Deutsche Bank lowers return forecast for HK, Singapore

  The asset management arm of the Frankfurt-based bank is predicting a slight downturn in core office and retail yields in two of Asia’s mature markets.  

Deutsche Asset and Wealth Management (DeAWM), the alternative investment management arm of Deutsche Bank, has lowered its return forecast for Hong Kong office, Singapore office and Asia’s retail sector, due to slowing cash yields for core assets in those markets.

According to the firm’s Asia-Pacific Real Estate Strategic Outlook 2014, the two office markets it downgraded most were Hong Kong and Singapore. The yield forecasts for those two cities were downgraded by about 1 percent and 0.3 percent, respectively, from six months ago. Hong Kong’s return forecast fell to approximately 8 percent from 9 percent, and Singapore’s return forecast fell to approximately 5 percent from 5.3 percent, making Singapore one of the lowest-performing markets in Asia.

DeAWM also reduced its five-year return forecast for the retail sector in all developed Asian markets by an average of 0.81 percent. In some cities, this brought the forecast down to as low as 5 percent, in some instances wiping out the spread between retail property yields and the yield of local government bonds. According to the firm, this is largely thanks to ecommerce taking more business from in-store sales.

Koichiro Obu, DeAWM’s head of research and strategy for Asia Pacific, told PERE that Singapore and Hong Kong are still attractive office markets for certain investors. He said: “The total returns may still be attractive in Hong Kong and Singapore, but this is due to expected rental increases in the future,” Obu said. “Cash yields are [today] limited in these markets.”

Obu also pointed out that cap rates in the two core markets have compressed substantially given all the competition for core assets in Asia. “Singapore and Hong Kong are therefore more suitable for high net-worth individual and corporate investment for now, rather than for yield-seeking investors,” Obu suggested.

This comes as an increasing number of Asia-focused core funds have come to market in the past few months, reflecting increased investor interest in the sector. Among them are funds from SC Capital and PAG while M&G is seeking a large equity commitment to its existing fund and Aberdeen Asset Management is drawing up plans for a core fund of funds.