According to a new report from the Urban Land Institute (ULI) and PwC, Melbourne is the best prospect in the Asia Pacific region for both investment and development.
The Emerging Trends in Real Estate Asia Pacific report for 2019 provides an outlook on Asia Pacific real estate investment and development trends, real estate finance and capital markets, and trends by property sector and metropolitan area.
The report is based on the opinions of 350 real estate professionals, including investors, developers, property company representatives, lenders, brokers and consultants.
Melbourne topped the ranking due to the fact its office supply pipeline is more constrained than that of Sydney, with rapidly shrinking vacancies likely to provide upward moment in rents. Rental growth was listed as ‘phenomenal’ in both Sydney and Melbourne across 2018, although yields have compressed slightly – running at around 4.5 per cent for prime office and retail and 5.5 per cent for industrial spaces.
Prices in Melbourne are also currently lower than Sydney, with office vacancies sitting at around four per cent in both cities.
“The survey results for this year’s Emerging Trends in Real Estate Asia Pacific report shows that many investors in the region are looking to Australia’s largest cities for investment opportunities,” said Susan McDonald, ULI Australia Chair and Head of Retail, Mirvac.
“Both Melbourne and Sydney are core markets at heart, but we are seeing that with the number of investable assets significantly lower than in Japan there is strong competition to place capital, especially with so many international players looking to buy.”
Trends across the Asia Pacific, according to the report, are:
Logistics facilities continue to be a go-to investment: In the only sector where investor opinions were uniformly bullish, investment allocations to the sector have risen significantly in 2018.
Co-living as a template for future housing: As cities are becoming denser and housing costs rise, more developers are looking to co-living as a way to pack more people into smaller areas.
Capital flows remain strong: The ongoing build-up of liquidity across the Asia Pacific region continues to see huge amounts of money being sent cross-border to be invested in foreign real estate assets. Strong outflows in the region seem certain to continue, especially with new reserves from Japan likely to enter the mix in 2019.
“Value-add plays remain the target of choice for many investors in Australia, with asset enhancement being used as a means to boost returns. The sheer weight of institutional capital, both domestic and foreign, has pushed yields down further in core markets, with most investors reporting that finding assets to purchase continues to be difficult,” said Tony Massaro, Partner, PwC Real Estate Advisory.
The top five markets for investment and development in 2019:
- Melbourne (first in investment, first in development) – Melbourne has just managed to best Sydney this year. It offers a constrained office supply pipeline, a good yield spread over the cost of debt and sovereign bonds, a deep, liquid, core market and good prospects for rental growth.
- Singapore (second in investment, eighth in development) – An improvement in Singapore’s office market has caused the city to take second spot in investment rankings, as it continues to rebound from cyclical lows.
- Sydney (third in investment, third in development) – Sydney remains near the top of the rankings for the same reasons as Melbourne. The city is a favourite of global investors due to relatively high returns and as a safe-haven play. Competition for assets has helped sustain pricing, while low vacancies and growing demand for space suggest rents will continue to rise.
- Tokyo (fourth in investment, fourth in development) – Tokyo’s move to fourth this year is somewhat surprising after last year’s drop, but probably reflects what has always made it a favourite for institutional buyers: cheap finance, attractive leverage, a good spread over interest rates and a large stock of investment-grade assets.
- Osaka (fifth in investment, sixth in development) – The lack of reasonably priced core assets in Tokyo continues to push investors into regional Japan, where local economies are now increasingly mature and stable. With supply tight in both residential and office sectors, the city is now probably the top market outside the capital.
Leading buy/hold/sell ratings for the various asset classes are as follows:
- Office — buy Ho Chi Minh City and Tokyo, sell Taipei and Auckland.
- Residential — buy Ho Chi Minh City and Bangalore, sell Kuala Lumpur and Auckland.
- Retail — buy Ho Chi Min City and Mumbai, sell Taipei and Kuala Lumpur.
- Industrial/distribution — buy Bangalore and Mumbai, sell Taipei and Kuala Lumpur.
- Hotels – buy Tokyo and Ho Chi Minh City, sell Taipei and Beijing.