The economic environment in Asia is mostly healthy. China and India are both achieving real GDP growth of 6-7% y-o-y, and we do not expect a Chinese financial crisis; Hong Kong’s economy has been improving due to strong domestic demand; growth in Singapore has undershot forecasts in recent years, but Q4 2016 was surprisingly robust, and the country has strong long-run investment attractions. Japan has been the chief weak spot, with real GDP growth stuck at about 1.0%, although the 10% depreciation of the Japanese yen against the US dollar since the election of President Trump should boost corporate profits this year. Over 2017 these favourable conditions should underpin solid leasing demand for office property, although increasing supply over the next three years in several big cities looks set to push up vacancy rates and constrain rental growth. Prospects for industrial property are also starting to improve across Asia due to firm economies and expansion in e-commerce and logistics. The outlook for residential property is more mixed, although Singapore and some Indian cities should see improvement over the next few years.

Interest rates are already rising in the US in response to continued moderate economic growth, and the prospect of additional near-term stimulus by the new administration of President Trump raises the possibility that US growth will exceed forecasts, pushing up interest rates faster than current expectations. Leaving aside the risk of threatened new tariffs on imports, accelerating US growth and the likely consequence of continued near-term US dollar strength could well be positive for Asian exporting nations. However, interest rates in Hong Kong are tied to US rates by the territory’s currency peg, and the key risk for Hong Kong is that faster than expected US growth forces an early and sharp return to positive real interest rates after eight years of very loose monetary conditions.

Despite the risks, we are optimistic overall. With the chief exception of Japan where property transaction volumes declined sharply in 2016 in response to sluggish economic growth and currency strength, investment demand has been firm in most major Asian centres. In 2017, the continued weight of investment capital should further depress yields across Asia despite likely upward pressure on interest rates in various markets from now on. We believe global investors and large property occupiers should stay focused on China and Hong Kong, and look again at Singapore.



Favourable economic conditions in China, India and other countries should underpin demand from investors for office property and occupiers for leased office space in Asia over 2017. However, an increase in supply over the next three years looks set to push up vacancy rates and constrain rental growth in various cities including Shanghai, Beijing, Singapore and Jakarta, while we foresee a further widening of rent levels between prime and non-prime districts in Hong Kong in particular due to uneven demand and supply. Faster than expected US economic growth could force an early and sharp return to positive real interest rates in Hong Kong, damaging confidence. However, investment demand has been firm in many large Asian centres, and over 2017 the continued weight of investment capital should further depress yields despite upward pressure on interest rates in several countries. China, Hong Kong and Singapore remain our preferred investment markets, while India has high long-run growth potential and deserves closer attention.

Summary of Asia Prime Grade Office property markets


China’s y-o-y real GDP growth reached about 6.7% in 2016, which was the highest level of any major Asian country after India. Fixed asset investment has been rising, growing by 8.3% y-o-y in November, while manufacturing profits rose by 16% y-o-y in Q3 (the fastest rate in two years) as producer prices recovered. GDP growth should slow to about 6.3% in 2017, although uncertainty about the outlook has risen in the light of threatened tariffs on Chinese imports by the incoming US administration. China’s key economic problem is the fact that underlying credit growth remains high (at almost 17% y-o-y in 2016*), and in the long run China needs to wean itself off a model of investment-led, credit-fuelled expansion. Nevertheless, the banking system appears reasonably healthy with a high savings rate and a high loan/deposits ratio, and in our opinion the chances of a financial crisis are low.

Besides continued high national economic growth and receding prospects of financial crisis, China’s largest cities, above all Shanghai, have local strengths which make them attractive investment destinations. According to Real Capital Analytics (RCA), over 2016, while aggregate property transactions in China fell by 10.3% y-o-y to USD28.8 billion, China overtook Japan and Australia to become the top-ranked country investment market in the Asia Pacific region. At a city level, Shanghai ranked fourth and Beijing ranked eighth. After three years of steady decline against the US dollar, we believe that scope for further depreciation of the Chinese renminbi is limited. While domestic players account for a high proportion of total property transactions in China, if the perception spreads that the bulk of renminbi depreciation has already happened, then investment in the country should be encouraged.

*Source: Oxford Economics. Underlying credit is defined as total social financing (TSF) excluding equity financing, including local government bond issuance.


Given the background of continuing strong economic growth and Shanghai's status as China's commercial hub and gateway to the whole Yangtze River Delta region, we expect Shanghai to remain a popular location for multinational companies. Indeed, Shanghai’s service industry grew by 10.3% y-o-y over the first nine months of 2016, supporting demand from a range of industries for quality office space. In Q4 2016, net absorption continued its strong rebound after the withdrawal of many peer-to-peer lending companies earlier in the year, rising by 80% q-o-q to 61,000 sq metres (657,000 sq feet). Vacancy nevertheless picked up slightly to 10.2%, the first figure above 10% in five and a half years. In Q4, average rent in the CBD dropped by 0.7% q-o-q to RMB10.4 per sq metre per day, but this still represented growth of 3.1% y-o-y.

