SINGAPORE (EDGEPROP) - Logistics markets with relatively larger domestic consumer bases and stronger e-commerce growth are likely to continue to register healthy demand, reveals M&G Real Estate in its real estate market outlook, covering the segments of logistics, retail, residential and office in Asia.
For the logistics sector in Australia, Japan and South Korea, the global real estate investment firm has forecast an 8.8% return on an unlevered basis in 2020, and a 6.5% return per annum over the next three years.
It added that the cities – Sydney, Melbourne, Tokyo, Osaka, and Greater Seoul – “should see the strongest space demand due to their sizeable populations and positive demographic fundamentals”.
Furthermore, the logistics rents for those markets are forecast to grow by an average 1.8% annually over the next three years. Well-located prime assets should also record greater rental growth, it notes, against the backdrop of limited spaces.
“Is [the logistics market] a crowded trade? And the answer – at least over the medium term – I would say, is a ‘no’,” pointed out Jonathan Hsu, head of research, Asia at M&G Real Estate, at a media roundtable on the release of the report on Jan 14.
The reason for that is ample demand. “Over the next four, five years, we are expecting 10 million sqm of demand, particularly in Japan, Korea and Australia, to continue to provide positive tailwind for the logistics sector,” he adds.
Hsu highlights that the cities where the firm sees this trend playing out more positively are Tokyo, Greater Seoul, Sydney and Melbourne. Demand from e-commerce is forecast at around 4 million sqm in Tokyo, 4 million sqm for Greater Seoul, and 2 to 2.5 million sqm for Australia. However, Australia is “more of a laggard in terms of the e-commerce story,” says Hsu. “It’s just at the very start of transforming into a more online, retail friendly market.”
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Benefiting from global uncertainty, third-party logistics growth is therefore expected to remain fuelled by the outsourcing of logistics operations by both e-commerce retailers and manufacturers, as many retailers hold back from expanding their own operations, the report highlights.
To that end, the retail sector is set to see further bifurcation as prime high street and well-located shopping centres outperform those in weaker trade areas, M&G Real Estate says. But Hsu describes the division as one with “select opportunities” and “not the end of brick and mortar”.
“High street retail for the most part should still garner interest from retailers, as it serves a purpose not only as a point of sale, but also from a marketing and branding perspective – to be located in the prime retail streets of Ginza, Orchard Road, I think that all has a certain brand value for retailers to have a display, to have a store, and a showroom for those [in the] prime retail districts,” he explains.
The retail sector in Asia is set to see further bifurcation as prime high street and well-located shopping centres outperform those in weaker trade areas (Credit: Albert Chua/ The Edge Singapore)
As such, prime high street retail in cities such as Tokyo, Osaka, Sydney and Melbourne are forecast to register stronger rental growth, backed by sustained demand from luxury and higher-end international retailers seeking distinct showrooms to increase their exposure to locals and tourists alike, states the report.
M&G Real Estate also observes that high street assets demand lower operating costs as compared to shopping centres, as they are “relatively less intensive to manage”.
Given the scarcity of such assets in cities like Ginza, Tokyo; or Myeongdong, Seoul, the firm expects yields for high street retail to continue to hold firm in the near term.
For Australia, Japan and South Korea, M&G Real Estate forecasts total returns of around 6% in 2020.
However, it is bearish on the retail segment in Hong Kong. Citing data over the past four to five months, Hsu explains that since the protests started, tourism has declined by double digits. “In July, it was down 5%, then in August, it was down 40%, all the way till the most recent number – it was down 56%.”
Overall, prime retail in Hong Kong is expected to see negative returns of around 15 to 20% due to the current civil unrest that has impacted tourist arrivals, retail receipts and consumer sentiment.
The clear winner in the residential segment, meanwhile, is Japan. Investments in multi-family residential (defined as one building owned by an owner that focuses on renting out all apartment units) in Tokyo and Osaka are forecast to deliver a 4.7% total return in 2020, backed by stable rental growth.
Hsu attributes the stability to a number of trends in the market. First, he sees population growth – or population reconsolidation to be more exact – in major Japanese cities like Tokyo, Osaka, Nagoya, and Fukuoka as people flock to cities as they age, given the location provides added convenience in terms of amenities, accessibility to hospitals and transportation. “They don’t really want to drive when they are 80 or 90 years’ old,” he says.
Second, the trend of millennials getting married later has also contributed to higher rental demand. “Each single person requires his own space although this is smaller than what was typically demanded in the past,” he notes.
Hsu observes that there is demand for smaller units located around the central five or even the central 23 wards of Tokyo. The same trend applies to Osaka, Nagoya and Fukuoka.
Third, the younger generation’s emphasis on convenience, in terms of being located in the city centre, is also one of the factors at play.
Broadly, there has been a change in trends in the residential sector. Richard van den Berg, fund manager at M&G Asia Property Fund, remarks that the younger age group leans towards renting over owning properties. “Traditionally, people would stay with their parents and after they have enough funds, they would buy properties. But that is evolving and Japan is in that sense a little bit ahead of the curve in Asia Pacific.”
This is why in Japan, “there are apartment buildings with one owner, professionally managed, and leased out continuously, instead of having apartment buildings built by developers, and sold immediately to individuals,” Van den Berg notes.
He has seen the same trend starting to gain traction in Australia and Korea – but on a smaller scale. “Those are the two countries we monitor – we like to see how that product and sector evolves, how liquid it is, what the returns are in good times and in bad times”, highlighting that “in Japan, the market is already very established.”
For the office sector, Japan is once again expected to outperform the market. In particular, Osaka prime offices are expected to experience an annual rental growth of around 8% in 2020, and 5.6% over the next three years.
On the other hand, M&G Real Estate expects Hong Kong’s office market to perform the worst within the region as the anti-government protests are “likely to further depress the already sluggish space demand from occupiers, particularly from Mainland Chinese corporations.” Hsu also regards the pullback of Chinese demand as a ramification of the US-China trade war.
M&G Real Estate expects the overall office sector to deliver close to 7% in total returns in 2020. Given low vacancies and a more controlled supply pipeline, core office markets in the Asia Pacifc region are expected to remain resilient, given the possibility of stronger headwinds in the global economy.
In addition, the digitalisation of developed Asia Pacific economies should continue to drive the creation of service-based jobs and lend strength to the prime office sector, particularly from growing innovation industries like ICT, 5G networks and FinTech. This would, in turn, provide diversification beyond manufacturing-based sectors, says the report.
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