LaSalle sees good opportunities in suburban retail centres and near-CBD offices in Australia
SYDNEY February 17, 2015 – Sub-regional retail centres in Australia and near-CBD and select suburban offices in Sydney are good investment opportunities for 2015, according to LaSalle Investment Management, which today released the 21st edition of its Investment Strategy Annual, a comprehensive survey of, and outlook for the global real estate markets over the next 12 months.
17 February 2015 - Sub-regional retail centres in Australia and near-CBD and select suburban offices in Sydney are good investment opportunities for 2015, according to LaSalle Investment Management, which today released the 21st edition of its Investment Strategy Annual, a comprehensive survey of, and outlook for the global real estate markets over the next 12 months.
Leigh Warner, National Director, Research & Strategy, Australia, LaSalle, says, “Office properties near the CBD in Sydney with good tenants and a long weighted average lease expiration are one of the best investment opportunities in the region’s office sector. In addition, the rent growth outlook for office real estate in Australia has improved as demand has picked up, led by Sydney and Melbourne. It will be one of the better performers in the region over the medium term.”
“Suburban retail centres driven predominantly by non-discretionary goods sales and where pricing has risen less than other retail formats are also a good opportunity for core investing. We recommend subregional and neighbourhood retail centres, plus dominant bulky goods centres that can capitalise on the housing rebound.”
Asia Pacific Outlook
The macroeconomic outlook for the Asia Pacific region in 2015-2016 is for below trend growth, with meaningful upside and downside alternatives possible based on events in China and Japan. Financial reforms in China and regulatory reforms in Japan are positive for the real estate sector in the long-term, although likely to create uncertainty and volatility in the short-term. We expect this dichotomy to persist throughout 2015, even as capital markets remain relatively strong, particularly in Japan.
In Hong Kong, Singapore, and South Korea, economic growth in 2015 will remain below long-term averages. This will be partly driven by developments in China and Japan, but also by domestic factors whether regulatory, economic or social.
Over the next few years, economic growth in Australia will also be slower than recent trends, with raw material exports to China slackening and the investment boom to sustain these exports winding down. The rebalancing towards domestic drivers will be gradual, with growth in 2015 slightly stronger and more widespread than in 2014.
Office: Markets with immediate supply shortages will perform best, such as Singapore and Tokyo. The rent growth outlook for Australia has improved as demand has picked up, led by Sydney and Melbourne. It will be one of the better performers in the region over the medium term, alongside Seoul. Singapore is strengthening short-term, but faces a wave of new construction arriving in 2016.
Logistics: The maturing of the logistics sector in much of Asia, along with strong demand from occupiers and a comparative shortage of modern facilities, translates into a relatively positive outlook. Yields are not expected to rise even where interest rates modestly move up, and in fact will compress further in Shanghai and possibly Tokyo in the short-term.
Retail: This sector will underperform as below-trend retail sales growth, shallow wage gains, and fragile consumer confidence will constrain sales volumes and retailer margins. Therefore, despite low and stable vacancy rates, relatively shallow rent growth is expected in most markets. In Japan, suburban retail has lagged other sectors in terms of yield compression and will start to catch up in 2015.
Residential: Demand for rental housing in Southeast and North Asia remains relatively weak and only modest rent growth is expected in 2015. Supply has kept ahead of demand across most markets. Some markets will exhibit above-trend rental growth and some yield compression, notably Shanghai and Tokyo. The rally in residential housing markets will continue in Australia.
Top Investment Opportunities - Core
- Retail: Suburban retail centres driven predominantly by non-discretionary goods sales and where pricing has risen less than other retail formats. We recommend sub-regional and neighbourhood retail centers in Australia, plus dominant bulky goods centers that can capitalise on the housing rebound. We also like this sub-sector in Japan’s Tier 1 cities.
- Logistics: Stabilised modern warehouses in transport hubs in China and in Hong Kong. In the latter, there is an ongoing reduction in stock due to obsolescence and usage conversion.
- Office: Grade A CBD for long-hold in tier-one cities in China, in Seoul, and in suburban or near-CBD with good tenants and a long weighted average lease expiration in Singapore or Sydney.
- Higher Return
- Distribution warehouse development will provide attractive returns in several markets, although land prices have risen over the past few years. We recommend a focus on South Korea and China.
- In Hong Kong, repositioning obsolete warehouses is expected to provide that market’s higher returns. This strategy also applies to Singapore, albeit by buying over-levered unoccupied assets intended for strata-titled freehold sales and selling the entire building.
- In Japan, construction costs have risen rapidly, limiting returns from development. Focus on lease-up or repositioning of urban retail, residential, and office. Retail repositioning is also possible in Singapore, where prime malls not held by REITs generally suffer from lack of active management.
- Value-add strategies for underperforming office assets in China and metropolitan/suburban areas in Australia.
- Paul Guest, Head of Research & Strategy, Asia Pacific, LaSalle, concludes, “Investors need to be conservative in their underwriting and cautious in their expectations. They should focus on holding assets in 2015 that can be improved and/or actively managed; where taking development risk, concentrate on sectors where there is abundant end-user demand driven by big trends; and avoid markets where aggressive rent growth has already taken place or needs to be priced-in.”