Navigating the ‘innovation’ theme for real estate opportunities
By Richard van den Berg
/ M&G Real Estate & EdgeProp Singapore |
A muted supply pipeline over the medium term is supporting the office rental outlook for key developed Asia Pacific cities like Singapore, says van den Berg. (Picture: Samuel Isaac Chua/The Edge Singapore)
EDGEPROP (SINGAPORE) - The Asia Pacific (Apac) region is currently a hotbed of digital innovation with its high internet and smartphone penetration rates; a handful of successful, homegrown unicorns; as well as dynamic and fast-moving e-commerce markets.
Factors responsible for the region’s spectacular economic growth
Companies in the region continue to break new ground in almost every area of digitalisation, with e-commerce being a key driver of innovation trends. According to Euromonitor’s estimates, Apac online sales value is expected to grow at an 8% compound annual growth rate (CAGR) between 2021 and 2026, resulting in a surge in occupier demand for good logistics infrastructure.
Governments, too, have been playing a key role in shaping the regional narrative on innovation via favourable business incentives and public investments in real estate. Singapore’s Jurong Innovation District is a case in point. Bringing together industry titans such as Siemens, Konica Minolta and Hyundai Motor Group, the District seeks to create an ecosystem of corporations and partners in the advanced manufacturing sector to help sustain Singapore’s lead on Industry 4.0.
These initiatives are expected to strengthen Singapore’s competitiveness as a business and innovation hub, attracting companies, talent and capital, which in turn will have a positive knock-on effect on real estate demand, such as offices and logistics.
With a unique value proposition across its more developed markets, the Apac region offers a compelling growth opportunity for businesses and investors to participate in. For example, Australia has a highly transparent real estate market and continues to experience strong demographic growth, whereas Japan is the world’s third largest economy and has a vast domestic population.
What does this mean for the real estate market?
When it comes to evaluating the prospects of any real estate market, economic growth indicators are key, as GDP expansion typically supports the growth of real estate demand. Sectors and markets that are underpinned by long-term structural growth themes will likely see stronger tailwinds, providing buffers against short- to medium-term risks and volatility.
For instance, prime office locations within emerging tech clusters offer investors opportunities to capitalise on Apac’s strong push into digitalisation via direct investments in real estate activities. These markets with a rapidly developing reputation for innovation, such as Seoul, Singapore, Tokyo and Yokohama, will continue to remain attractive to established internet, technology and gaming sectors, due to agglomeration economies, thus sustaining office space demand over the medium to long term.
In addition, with a sharpened focus on staff well-being and with the redefinition of the office as a central workplace for interactive collaborations as well as the increasing focus on de-carbonisation targets and stricter ESG reporting, occupiers are also expected to place a premium on higher-quality assets that address considerations of wellness, services and ESG.
At the same time, while hybrid working is here to stay, back-to-office momentum in Apac, particularly in North Asia, is expected to remain resilient due to a preference for face-to-face interactions, convenient public transport systems and smaller home sizes.
This is backed by data from the Google Mobility Index as of October 2022, which indicated that footfall levels to Singapore and Hong Kong workplaces are about 7% and 6% less than pre-pandemic levels, respectively.
Coupled with a generally muted supply pipeline over the medium term, the office rental outlook in developed Apac, especially Seoul and Singapore, is likely to remain well-supported.
With the above backdrop, prime office buildings with strong sustainability credentials in emerging tech clusters are expected to outperform, in terms of achieving resilient income streams during this period of economic uncertainty.
M&G Real Estate acquired Minato Mirai Center for more than $997 million in October. (Picture: M&G Real Estate)
For example, M&G Real Estate acquired Minato Mirai Center, a prime-grade office building in Yokohama, Japan, for more than $997 million in October. The award-winning Minato Mirai Center is one of Japan’s few buildings to hold a five-star Casbee (Comprehensive Assessment System for Built Environment Efficiency) rating — the highest recognition of ESG performance available. State-of-the-art design provides maximum layout flexibility, solar light tacking, as well as reduced heat and carbon emissions for its occupiers.
The logistics sector is also expected to benefit from the pandemic-induced e-commerce boom, as well as tech-related manufacturing of components such as semi-conductors. This will underpin continued growth in demand for warehouse space on the part of online retailers and third-party operators. Supported by favourable leasing fundamentals and tight supply, evident by low single-digit vacancies in prime logistics assets across key Apac cities, rental growth momentum is expected to be sustained over the medium term.
Key takeaways
In light of the innovation wave sweeping across Apac, real estate investors should consider the following three takeaways.
Firstly, identify rising innovation clusters that have large growth potential. These clusters serve as ecosystems that big technology companies, venture capitalists, law firms and other businesses want to be a part of. Longer-term investors should assess the potential growth prospects of these precincts across cities to determine which ones will emerge dominant and mature with an established identity as a technology hub.
Within Apac, Sydney’s upcoming Tech Central and more established submarkets such as Seoul’s Gangnam business district are examples of innovation-centric precincts that should experience stronger demand from technology-based tenants.
Secondly, real estate investors should align themselves to the needs and wants of technology-based occupiers to build more future-proof assets. With the rising influence of technology giants as anchor occupiers, real estate markets are bound to be shaped by their priorities. For instance, given technology firms’ focus on collaboration and employees’ welfare, landlords should enhance tenant engagement and experience, such as providing shared working space and wellness facilities.
Similarly, in the logistics sector, e-commerce giants and third-party logistics providers have unique real estate needs such as a higher ceiling-to-floor height and higher floorload tolerance to support sophisticated automation systems that are increasingly vital on the back of increased pressure on delivery speed and labour shortages.
Thirdly, a long-term and selective perspective is essential if real estate investors are to capture the burgeoning opportunities arising from Apac’s growing innovation and technology sector. In turn, this will enable them to future-proof their portfolios while remaining nimble to Apac’s dynamic growth narrative.
Richard van den Berg is the fund manager for M&G Asia Property Fund, part of M&G Real Estate
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