Looking forward, Shanghai is continuing its transition to services-led growth, and the city’s strong tertiary sector, including financial services, should support demand for office space in 2017. However, 1.1 million sq metres (11.8 million sq feet) of office space is scheduled to be completed in Shanghai’s CBDs alone in 2017, with more than one-half in Pudong. Meanwhile, the CBD market will face strong competition from the decentralised areas, and especially from office clusters in close proximity to the CBDs. This huge expansion will probably outpace the city’s ability to absorb office space, and so the vacancy rate should continue rising. Correspondingly, we expect landlords to offer a more flexible incentive scheme, and rents should come under modest pressure in the near term despite strong underlying demand.


Average rents in Beijing were stable to marginally down over Q3 and Q4 2016. Real GDP growth in Beijing remains high at 6.7% y-o-y, supporting strong office leasing demand, although this comes more from domestic than international companies. Rental growth would probably have been higher but for increased supply. In Beijing, we predict average annual new supply over 2017-2019 of 0.45 million sq metres (4.84 million sq ft), or nearly double the average level for 2011-2016 of 0.25 million sq metres (2.69 million sq ft). Several projects have been postponed to 2017, which should be the peak year of new supply. Consequently, we expect the vacancy rate to rise from 8.0% at end-2016 to about 13.0% at end-2019. Despite firm underlying demand, we expect this increase in supply to push rents down by about 0.5% on average between 2016 and 2019.

Hong Kong

Economic growth in Hong Kong is modest but accelerating: real GDP rose by 0.8% y-o-y in Q1 2016, by 1.7% in Q2, and by 1.9% in Q3. This improvement has been driven by strength in domestic demand, with consumer spending, investment and imports all picking up. The encouraging growth figures have contributed to an improvement in business sentiment, as measured by the Hong Kong government’s business sentiment index. There has been a close historical relationship between business sentiment in professional services and office rents in Hong Kong. We expect the present rebound in the economy and in sentiment to continue, driven partly by stabilisation in China. This outcome should support positive rent growth, and underlies our prediction that benchmark rent will rise by 8% to HKD78 per square foot between end-2016 and end-2020.

While overall prospects for the leasing market are strong, Hong Kong is increasingly developing into a two-tier market due to uneven demand and supply. In Central and Admiralty, i.e. the core CBD, keen interest from mainland Chinese companies and very limited supply have so far outweighed budget cuts by multinational companies, pushing rents higher. In contrast, in other districts, especially Kowloon East, new supply has added pressure to an office leasing market which is already softening as tenants in the trade and sourcing industries restructure and rationalise. Looking forward, the rent gap between core and non-core districts should continue to expand: hence our estimate that average rent between end-2016 and end-2020 will rise by 16% to HKD137 per square foot in Central and Admiralty, but will drop by 3% to HKD33 per square foot in Kowloon East. Probably no other major city in Asia has such a wide gap in rents between core and non-core areas.

The investment market in Hong Kong has been very firm. Over 2016, based on RCA data, total property transaction volume rose by 3.4% y-o-y to USD12 billion. On this basis Hong Kong ranked as the second most active city property investment market in the Asia Pacific after Tokyo (which saw a 43.5% y-o-y decline), and ahead of major investment centres such as Shanghai, Sydney and Beijing. Chinese investors have been notably active in the market, since investment in Hong Kong has provided them with a simple way to hedge against possible further RMB depreciation.

Looking forward, we expect the investment market to remain strong in Hong Kong in the near term. However, now that net yields on office property in Central have fallen to only about 2.5%, scope for further capital appreciation is looking more limited than before. Considering that Hong Kong has benefited from negative real interest rates ever since the Global Financial Crisis, there is also a risk that business sentiment will suffer if interest rates in the territory rise sharply – which they may do if faster than expected US economic growth pushes up US interest rates rapidly. (Note: Hong Kong interest rates are effectively tied to US rates as a result of the territory’s currency peg.) The prospect of an early return to positive real interest rates in Hong Kong would most obviously threaten residential property values in Hong Kong, but could damage confidence generally, and so hurt other parts of the property market too.


Singapore’s recent economic performance in recent years has been mostly disappointing, with y-o-y real GDP growth of 2.0% in 2015 followed by weak figures over first three quarters of 2016, especially Q3 which showed a 1.9% q-o-q contraction. However, according to the government’s advance estimate GDP surged by 9.1% q-o-q in Q4, driven by a surprisingly strong rebound in both manufacturing and service sector activity. The monthly manufacturing PMI survey also points to a gradual improvement in industrial conditions with four consecutive months of expansion.

