Spotlight on South-East Asia

In 2017, three funds targeted the region, collectively raising $2.1bn. In H1 2018, only AEW Value Investors Asia III has  so far focused on the area, closing on $1.12bn. 

Singapore

The most mature real estate market in South-East Asia, the city-state took a a hit from the global financial crisis in 2009, but bounced back rapidly and is expected to enjoy 2.9 percent GDP growth in 2018, according to the IMF. The government is pursuing a new economic growth model focusing digital technologies, innovation and improving workers’ skills. This should help rebalance the country’s open economy, which is vulnerable to external trade war tensions.

Real estate transaction sales totaling $7.27 billion were recorded in Q1 2018, driven by developers’ active acquisitions of residential sites, particularly in the mid-tier and high-end of the market.

Office: Prime office rents have increased supported by strengthening economic fundamentals: CBD premium and grade A rents rose 4.8 percent in Q1 2018 compared to 2.7 percent growth in Q4 2017, while average vacancy rates fell 2.3 percentage points to 5.8 percent in the same period. The investment market also continued to pick up in Q1 2018, driven by future income growth expectations. The bulk of demand for CBD office space is coming from the technology and legal services sectors.

Retail: Prime retail rents remained stable across all retail submarkets in Q2 2018. Capital values moved in tandem with the rental trend, keeping yields relatively stable. Improving retail sales and tourist numbers are expected to increase demand for prime retail space, at least in the near term.

Logistics: Demand for warehouse space is being driven mainly by renewals and relocations as some firms see an opportunity to secure better quality premises at attractive rates. Gross rents and capital values for warehouse premises have remained stable now for three straight quarters, following 10 consecutive quarterly declines. A more positive economic outlook as well as a predicted fall in vacancy rates may see this trend reverse by the end of 2018.

Malaysia

Malaysia’s general election in May returned former Prime Minister Tun Dr Mahathir Mohammad to office. In the year running up to the election, real estate investment in the country was on an upward trajectory reaching a total transaction volume of M$4.1 billion ($1 billion; €0.85 billion) in Q1 2018. The positive sentiment around the election result is expected to boost investment activity for the remainder of the year.

A supply boom is expected to hit the office sector in the capital Kuala Lumpur by the end of 2018. This will likely lead to a spike in average vacancy rates and an accompanying downward pressure on rentals. Demand for logistics space is growing as Malaysia’s economy diversifies from natural resources to manufacturing. Rapid growth of e-commerce is also a contributing factor.

Indonesia

Indonesia reached a milestone in 2017 with an estimated GDP value of $1.004 trillion, the highest since 2014. Monetary conditions remain accommodating, with benchmark interest rates being kept at a relatively low 4.25 percent. Despite a low interest rate environment, the residential transaction market in Jakarta remained relatively modest. The total number of apartments sold in the capital of Kuala Lumpur throughout 2017 was around 6,000 units, down 50 percent from the previous year.

Complex and constraining regulations on asset transactions and ownership continue to hinder Indonesia’s economic development and ability to attract foreign capital. The majority of foreign direct investment in the country is through partnerships or joint ventures with local companies. China, Japan, Singapore and South Korea remain the most active investors in Indonesia.

Demand for office space in Jakarta bounced back in 2017 after two relatively challenging years. This momentum has carried over into 2018. Technology firms were responsible for around 30 percent and 15 percent of the space leased in 2017 and early 2018 respectively.

If absorption levels fail to match the record supply coming into the market in 2018, average office market vacancy rates may trend upwards. In the retail space, there is no new supply in the pipeline in Jakarta following several department stores closures in 2017. If this trend continues in 2018 it could fuel some rental growth.