Market Outlook

Largely muted cap rates across Asia Pacific.

 

Uncertainty surrounding COVID-19 continued to put potential transaction activity on standby mode in Q42020. We saw largely muted cap rate fluctuations across the region.

Key Highlights in Q4 2020:

• In India, notable exceptions included dips in industrial cap rates as the region-wide proliferation of e-commerce for both F&B and retailing generates sustained demand for warehousing and logistics facilities.
  
  
• Mumbai’s retail cap rates edged upward as drops in rental and vacancies exert downward pressure on asset values.
  
  
• Elsewhere in Manila, we witnessed a drop in rental values which are yet to be reflected on asset values.
  
  
• In Australia’s office sector, we expect modern assets with long term leases to continue showing resilience in value as investors focus more on low-risk buying opportunities.
  
  
• While the underlying appetite for office assets in Australia remains healthy, transaction volumes is temporarily being affected by international travel restrictions which has impeded upon site visits. Further, limitations brought about by the foreign investment approval process has posed uncertainties on inbound capital flows. However, recent inroads to policies have been made which appear optimistic.

Overall, we believe that varying expectations on economic outlook has translated into mismatch between buyers’ and sellers’ price expectations.

The gradual restoration of activity will drive capital back to office, retail and industrial sectors, in turn affecting their cap rates later in 2021.

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The retail sales index (RSI) (excluding motor vehicles in chained volume terms) fell by a slight 2.4% year-on-year (y-o-y) to 98.0 in November 2020. Retail sales performance improved in the month, led by prominent large-scale sales events such as 11.11 and Black Friday on digital platforms. Prior to these events, many brick-and-mortar stores also started going virtual with establishments such as Isetan and Metro selling their products on platforms like Lazada, and BHG setting up their own shopping site. This resulted in increased online sales in November, which accounted for about 16.7% (excluding motor vehicles), or some S$516.4 million of the total retail sales amounting to S$3.1 billion. Of these, majority of the retail trade mainly comprised transactions of Computer and Telecommunications Equipment, Furniture and Household Equipment, and Supermarkets and Hypermarkets.

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From Q4 2020 to 2024, some 53.8 million sq ft gross floor area (GFA) of industrial space is slated to be completed. Of these, about 43.2% of the upcoming supply is expected to be completed in 2021, with a significant proportion being multiple-user and single-user factory spaces. Coupled with the phased withdrawal of government fiscal support for businesses, multipleuser factory prices and rents are likely to come under pressure, falling by not more than 5% in 2021 while single-user factories could fare slightly better.

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• The COVID-19 pandemic has significantly accelerated a number of secular shifts that were already starting to have fundamental impacts on the role real estate plays in the economy as well as in investment portfolios.
• Such disruption increases the need for evolving data and analytics to understand the rapidly changing drivers of performance and risk consistently across all types of real estate investments.
• Despite a long list of difficult questions facing the asset class, climate change and its impact on risk and return are more important than ever for real estate investors.

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