Reflecting the difficult economic background, conditions in the Singapore office property market have not been encouraging either. In Q4 2016, overall office rents across Singapore slid for the sixth consecutive quarter under the pressure of oversupply and lacklustre demand. With limited demand drivers and large new supply completions, we expect CBD Premium and Grade A office rents, which declined 5.4-10.9% in 2016, to continue to decline through 2017, albeit at a slower pace. As tenants continue the flight to quality, we expect older buildings to see faster rent declines than new buildings. Regarding supply, for 2017, we expect bumper supply of over 2.35 million sq feet (218,000sq metres) of Premium and Grade A office space to be completed, mainly from the 1.88 million sq feet (175,000 sq metres) of Marina One. Consequently, we expect the office vacancy rate in the CBD to rise from 7.0% at end-Q4 2016 to 9.0% by end-2019 – not high by the standards of many other Asian countries, but high in historic terms.

Despite the near-term pressures, long-term prospects for Singapore property look far brighter. Singapore has been famously resilient over the years, reflecting ample foreign reserves and strong state directives to navigate the territory through crises. This resilience reflects the country’s status as a world-class metropolis with a sophisticated market economy and high legal and regulatory transparency. With the caveat that it must address slowing population growth, Singapore's long-run strengths provide a firm foundation for an eventual pick-up in growth. Led by office property, total property transactions in Singapore increased by 23.5% over 2016 to USD7.1bn, suggesting that many investors see the positive side of the story. The prime grade office net operating yield for the Singapore CBD of about 3.6% is more attractive than the corresponding figure of about 2.5% for prime grade office property on Hong Kong Island. We believe that investment interest in Singapore should continue to strengthen.


The Japanese economy remains sluggish and this has weighed on office leasing demand. Although overall leasing activity was firm over most of 2016, the Tokyo office market has been suffering from a gap between landlords' rent expectations for new buildings and tenants' demands for attractive prices. This has been evident in low pre-commitment levels for 2017 office supply. We expect new supply in 2017 to fall from the 2016 level, but then to rebound strongly in 2018 and 2019, with 70% of the supply located in Tokyo's three central wards (Chiyoda-ku, Chuo-ku and Minato-ku). We think that companies will remain cost-conscious into 2017 and so predict that average rent will drop by around 5%, with the vacancy rate rising to above 5% by the year-end.

The weakness of the economy and the strength of the Japanese yen took their toll on investment volumes in the Japanese property market in 2016. According to RCA, total investment transactions for income-earning properties in Tokyo fell by 43.5% y-on-y over 2016, to USD18.6bn. This was one of the steepest declines among major investment centres globally. However, the 9-10% decline in the Japanese yen against the US dollar since the election of President Trump may stimulate a recovery in investment interest in Japan.


India’s y-o-y real GDP growth reached about 7.1% in 2016 and is set to remain above 6.5% for the next three years. With more than 50% of the population below the age of 25, the demographic profile is very favourable, and the government is pursuing bold, business-friendly-reforms, although so-called demonetisation (i.e. the withdrawal of high-value banknotes) has hit growth in the near term. Office absorption has witnessed sustained momentum with Grade A absorption for the nine major cities in India totalling 41.6 million sq ft (3.9 million sq metres) in 2016, up 3.5% y-o-y and indicating robust leasing demand from occupiers. The technology sector continued to drive the market with a 58% share of total leasing volume. Bengaluru (Bangalore) remained on a high growth trajectory and maintained its leading status among the key cities by retaining a 31% share of leasing volume last year, followed by Delhi-NCR on 18% of the total. Hyderabad and Chennai stood on 13% each while Mumbai, Pune and Kolkata accounted for 14%, 9% and 2% respectively.

In 2016, 27.2 million sq ft (2.53 million sq metres) of new office space was released into the Indian market. This was insufficient to cope with the very strong demand especially in markets such as Bengaluru, Hyderabad, and Pune and resulted in a significant fall in vacancy levels and an increase in office rents in most of the micromarkets in these cities.

In the technology-driven markets like Hyderabad, Bengaluru, Pune and Chennai, we anticipate that the demand-supply gap will remain a concern in coming quarters. While a few Grade A office buildings are likely to see completion towards end-2017, we expect upward pressure on rents at least over H1 in these markets. Tenant appetite for higher quality offices has been reflected in new leases being executed at above-market rates in select Grade A buildings in these cities. Expecting a similar trend in 2017 as well, we think there will be a slight shift in demand to cities such as Gurgaon and Noida due to the availability of quality supply. With 10- 12% annual growth in the IT sector likely to persist till 2020, demand for office growth should remain strong for the next few years in the technology-driven markets. In traditional commercial markets such as Mumbai and New Delhi, we expect average rents to stay stable or decline slightly over 2017, with rents under pressure in older and strata-titled buildings in particular. However, limited new supply in prime locations means rents may move upwards in the top areas in these cities over the next few quarters.

