ASIA PACIFIC WATCH AUGUST 2018

Source: CBRE ERIX as of July 2018

OFFICE VACANCY RATES OF SELECTED APAC METROS

We have often given client recommendations which specify the “targeting of low vacancy or falling vacancy submarkets.” But which exactly are these? Of the more than 50 markets (city-sector combinations) that we formally forecast in APAC, the vast majority currently have single-digit vacancy rates and a growing number of them have been enjoying sub-3% vacancy rates in the past year or more. Of course, we have frequently noted as well that record low yields prevail in nearly all of them, making them expensive places in which to acquire assets. But as suggested in our market forecasting, we think that rental growth going forward will actually be quite modest inspite of the tight space market conditions currently, although some specific submarkets will well outperform their wider metros. Modest overall rental growth is expected because on an absolute basis, rent levels in some APAC cities already rank among the most expensive in the world, and caution is being exercised by many occupiers given the multitude of risks in the global economy. New more flexible and more efficient ways of using space and disruptors to conventional ways of using real estate are also limiting the type of rental growth that we would normally see when vacancy rates fall to such low levels.

TOP OF CYCLE OCCUPANCY FOR MOST OFFICE MARKETSOsaka and Tokyo both currently enjoy sub 2% vacancy rates in their office markets and in some of their submarkets, the more affordable B Grade space is even tighter. Japan’s third-largest metro, Nagoya, has a similarly low vacancy rate while Sapporo, Saitama, Kyoto and Fukuoka have even more impressive vacancy rates – each below 1% as of 1Q 2018 (CBRE). Hong Kong (Central/Admiralty) has a vacancy of just 2% although when including the submarkets on the Kowloon side (notably Kowloon East at over 12%), the overall vacancy rate has risen to just above 5%. Of the major markets, Beijing’s is the only one where vacancy has recently spiked upwards – albeit still below 10%. Seoul’s office vacancy rate remains high at 11.1% as of 1Q 2018 (CBRE).

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Data points through end of July 2018.Change represents month-over-month change.

PRINCIPAL CONTRIBUTORS:Shane Taylor

Pat Banyatpiyaphod

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Beijing Guangzhou Sydney Hong Kong Tokyo Osaka Singapore

This information is for our clients and investors only. Please note that the content of this report is for informational purposes only and should not be viewed as investment advice or an offer or solicitation. Any opinions are solely those of the Strategy & Research Team of CBRE Global Investors and are subject to change without notice, and may not be consistent with market trends or future events. This research is based on current public information that we consider reliable, but we do not represent it as accurate, updated or complete, and it should not be relied on as such.

Copyright © 2018, CBRE Global Investors, LLC. All rights reserved.

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Beijing Retail Shenzhen Retail - Shopping Centres

SELECTED INDUSTRIAL MARKET VACANCY RATES

Source: CBRE ERIX as of July 2018

Source: ARES as of July 2018

VACANCY RATES IN MAJOR AUSTRALIAN OFFICE SUBMARKETS

SELECTED RETAIL MARKET VACANCY RATES

WIDE RANGE OF AUSTRALIAN OFFICE SUBMARKET VACANCYAccording to the latest report from the Property Council of Australia (as of July 2018) the overall office vacancy for Australia was 9.6% and 7.7% for Grade A. Yet the markets more influenced by the commodities sector – notably the five at the left-hand-side of the graphic – are also the ones continuing to suffer from high vacancy rates. In contrast, the CBDs of Sydney and Melbourne have sub 4% vacancy rates for Grade A while Melbourne’s St Kilda Road submarket and Parramatta - which is emerging as Sydney’s “second CBD” - enjoy even tighter space conditions. Parramatta currently has a 0% prime vacancy, a 2.7% Grade B vacancy and even when including its Grade C and D office stock, its total overall vacancy rate of 3.0% is its lowest since 1990 (PCA).

VACANCY RATES OF JREIT QUALITY RESIDENTIAL INLARGE JAPANESE MARKETS

RETAIL IS MORE A MIXED BAGWe have been documenting in numerous annual and quarterly reports in recent years, the headwinds faced by retailers in the region and the still-strong construction pipelines of many cities and it is thus more difficult to find really low vacancy rates across these markets. Beijing and Shenzhen have been among the stand-out metros in terms of recent strong occupancy. Hong Kong shopping centers have been well occupied and defensive in spite of the dire fundamentals of the high street submarkets there (see our April 2018 Watch for more details). However high street submarkets in Japan are often outperforming their shopping center markets: Tokyo’s Ginza and the high streets in its Shinjuku and Shibuya wards currently enjoy low vacancy. CBD retail markets in Auckland and Melbourne have recently maintained sub 4% vacancy rates.

LOGISTICS FUNDAMENTALS REMAIN STRONGNot only have record amounts of new logistics space supply been delivered in many markets across APAC in recent years, strong demand drivers have led to even more impressive amounts of space being absorbed. With high volumes of older, obsolete stock being withdrawn from many markets for redevelopment into higher/better uses, it is unsurprising to see vacancy rates in this sector come down in many APAC markets. Beijing’s logistics market went from being over 20% vacant at the time of the GFC to now being near fully occupied. Greater Tokyo currently has an overall vacancy of around 7.0% but three of its four broad submarkets: Gaikando, Route 16 and the Port Area each have below 2% vacancy. Several logistics submarkets in Auckland and Sydney – especially their inner-city and airport submarkets - are currently less than 3% vacant.

LOW RESIDENTIAL VACANCY IN JAPANJapan is the only market of any notable size in APAC with an en bloc, for-rent residential market. Regulatory efforts are underway for such a market to emerge in China and potentially Australia but for now they remain strata-titled markets where private landlords rent individual units to tenants. The inner wards of Japan’s largest cities continue to enjoy positive population growth and household formation is particularly strong in the single-person household segment and this smaller-sized stock is very commonly for-rent. With supply relatively constrained, we have thus seen vacancy rates fall to very low levels in the JREIT quality residential markets. Tokyo, Nagoya and Fukuoka have seen their vacancy fall to close to 2% this year, with Osaka a little higher at around 4%.

Source: Property Council of Australia as of July 2018

Source: CBRE ERIX as of July 2018

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Tokyo 3 Inner Wards Tokyo 23 Wards Nagoya Osaka Fukuoka

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