1. Firm economic growth and persistent low real interest rates will continue to drive occupier and investment property markets in Asia
Economic conditions have strengthened around the world: 2017 will see the highest global real GDP growth since 2010, and 2018 should be better still. In Asia, China, Japan, South Korea, Hong Kong and Singapore should all achieve higher or sharply higher growth in 2017 than in 2016, although modest slowdowns look probable for 2018. Momentum in India slowed in H1 2017, and so growth will be below China’s for that year; however, growth should rebound sharply in 2018. Improved economic conditions have boosted demand for leased office space, especially in Hong Kong but also in Singapore, the leading Chinese cities and in India. Demand for industrial and logistics property has strengthened for similar reasons. With overall demand for leased office and warehouse property set to stay strong, office and warehouse rents should rise further or at least stay reasonably stable, boosting cash rental streams to landlords and thereby supporting investment property demand.
US interest rates are clearly set to rise gradually from now on, putting upward pressure on benchmark interest rates in Asia. Nevertheless, monetary conditions in many Asian countries are currently so loose that that we expect the pace of monetary tightening over 2018-2019 to have only a very moderate impact on property markets. We think that Hong Kong will continue to enjoy negative real (i.e. inflation-adjusted) interest rates until late 2019 or early 2020, and with inflation likely to move gradually upwards in Singapore, Japan, India and China real interest rates ought to stay low and perhaps even fall in those markets too. Persistent low real interest rates should naturally ensure that funding costs remain low for property developers and investors.
2. Property investment volumes in Asia will remain strong, and yields may well shrink even further
With robust economic growth and low real interest rates set to persist in Asia, investment property transaction volumes should remain high. Based on RCA data for Asia Pacific as a whole, after a strong 2016 transactions in completed properties rose by 4% YOY to USD102 billion over the first nine months of 2017. Particularly strong were Hong Kong (+38% YOY) and Singapore (+83% YOY); and these two cities rose, respectively, to be the first and third ranked urban investment centres in Asia Pacific over the period. Looking forward, we expect the investment market in India (+85% YOY over the first nine months) to continue maturing, while Japan may well recover from recent weakness as its economy accelerates. It therefore seems reasonable to expect transaction volumes to rise again in 2018. The chief risk to this view is not weak demand or availability of capital, but a shortage of high-quality properties available for sale, whether in the core or value-add segments of the investment property market.
Assuming investment volumes increase again in 2018, property yields may well fall still further, even after several years of compression. Stretched valuations are a real issue, with prime grade office property in Tier 1 Chinese cities now offering only very narrow or even negative spreads over ten-year bonds. In contrast, prime office properties in Singapore offer a 1-2 percentage point yield spread over bonds, and this remains one of our preferred markets in valuation terms. Yields on retail and industrial property in Asia remain higher than for office property, but as a rule are also stable or falling.
 According to RCA’s report “Asia Pacific Capital Trends 2017 Q3”
3. Office rents in major centres will continue to rise or be fairly stable in 2018
We expect prime grade office rents to rise further in 2018 in Hong Kong (+4-7% on Hong Kong Island; flat in Kowloon) and Singapore (+5-7%), driven by firm GDP growth and strong or recovering occupier markets, with increasing demand from new tenant segments such as coworking operators and technology and media companies. In China, we expect office rents in Shanghai and Beijing to fall by 1-3% in 2018, since heavy new supply is likely to offset firm demand in the near term; beyond that, however, rents should be stable or rise. In Shenzhen and Guangzhou, firm demand should continue to push up rents in 2018, but the impact of heavy new supply should push rents down from 2019. However, in the case of all these Chinese cities firm demand from occupiers in finance, technology and other sectors means that prospects for rent growth, office net absorption and vacancy levels are more positive than we had assumed until a few months ago, when we expected rents to fall sharply in response to a wave of new supply. In India, we continue to project an average 5% annual increase in office rents over the next three years in the technology-driven markets of Bangalore, Hyderabad and Chennai.