As more and more companies realise the importance of adopting a flexible working strategy at the core of their business plans, use of co-working space is gaining popularity in India as well. This trend was pioneered by start-ups, entrepreneurs and freelancers to fulfil their need to work in a suitable cost-effective environment. Now large occupiers have also started exploring this option for their transitional office requirements. We believe this trend will pick up further in 2017.

The Indonesian economy looks solid, with real y-o-y GDP growth stable in the 5.0-5.1% range. Exports grew by 15.6% y-o-y in December 2016 versus 21.0% in November: export prices rose at the fastest pace in two years, but volumes grew at a slower pace than over the previous few months. However, overall growth momentum was firm, and the ongoing recovery in global demand should support Indonesian trade. CPI inflation was about 3.5% for 2016, well below the 6.4% average of the three preceding years. However, given the traditional vulnerability of Indonesian financial markets to higher interest rates in the US, Bank Indonesia is likely to be cautious about further monetary easing, and the central bank will probably maintain stable monetary policy over H1 2017.

Despite the firm economic background, the Jakarta office market continues to labour under the weight of moderating demand and high availability of space. Total office space absorbed in 2016 was smaller than in 2015, while certain newly operating office buildings recorded occupancy of below 20%. There was no new office supply in H2 2016 in Jakarta’s CBD, so occupancy actually moved up slightly in Q4. However, we predict new CBD office supply of at least 600,000 sq metres (6.46 million sq feet) over each of the three years from 2017 to 2019, compared to just over 300,000 sq metres in 2016 and the annual average for the period 2010-2015 of 210,000 sq metres (2.26 million sq feet). Consequently, we expect the vacancy rate in the CBD to move above 20% in 2017 and 2018.

Given the prospect of substantial additional supply, rents continue to slide, with premium rents falling by about 6% y-o-y late last year. Decreasing premium rents have hit the average rent for lower class office buildings, particularly Grade B and C, which dropped 20% y-o-y in Q4. It is true that three newly operating office buildings outside the CBD were able to command rents above market prices. Nevertheless, we expect Jakarta office rents to fall by about 3% on average over 2016-2019.

Outlook for 2017 Prime Office Rental Market for Major Asian Cities



After a year of strong increases in residential property prices in many markets over 2016, prospects for 2017 look more subdued. In reaction to what has been an over-heated residential market and the cooling measures imposed by numerous city governments in China, we expect that the residential market in Tier 1 cities will experience a mild adjustment in 2017. In Hong Kong, assuming that pace of interest rate increases is only gradual, we think the residential market can resist downward pressures over 2017. However, if faster than expected US economic growth forces an earlier return to positive real interest rates than our current assumption of H2 2018, confidence in the residential market could be hit hard. In contrast to most other Asian centres, residential prices in Singapore have been falling since late 2013. While prices may still fall further in H1 2017, beyond then prices ought to stabilise; and in the long run we believe that any easing of the government’s residential cooling measures should spur investment in the luxury residential sector. In India, in the near term market confidence has been damaged by demonetisation. However, mid-segment projects with realistic pricing are enjoying fair success in both the primary and the secondary markets. Looking ahead, new regulations and probable further cuts in interest rates should allow sentiment to pick up steadily over 2017.

Real interest rates in major Asian markets 2009-2016



The Chinese residential market moved in two directions in 2016. Tier 1 cities experienced strong increases over the first nine months of the year, with Beijing and Shanghai, for example, rising by 28% and 33% y-o-y respectively in September. The overheating of the residential market in major cities partly reflects continuing strong growth in new credit in China: based on official figures, the broad measure of credit known as Total Social Financing is rising by about 12% y-o-y, although Oxford Economics is one economic forecaster which calculates an adjusted figure indicating y-o-y growth of about 16%. In contrast, many Tier 3 and Tier 4 cities continue to suffer from excessive stocks of unsold houses and consequently from pressure on prices.

According to China’s National Statistics Bureau, average prices of new homes in 70 Chinese cities increased by 11.2% y-o-y in September 2016 after a 9.2% increase in August. In response to the overheating in Tier 1 and Tier 2 cities, about 21 Chinese city governments announced measures to cool the residential market in late September or early October. These measures ranged from relatively modest steps such as bans on new home purchases over the Golden Week holiday to firmer and more permanent steps such as tightening of down-payment requirements. Recent data releases from National Statistics Bureau show that prices in leading cities declined in the low to mid-single-digit per cent range in October, and slightly further in November. Although the declines are only modest, the direction of movement is reassuring. In the long run, these measures should help to stabilise the residential market in China.

