Singapore tumbled to 21st position in investor sentiment ranking

By Feily Sofian

/ The Edge Property |

November 22, 2016 9:00 AM SGT

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Real estate investors are considering emerging markets for higher returns, as they face a shortage of core assets and increasingly compressed yields in safe-haven cities. Two Indian cities, Bangalore and Mumbai, took the top spots in Asia-Pacific for investment prospects in 2017, according to the latest annual survey by PwC and the Urban Land Institute.

Singapore tumbled to 21st position from 11th in the previous survey. John Fitzgerald, Chief Executive of Urban Land Institute, Asia-Pacific, describes the city-state as being in a perfect storm of a weak economy, excess supply and declining demand. While office occupancy rates have been hit by the downsizing of the financial sector, another 4.05 million sq ft of office space is expected to come onstream next year, going by the latest statistics by URA.

The “Emerging Trends in Real Estate Asia Pacific” survey polled about 600 industry leaders on the outlook of real estate investment, trends and other issues. A majority of respondents are based in Singapore, Australia, China, Hong Kong and Japan.

The survey found a dramatic turn in sentiment. Bangalore jumped to the first position, up from 12th in the last survey. Domestic and international companies are said to be flocking to the city to open call-in and R&D centres, driving demand for new spaces. Mumbai rose to second position from 13th in the last survey as major road and rail infrastructure programmes boosted investment sentiments.

The swing in votes was also testament to how fast economic conditions in several emerging markets have improved, the survey report says. Manila, Ho Chi Minh City, Shenzhen, Shanghai, Jakarta and Bangkok occupied the third to eighth positions.

Tokyo and Sydney, which had been investors’ top picks in recent years, slipped to 12th and ninth placing respectively. Respondents' take on Tokyo was polarised. Residential assets have remained popular, underpinned by high occupancy rates and stable rental income. The office market, on the other hand, is bracing for a large supply in 2018. Investors might also be jaded with the shortage of available assets as owners choose to refinance their properties rather than sell in the current negative interest-rate environment.

The shift in investment preference towards emerging markets may not necessarily translate into a surge in transaction volume, according to the report. These markets are said to lack the critical mass of investable assets, and a majority of investors do not have the connections, experience and risk appetite to exploit the opportunities.

In addition, investors who continue to favour core assets have the option to develop one. “Development has become more popular. One way to get around the shortage of core products is simply to buy land and build one,” says Fitzgerald. Development entails higher risks, however, and core investors usually avoid the option, he notes.

Recently, Malaysia’s IOI Properties Group won a white site at Central Boulevard in Marina Bay. The group had put in a bid of $2.57 billion, or $1,689 psf per plot ratio, 16% higher than the next highest bid. A total of seven developers contested for the site, including Chinese developer Nanshan Group as well as the Hongkong Land and Cheung Kong Property Holdings partnership.

Best bets

By property type, logistics facilities have become the most favoured asset class among institutional investors on the back of structural undersupply in the region, driven by the boom in e-commerce, according to Fitzgerald.

Geographically, Shenzhen ranked first in the industrial/distribution property sector. A total of 83% of respondents recommended buying and the rest advised holding. The ongoing infrastructure development in the Pearl River Delta is expected to enhance transport network and boost demand for these facilities.

Mumbai and Bangalore took second and third spots, with 80% of respondents taking a buy stance. India is said to be a chronically undersupplied market. Meanwhile, companies are expected to consolidate their operations from a single large warehouse with the implementation of the goods and services tax. This move will enhance efficiency and allow e-commerce players to serve more locations. Under the existing regime, tax rates vary across regions and companies would operate from multiple locations to save on taxes.

Bangalore also ranked top in the apartment rental sector. One respondent commented that the market was driven by the inflow of engineers into India’s top IT destination. He cautioned, however, that a potential oversupply might hamper capital appreciation.

Ho Chi Minh City came in second. Local purchasers are expected to dominate the market, with smaller and affordable homes likely to fare better than those in the higher-end segment.

Emerging markets also topped the chart for office properties. Manila and Bangalore ranked highest on the back of robust demand from business process outsourcing companies. Yields in Bangalore are said to be around 9%. In Manila, there is plenty of domestic capital competing for these properties.

Separately, niche assets such as affordable housing, senior housing and self-storage featured strongly among investors, in line with their quest for higher returns.

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