outlook remains favorable, supported by its status as the world’s key manufacturing base and logistics hub. It is forecasted that logistics outsourcing in Asia will reach US$79.9 billion by 2012. Demand for warehousing services in Asia is likely to rise in tandem with increased efficiency and subsequently higher volumes in supply-chain operations.
Indeed, many international third-party logistics corporations, manufacturers and retailers have seen robust demand for quality distribution centers. The region’s relatively low labor costs, skilled work force and healthy global demand for consumer products will continue to attract FDI and bode well for industrial real estate.
By Youguo Liang, PhD, CFA, managing director of research, Pramerica Real Estate Investors.*