We believe that the tightening policies will cause a further decrease in transaction volumes and price levels for residential property in Tier 1 and 2 cities in 2017. This decrease is more likely to signify a normal market adjustment than the start of a general bear market. This is partly because we expect that the current situation of divergence between large and small cities will persist in China over 2017. While developments in Tier 1 cities receive the greatest attention, the market situation in Tier 3 and Tier 4 cities is more representative of the residential property sector overall and, therefore, more important for national policy-making.

Hong Kong

As shown in Chart 1, Hong Kong has enjoyed negative real, i.e. inflation-adjusted, interest rates since 2009, i.e. since the ending of the Global Financial Crisis; as a result, we would argue that the territory has seen the loosest monetary conditions in Asia for most of the past seven years. Negative real interest rates helped fuel a boom in Hong Kong residential prices of about 200% between 2010 and a peak in September 2015. Residential prices dropped by about 11% over the next few months before starting to recover. By September 2016, prices had rallied to the level of one year previously. In an effort to cool the market, the Hong Kong government announced in October the imposition of the strictest new stamp duty on non-first time, non-permanent resident purchasers in Hong Kong’s history. Even so, prices rose marginally over that month to exceed the peak of September 2017.

However, in combination with rising interest rates in Hong Kong we expect that the new stamp duty will dampen the Hong Kong residential market over 2017. We think the stamp duty policy will have a larger impact on the secondary market than on the primary market because developers can encourage primary market sales by offering direct and indirect sales incentives. In addition, the stamp duty is likely to have a greater impact on the medium to high end market than on the mass market given strong inelastic demand for housing in the mass market. We forecast that the overall residential market will witness a mild 5% drop in prices by the end of 2017. A sharper decline over the coming year seems unlikely considering continuing strong demand and low supply in Hong Kong.

Looking further ahead, a sharper downward correction in Hong Kong residential property prices remains possible given both rising supply in the New Territories and the Kai Tak area after 2020 and the prospect of rising real interest rates. Interest rates in Hong Kong are effectively tied to US interest rates as a result of the territory’s currency peg to the US dollar. While US interest rates are clearly set to increase from now on, the pace of increase is very difficult to predict, and depends in part on the economic policies of the new administration of President-elect Trump. It is possible to construct both positive and negative growth scenarios for the US, under which US interest rates would rise, respectively, quite rapidly or only very gradually. Hong Kong residential property prices would probably prove quite resilient in the face of gradual increases in interest rates, but not rapid increases. At this stage we maintain our view that Hong Kong will return to positive real interest rates by H2 2018. However, an earlier return is entirely conceivable.


In contrast to most other major cities globally, housing prices in Singapore have been stagnant or falling since late 2013. The reasons for this include stern cooling measures implemented by the Singapore government and a weakening economy over the past few years – notwithstanding the remarkable 9.1% q-o-q jump in the advance estimate of real GDP growth for Q4 2016. Pressure on the residential market persisted over 2016: in Q3, the residential property price index dropped by 1.5% q-o-q, following a 0.4% drop in Q2. While it is hard to say whether residential prices have reached their low point or not, we presently assume that the residential market will remain flat in 2017. Looking forward, we see significant potential for a recovery because Singapore’s long-run investment attractions remain compelling. Singapore has been famously resilient over the years, reflecting the country’s status as a world-class metropolis with a sophisticated market economy and high legal and regulatory transparency. We believe that any easing of the government’s residential cooling measures should provide an impetus for investment in the luxury residential sector in particular. Foreigners should find it attractive to re-enter the market when the additional buyer's stamp duty of 15% imposed on foreigners is eventually relaxed or removed.


In 2016, about 89,000 residential units were launched across six major cities in India, which is 34% less than the units launched in 2015. Out of the total new launches, Bengaluru (Bangalore) accounted for 28%, Mumbai for 25%, Pune for 23%, the National Capital Region (NCR) for 15% and Chennai for 9%. The decrease in the number of new launches indicates the waning interest of buyers in the primary market.

The certainty of implementation of the Real Estate (Regulation and Development) Act (RERA) and consumer activism in the form of various protests over timely completion of projects have pushed developers to focus on completion of existing projects. Institutional investors maintained a strong interest over 2016 in financing of Grade A residential projects under-construction, helping developers to complete their existing projects. We expect a similar trend at least in H1 2017.

Although many forecasters predict a decrease in capital values, we maintain our earlier prediction that capital values will remain stable in the primary market while due to a few distressed deals the secondary market may see a correction of 5-7% in 2017. We advise buyers intending to purchase for self-use to look out for options as they can obtain attractive discounts and feasible payment plans.