4. Flexible workspace will strengthen further as a source of new leasing demand
The flexible workspace market has seen huge growth in many Asian cities, and this trend should continue. Flexible workspace operators are now a major source of demand for leased office space in Hong Kong, Singapore and the Tier 1 and Tier 2 Chinese cities, and are growing in importance in India with Jakarta and Bangkok set to be the next markets to witness significant growth. The global player WeWork is leading the trend; WeWork has just signed its largest ever leasing deal in Shanghai (for an entire Grade A building covering 27,000 sq metres or 290,500 sq feet in Huangpu). However, there is plenty of competition to the international operators from expanding regional players, including naked Hub and JustCo. We expect to see deeper partnerships formed between landlords and operators over 2018, with many landlords understanding the need to add flexibility to their portfolios to retain large space users. End-user demand comes from both large and small companies across a range of sectors from finance to technology and manufacturing. Looking forward, we expect the size of flexible workspace centres to increase and also expect greater differentiation, with all levels of the market to be covered and some operators even looking to cater for specific vertical sectors. The trend for corporate take up will undoubtedly grow in 2018, with many of our clients studying the sector deeply in order to achieve flexibility and cost savings.
 See the article from Mingtiandi dated 12 December 2017.
5. Technology companies will strengthen their presence in the CBD and CBD fringe
Acquisition of talent is the greatest challenge that technology companies face, ranking far ahead of other constraints; this was cited as the key problem in 40% of responses to our question on the subject in interviews with Asian technology occupiers. We think technology groups need to move towards the CBD or CBD fringe to find and retain talent in R&D, software and IT, and sales & marketing, all groups which should increase in proportion to integration of artificial intelligence; and we expect the attractions of the CBD and CBD fringe to strengthen further over time. Business parks on city edges are an option for smaller or start-up groups. Different economic criteria apply to manufacturing units, for which location outside cities makes sense. However, technology occupiers attempting to concentrate all their operations in out-of-town campus sites look unlikely to attract all the high-skilled staff needed for the key roles of the future.
 See Colliers’ “Tech Trends in Asia” report, 5 December 2017
6. Higher trade flows and e-commerce will continue driving industrial and logistics property in China, Hong Kong, Singapore and India, with industrial property emerging as a key organised asset class across Asia
The industrial and logistics property market in China continues to be driven by firm real GDP growth (about 6.8% in 2017), steady growth in retail sales (up by 14% p.a. on average over 2007-2016), and above all by strong growth in e-commerce retail sales (up by 67% p.a. on average over the past ten years, and still growing by 34% YOY over the first nine months of 2017). Retailers and third-party logistics businesses related to e-commerce growth are key demand drivers for leased logistics space across China.
Given firm demand for logistics space and very limited land supply, we think that vacancy rates will fall and rents will rise in 2018 and over the next few years in prime logistics properties in Shanghai in particular, with demand increasingly spilling over to cities further out such as Nantong, Changzhou, Wuxi and Changshu. In the same way, in North China, we expect strong demand for logistics property in the established markets of Beijing and Tianjin to overflow to adjacent areas, for example emerging markets lying between the Beijing New Airport and Xiong’an New Area in Hebei Province. Meanwhile, the logistics property market in China’s mid-West looks set for substantial growth, reflecting growth in e-commerce demand, the benefits of the Chinese government’s ambitious Belt & Road initiative, and the operation of the Sino-Europe Railways. The inland cities of Chengdu, Xi’an, Chongqing, Wuhan, Changsha and Zhengzhou are attracting attention from investors.
In Hong Kong, recovering global trade volumes should continue to drive exports, while the pick-up in tourist arrivals is helping fuel a recovery in retail sales. Both factors suggest a positive outlook for the warehouse market in 2018 amid a total lack of new supply. In Singapore, we expect new supply to ease after 2018, allowing rents to stabilise and post modest growth. In the meantime, however, new high-specification industrial space ought to lead demand. Finally, we expect industrial space to emerge as next organised property asset class in India, giving a decentralisation push which should unlock land values in areas outside major cities and stimulate business activity.
