Market Outlook

The Asia Pacific (APAC) region is experiencing a boom in infrastructure investing. The Infrastructure sector in countries that include India, Indonesia, China, Australia, Philippines, Myanmar, Vietnam, Thailand and Singapore is expected to grow 7% to 8% per year over the next decade.

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Market adjustment slows

Although the market continues to correct, we note signs that the rate of adjustment is slowing.

• For the central fi ve wards (C5W), COVID-19 is still taking a toll on the market and casting a shadow over the market’s future, although the impact appears to be showing signs of alleviation. • Average Grade A offi ce market rents in the C5W fell 1.9% quarter-on-quarter (QoQ) and 5.3% year-on-year (YoY), and now stand at JPY35,762 per tsubo1 per month.

• The average Grade A offi ce vacancy rate in the C5W increased slightly by 0.2 percentage points (ppts) QoQ to 1.2% in Q1/2021.

• Average large-scale Grade B offi ce rents declined to JPY27,275 per tsubo per month – a contraction of 2.1% QoQ and 4.5% YoY.

• The average vacancy rate in the Grade B market lies at 2.2% following a loosening of 0.6ppts QoQ and 2.0ppts YoY.

• With limited supply expected this year and the next, the market should have time to adjust and recover, although secondary vacancy derived from the large supply in 2020 is a concern.

• While prime real estate is expected to hold steady, rents in poorly located and older offi ces are likely to fall, resulting in an overall market deterioration.

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Rental declines moderate

Occupier demand started to rise in Q1/2021, but the reintroduction of crowd density controls now suggests a more protracted recovery.

 

• Food & beverage (F&B) revenue largely declined in Q1/2021 as operators continued to be aff ected by the COVID-19 pandemic control measures such as dine in capacity constraints and restrictions on large-scale events. However, retail sales (excluding motor vehicles) improved in the quarter, largely due to a lower base in the same period last year.

• With the positive net demand of 301,000 sq ft outweighing the net supply of 108,000 sq ft, the overall vacancy rate declined for a second consecutive quarter by 0.3 of a percentage point (ppt) to 8.5% in Q1/2021, the lowest since the onset of the COVID-19 pandemic here in Q2/2020.

• Despite the lack of tourists, the Orchard Area remains resilient with the vacancy rate remaining unchanged at 11.6%. On the other hand, the vacancy level in Suburban Areas declined for a third consecutive quarter by 0.8 of a ppt to 5.2%, its lowest level since Q1/2016. • Savills monthly prime rents in Orchard Area fell, albeit at a slower pace, by 3.0% quarter-on-quarter (QoQ) to S$22.80 psf, compared to the 7.8% decline registered in Q4/2020.

• The more vibrant suburban malls saw a smaller contraction in Savills monthly prime rents in Suburban Areas of 2.0% QoQ to S$24.00 psf.

• Despite the limited supply pipeline over the next few years, the uptick of COVID-19 community cases led the government to backtrack from Phase 3 of the pandemic control measures to reintroduce Phase 2 (Heightened Alert). While the government has provided some form of support to retailers, it is expected that business conditions will remain challenging and rents of malls in both Orchard and Suburban Areas are forecast to decline by 15% and 10% respectively in 2021.

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The COVID-19 pandemic brought the logistics sector abruptly into the global spotlight. With increased attention on the sector, both in 2020 and in the near-term, this report focuses on key drivers for the sector, recent market performance and an outlook for the industry.

Growth drivers

• At the ground level, ongoing population growth and economic expansion will drive the global middle class almost to double over the next decade. This increased level of consumption, together with the accelerated shift to e-commerce, will fundamentally drive the need for stronger, more resilient and more diverse supply chains. Ongoing development of transport infrastructure will be critical to ensure market connectivity.
• A shortage of labor in some markets, especially across Europe, together with a sharper focus on Environmental, Social and Governance (ESG) priorities, will force accelerated adoption of technology to bring greater efficiencies and transparency. Similarly, the use of third-party logistics (3PL) operators will continue to grow as they provide corporations with opportunities for greater nimbleness and flexibility in meeting consumer demand. 
• Geo-politics will continue to shape the global trade environment. Many short-term interim solutions have been put in place to safeguard against recent trade flow disruptions, but complete roll out of new supply chain solutions will take years as corporates weigh opportunities for reshoring and demand/supply drivers.

Leasing Market

• Industrial markets have proved resilient in 2020, and demand remained robust, despite economic growth figures being amongst the worst on record. Accordingly, industrial/logistics vacancy has remained tight across the world, although this has been due, in part, to limited development supply pipelines.
• Notwithstanding, rental growth has remained comparatively elusive across the world with less than half of the markets tracked recording growth in 2020 but this varies in and within regions. While this may not be surprising in light of the pandemic, it also reflects the longer-term stagnation in rents, with less than half of the global markets having achieved more than 2.5% rental growth per annum since 2017. However, this is expected to change with increased cost pressures being exerted on landlords; not least of all being higher acquisition costs and increased land taxes and infrastructure charges.  

Outlook

• Demand drivers highlight gaps in supply chains that can potentially be addressed by the expanded range of logistics asset types. To the extent supply chains connect production to consumption, these gaps can be in the same or across multiple regions. 
• Structural trends fueling demand over the long-term are also being accelerated by both business and consumer reactions to the pandemic. The investor outlook, therefore, is continued strong capital and income returns, with the latter likely to increase in contribution. 
• The combination of strong demand and supply chain reconfigurations to enhance efficiencies puts a sharper focus on land availability for new development. This will be a fundamental issue that needs to be addressed for real estate to meet the future needs of the sector. 

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