In the wake of demonetisation in November 2016, many banks have cut home loan rates to 8.25-9.00%, i.e. the lowest level in the last eight years. The government has also announced an interest subsidy of 3-4% for first-time affordable housing homebuyers in 2017. In our view, the 2017 Union Budget should bring more incentives for homebuyers in the form of tax cuts and interest subsidies. In addition, while Indian interest rates are at an all-time low, various economists predict another modest cut over Q1 2017, which will further reduce home loan rates and hence the cost of buying. All these initiatives should help entice buyers back into the residential market. We expect demand for quality stock in areas with good connectivity and social infrastructure to revive in the near term, especially in mid-segment housing. However, realistic pricing will be the key to an early revival as right now both buyers and sellers are hanging on in the hope of achieving optimum prices.


While the Mumbai residential market started 2016 on a promising note, by Q4 it had been rocked by the demonetisation drive. In the wake of demonetisation the gap between buyers’ and sellers’ expectations has widened, and so we expect market activity to slow for a time. We anticipate a more active H2 2017 as the gap between buyers’ and sellers’ expectations narrows again. The market should also be stimulated by a probable further cut in Indian interest rates and the implementation of the RERA reforms.


We expect dull demand and a limited number of new launches in H1 2017 as market weakness persists after the demonetisation move. Contrary to the general perception of a significant price correction, we do not believe that prices will crash. We anticipate that prices will largely remain stable, although a more noticeable correction of 5-7% in emerging micromarkets such as Dwarka Expressway and Golf Course Extension Road looks probable due to the high inventory available in the secondary market.

The entry of reputed developers is likely to boost market sentiment in the short term. With land prices escalating, we will see more strategic partnerships between developers and private equity players. We anticipate that the equity infusion will revive stalled projects and NOIDA will continue to see significant completions in 2017.

Bengaluru (Bangalore)
With the state government gearing up to implement the RERA, end-user confidence is strengthening. Although sales volume has come down moderately, Bengaluru was one of the major cities to be least impacted by the recent demonetisation move of the central government. Buyers are likely to delay their purchase decisions for a time, but we predict a revival in demand shortly.



Asian economies look mostly healthy, with the two of the three biggest, China and India, set to grow by over 6% in 2017. Economic growth in Hong Kong has been accelerating, while after a few years of weakness Singapore picked up in late 2016. Among the large markets, the chief weak spot is still Japan, although recent yen depreciation should support the economy this year. This solid background should underpin demand for manufacturing property in Asia in 2017. Meanwhile, continued strong expansion in e-commerce should support demand for logistics property in the more developed Asian urban markets. Industrial property only accounts for 9% of total property transaction volumes in Asia, and we see ample scope for this proportion to increase. Overall we are cautiously positive about prospects for industrial property in Asia in 2017, although the threat of high tariffs on Asian imports by the incoming US administration carries risks.

2016 Investment volume – APAC by sector (USD billion, % of total, excluding land sites)

*Volume in billion USD


Real y-o-y GDP growth in China reached about 6.7% in 2016, and should only slow to about 6.3% in 2017. The country’s banking system appears mostly healthy, and we think the risk of a financial crisis has receded. Profits in manufacturing rose by 16.0% y-o-y in Q3 2016, i.e. at the fastest rate in two years; this growth reflected not only rising sales, but also margin expansion driven by higher output prices. After three years of steady renminbi depreciation, the USD/RMB rate stands at 6.88, a level which should underpin solid exports this year, although in our view scope for further RMB depreciation is now limited. Coupled with continued expansion in the e-commerce and logistics sectors in and around first-tier cities, this favourable background should ensure firm leasing and investment demand for Chinese industrial property this year. Chinese industry as a whole may suffer if the new US administration implements its threat to impose steep tariffs on Chinese imports, but the impact on the logistics sector should be moderate, since it is driven more by domestic demand.


Shanghai’s logistics property market remained robust in 2016, underpinned by a positive outlook towards retail sales and other sectors that typically require logistics property. Seven high quality logistics developments were completed in 2016 with a total area of 624,800 sq metres (6.72 million sq ft), the highest annual supply since 2008. Despite the high new supply, given the strength of demand net absorption totalled nearly 640,000 sq metres (6.89 million sq ft,) and the overall vacancy rate fell by 1.6 percentage points y-o-y to 13.0% by end-December. The new completions accounted for 60% of net absorption. Strong demand and limited available quality leasing space pushed up average rent for Shanghai’s standard logistics property by 4.4% from 2015 to RMB1.29 per sq metre per day, up by 1.1 percentage points. Average rent for manufacturing property also increased, rising 3.9% y-o-y to RMB1.02 per sq metre per day.