7. The business and industrial park market will strengthen in Shanghai and Singapore, and take off over the next several years
Shanghai is seeing strong interest in business parks due to a strategic geared move to become a global science and innovation centre. Colliers' analysis of business parks in Shanghai has found that domestic enterprises are the main new tenants and investors. Internet and IT enterprises account for the majority of the leases, and Zhangjiang and Jinqiao are the most active submarkets for leasing and investment. In the coming five years, new supply should slow in core areas. We expect the vacancy rate will remain low and fall steadily. Meanwhile, rent for business parks in Shanghai should rise by just under 5% per annum on average over 2017-2021. We expect domestic buyers to continue to dominate investment in business parks, although foreign investors should also find the sector attractive.
In Singapore, national strategic directives and support from the government are helping prepare the economy for the so-called Fourth Industrial Revolution featuring the adoption of new technologies such as big data and analytics, artificial intelligence and the Internet of Things. Pilot schemes for flexible land use for industrial purposes are being tested now in major planned projects, and integrated "live-work-play-learn" spaces are being rolled out to access, attract and train talent. We envisage that supply of space in business parks and high-specification industrial parks will increase steadily from now on, and double by 2030.
8. Retail property will recover in Hong Kong, though Singapore is less certain
Retail rents on prime streets in Hong Kong have fallen nearly 45% over the past four years. However, recovery now appears to be very close. Driven by robust local consumption, rebounding tourist arrivals and the increasing popularity of mid-tier health and lifestyle brands and new dining concepts, retail sales have been picking up and the decline in prime rents has moderated in all major retail districts. For 2018, we predict a 3-4% rise in retail sales and a 1-3% increase in retail rents. By contrast, recovery prospects do not yet look so clear in Singapore. Retail rent corrections appear to be tapering off in the prime Orchard Road belt, but overall retail market recovery is more gradual. We expect Orchard Road prime floor rents to rise 1-3% per annum on average over the next four years; conversely, we expect prime rents in regional centres to fall 1.0-1.5% in 2018, and only to stabilise over 2019-2021.
9. Residential property prices will rise further in Hong Kong and Singapore
Given firm demand, limited supply, persistent negative real interest rates and promotional efforts by developers in the primary market, we expect mass-market residential property prices to rise 8-10% in Hong Kong in 2018. Luxury residential sales are more dependent on secondary market demand, and so price increases in this segment are likely to be more moderate; we project growth of 3-5% in 2018. Hong Kong interest rates are effectively tied to US interest rates by the territory’s currency peg. Unless US interest rates rise materially faster than we currently expect, pulling Hong Kong rates up with them, increasing interest rates look unlikely to affect home prices until H2 2019 or early 2020, when we expect real interest rates to turn positive for the first time since the Global Financial Crisis of 2008-2009.
In Singapore, data from the Urban Redevelopment Authority showed the first uptick in private home prices after 15 consecutive quarters of decline. We believe that the current wave of collective sales in Singapore will continue rising through 2018 and into 2019, and that prime luxury residential sites will gain favour soon. The current wave may well accelerate price recovery in the near term due to immediate incremental demand from displaced sellers and the large capital gains. We expect average home prices to rise 17% over 2018-2021, driven by higher GDP growth, falling physical completions and ongoing collective sales deals.
10. Black swan events: what could go wrong?
Precisely because prospects look bright, it is important to ask what might go wrong. In our view, the greatest risk to property markets in Asia is a global or regional financial downturn, prompted by high equity valuations (notably for US and Chinese technology stocks, though also for Chinese property developers). Besides reducing the yield attraction of property assets, a major downturn in equity and/or bond markets would upset the benign conditions that large financial occupiers currently enjoy in major Asian centres. We assign a 35% probability to this scenario. In addition, we highlight the chance that investment property markets may suffer from signs of reduced demand for leased CBD office space from large financial tenants due to faster than expected adoption of artificial intelligence and consequent workforce reduction programmes; we note that the financial sector still accounts for 40-50% of CBD office space in Hong Kong, Singapore, Shanghai and Beijing. We assign a 20% probability to this scenario. In our view, both scenarios are significantly more likely than a major Asian conflict (10% probability), although this last outcome has the potential to cause the greatest damage to financial markets and general economic confidence.