The investment market remained attractive for logistics property developers and institutional investors in 2016, displaying considerable activity. Notably, in July, Logos Property Group closed its second joint venture with Ivanhoé Cambridge and CBRE Global Investment Partners, with the goal of investing USD400 million (RMB2.76 billion) into acquiring and developing logistics facilities in Shanghai and neighbouring cities. In the manufacturing sector, one notable transaction was Kerry Properties’ investment of RMB2.4 billion (USD348 million) to acquire an 18.9% share of a large industrial site in Pudong’s Houtan area; the company plans to redevelop the site into a mixed-use commercial and residential property.

Looking forward, we expect demand for industrial property in Shanghai to remain firm, reflecting both healthy economic conditions and growing consumer spending. Support for e-commerce in particular is strong, as is shown by the establishment of a Shanghai cross-border e-commerce demonstration zone and a pilot zone in early 2016. In November, the central government postponed a new and stricter supervision policy on cross-border e-commerce imports until end-2017. Despite the lack of support from Shanghai government, over 700,000 sq metres (7.53 million sq feet) of standard logistics property is scheduled to be completed in Shanghai in 2017, with nearly 60% by area in Pudong. In the short term, the vacancy rate will probably increase as a result, and rental growth may be constrained. Beyond that, prospects remain favourable.


In Beijing, strong growth in online retail sales – up by 18.2% y-o-y over the first 11 months of 2016 – has underpinned demand for logistics property. However, since a high percentage of high-quality warehouses in Beijing is occupied by tenants with long-term leases, available leasing space has been limited. This has encouraged companies to turn to nearby cities including Tianjin and Langfang to search for warehouses. Looking forward, constrained by Beijing's tight industrial land supply, we think that logistics developers will accelerate their expansion in Beijing's neighbouring cities. With further infrastructure development in Tianjin and Hebei, more cost-sensitive companies are likely to relocate or set up new warehouses in these areas.

Four prime logistics properties with a gross floor area of 225,000 sq metres (2.4 million sq ft) are scheduled for opening in Beijing in 2017. We expect these new projects to be quickly absorbed by the market, as e-commerce retailers and third-party logistics service providers should continue to seek space in the city to sustain and expand their business. Thus, the vacancy rate should only rise moderately: we forecast an increase of about 1ppt to 7.3% by end-2017. We predict a moderate increase in average industrial rent of 0.1% over 2017. With demand healthy, there is room for faster growth beyond this year.

Hong Kong
Economic growth in Hong Kong beat expectations over the first nine months of 2016, with y-o-y real GDP growth of 0.8% in Q1, 1.7% in Q2 and 1.9% in Q3. This improvement was driven by strength in domestic demand and was reflected in rising business confidence. Despite this favourable backdrop, the industrial market underperformed in 2016, partly because investors shunned the market after the termination of the government’s industrial building revitalisation scheme. We expect a brighter market in 2017 since we expect industrial properties to serve as an alternative to residential assets after the imposition of harsh new stamp duty rules on residential property in Hong Kong in November 2016.

We expect the decline in rents and prices in the industrial sector over the past two years to come to an end in 2017 with rents trending upwards, led by mixed industrial and office (I/O) buildings. In the important logistics sub-sector, we predict growth in warehouse rents of up to 3% this year. We believe that demand should remain stable while some changes are likely in tenant profile in prime warehouses. We do not expect existing tenants to reduce their real estate requirements in general, while in addition the logistics market is becoming increasingly concentrated among large service providers. Despite the fact that some landlords are more open to negotiations in order to boost absorption, relocation demand should help support rents in decentralised locations. Moreover, new supply is limited: the 1.7 million sq ft (158,000 sq metre) development in Tai Po by the China Merchants Group is the only major new building opening that we anticipate in 2017.


Singapore’s recent economic performance in recent years has been mostly disappointing, with y-o-y real GDP growth of 2.0% in 2015 followed by weak figures over first three quarters of 2016, especially Q3 which showed a 1.9% q-o-q contraction. However, according to the government’s advance estimate GDP surged by 9.1% q-o-q in Q4, driven by a surprisingly strong rebound in both manufacturing and service sector activity. The monthly manufacturing PMI survey also points to a gradual improvement in industrial conditions with four consecutive months of expansion.

After a difficult 2016, in which most industrial companies stayed cautious on their real estate requirements, we expect the situation to continue for H1 2017 and most probably improve in H2 2017. As a result of the unexpected outcome of the US presidential election in last November, some industrialists are delaying their decisions in space commitment and adopting a “wait-and-see” approach. Nevertheless, leasing activities are likely to pick up in H2 2017 when the situation is clearer. In addition, in view of the upward pressure on interest rates, cost-conscious end-users who intend to purchase their own units could turn to leasing the premises instead.

We expect overall average industrial rents to remain flat for H1 2017 and to pick up marginally by end of 2017. In particular, the average rents for independent high-specification industrial buildings located outside the science and business parks look set to stay flat in H1 2017, and to turn up by about 5% by end-2017. We anticipate greater interest for hi-specification industrial space located near the MRT stations, under the Downtown Line 3. Given the improved accessibility after the completion and commencement of operations of the stations by end of 2017, we envisage a potential increase in demand for space with such attributes.

Coupled with the ample space options available, there should be opportunities for industrial occupiers to secure choice business premises at competitive rents. Tenants looking at a lease period of five years or more should consider locking in their rents in the current market. We believe that the rise in supply against subdued demand will result in a higher island-wide vacancy rate in 2017.

Japan's economy has been ticking away at a moderate pace impacted by weaker household consumption following the consumption tax hike in 2014, a decline in crude oil prices, and an uncertain global economy. Real GDP in Q2 2016 grew by 0.3% q-o-q, the weakest figure over the first three quarters of the year. Although historical revisions paint a slightly more positive picture, spending growth has been modest, and consumer confidence is weak. However, the Japanese yen has weakened by about 13% against the US dollar since the election of President Trump, and this depreciation should boost exports and support corporate profitability over the coming year. Oxford Economics now predicts y-o-y real GDP growth of 1.0% for both 2016 and 2017.

Despite the weak economy, Japan retains several important investment attractions including low financing costs, reasonably stable politics and high yield spreads over bonds offering very low yields. The strength of the yen until recently seems to have deterred investment, and helps explain why Japan saw a 34% y-o-y decline in property transaction value over the first nine months of 2016. Supported by the 10% depreciation of the yen against the US dollar and since the election of President Trump and limited supply in the market, it seems reasonable to expect the industrial property market in Japan to pick up modestly from now. Up to now, we have assumed that rental growth of 1.0% and capital value growth of 3.0% over 2016 will be followed by -2.0% and 0% over 2017. Our forecasts for 2017 may now look cautious.

India is Asia’s fastest-growing major economy, with real GDP growth likely to exceed 7% annually for the next few years. Prime Minister Narendra Modi’s flagship programme to boost India’s image as a global manufacturing hub has enticed many device makers and technology companies to establish a presence in the country, amongst others. Other sectors that are likely beneficiaries of this move are companies in defence manufacturing, electronic manufacturing and start-ups. The government aims to raise the manufacturing share of India’s GDP from the current level of 15% to 25% by 2022.

India has been keen to improve its reputation as a difficult place to do business, and the central and state governments are trying to dismantle barriers in markets for land, labour, approvals and infrastructure. The government has recently opened certain sectors to foreign direct investment (FDI) and relaxed FDI barriers for others such as defence. The government has identified five main industrial corridors that are designed to be the epicentre of its industrialisation strategy. The government is planning to create 100 “smart cities” along these corridors to support industrial development. Certain foreign governments and domestic private enterprises have already committed huge investment plans for India. For example, Japan has shown a keen interest in the development of the Delhi-Mumbai Industrial Corridor (DMIC), while the UK is collaborating in developing the Bangalore-Mumbai Economic Corridor project. In addition, Indian legislators have approved the implementation of uniform Goods and Services Tax (GST) across Indian states.

In the short term, the industrial and warehousing property sector should be the chief beneficiary of the implementation of the integrated GST. The decision to establish a warehouse will no longer be based on tax arbitrage, but on achieving the most optimal logistics solution. Logistics companies will look to establish large consolidated warehouses located on strategic transit corridors. Various global players such as Amazon and e-Bay have already entered the Indian market and started occupying large warehouse space in order to gain a share of the e-commerce business. We expect a 3-7% increase in rental values in well located industrial areas in 2017 due to limited availability of grade A stock with modern amenities. 

The Indonesian economy looks solid, with real y-o-y GDP growth stable in the 5.0-5.1% range. Exports grew by 15.6% y-o-y in December 2016 versus 21.0% in November: export prices rose at the fastest pace in two years, but volumes grew at a slower pace than over the previous few months. However, overall exports and imports growth momentum was firm, and looking ahead, the ongoing recovery in global demand should support Indonesian exports.

This improving background should support demand for industrial property after an inactive year in 2016. Total industrial sales performance in 2016 was muted, representing only 50% of the 2015 total. Maintaining prices and allowing more room for negotiations characterised the general transactions in 2016. Landlords were generally in a position to offer more attractive prices, particularly for substantial transactions with considerable size.

Looking ahead, we see grounds for optimism. We expect several industrial estates with land stock to continue transforming their raw land into ready-to-use land with full infrastructure, in anticipation of sizable enquiries by tenants with expansion plans. Adequate economic growth combined with stable and firm government will be the ideal catalyst to drive the industrial property markets in the future. For this reason, we expect to see the continuation of industrial land construction, as well as more enquiries especially regarding logistics and consumer goods.



Andrew Haskins
Executive Director
Research Asia


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