Changing trajectories as investment cools and rents soar
2022 Volatility continues but long-term drivers remain for Asia PacificThe Asia Pacific logistics & industrial market continues to perform strongly, underpinned by strong fundamentals – though there is emerging evidence that growth is switching from the investment market to the occupier market. View a summary of the research highlights.
Inflation in Asia Pacific has risen quickly this year and is likely to rise further. However, while price pressures are increasing, they are far from uniform across the region, and it remains more benign in Asia Pacific than elsewhere.
Global growth in 2022 has been revised downwards by around USD1.6trn, with the largest downgrade occurring in Europe. At the start of the year European real GDP growth in 2022 was forecast at 3.9%; as of July this had been revised to 1.7% (-230bps). In North America the forecast has dropped from 3.6% to 2.0% (-160bps), while in APAC the revision is only 70bps - from 4.6% to 3.9%. Encouragingly, the outlook for Asia Pacific in 2023 is currently little changed at 4.3%, just -30bps from the view at the start of the year.
Domestic demand in most markets is showing resilience, though a key underpinning of these economic growth forecasts is the export demand for Asian manufactured products. While lockdowns caused volatility in the manufacturing sector, so far this year growth in the export of goods and services has been steady at around 4% y-o-y. This is comfortably above the 2014-19 average of 2.5% and looks set to continue over the near- to medium-term (Figure 1).
This ongoing demand for goods manufactured in the region will support demand for industrial and logistics space.
Figure 1: Asia Pacific real exports of goods and services (% y-o-y)
Source: Moody’s; Cushman & Wakefield
Vacancy and Market Conditions
The industrial sector across the region is at varying levels of maturity, broadly characterised by rapid expansion in emerging markets such as India and Southeast Asia, along with more established markets in Australia, Greater China, Japan, and Singapore. As such these trends play out in local market dynamics. Running alongside this, many occupiers are leaning to greater inventory holdings to hedge against supply chain disruption, which is further driving demand for industrial space across the region.
In more mature markets where supply is more limited, vacancy rates have declined and in places are now extremely tight. Logistics space in Shenzhen, Hangzhou and Suzhou for example all exhibit vacancy rates of circa 5%, while warehouse space in Hong Kong is approximately 1% vacant. Similarly, industrial sub-markets in Australia’s eastern seaboard are recording vacancy rates in very low single digits and Tokyo is still seeing vacancy rates of less than 2% for large-scale logistics space – a marginal softening from early 2021 when they were practically zero. In emerging markets, competition is rife for high quality assets in prime locations which at times has seen developers unable to keep up with demand, as is currently the case in Delhi.
Together, these factors have given landlords the upper hand. Over 55% (19) of Asia Pacific markets analysed are considered landlord-favourable and only 5% (2) favour the tenant, with the remaining 40% (11) (mainly in India) considered neutral. In contrast, just 15% of CBD office markets are considered landlord favourable.
Rental pressure is becoming increasingly evident after a lacklustre couple of years. Coming into the pandemic, rental growth across a selection of the region’s Tier 1 and Tier 2 markets averaged 4.5% (Figure 2). Through 2020 and 2021 rents in most markets were either stable or declined however in late 2021 more markets registered q-o-q rental growth; 75% of the markets analysed recorded positive growth in Q2 2022. In line with this, average annual rental growth across a selection of Tier 1 and tier 2 markets has improved from a low of 1% in Q2 2021 to almost 6% in Q2 2022, though this is far below the U.S. average of 19%.
There is considerable variation at the sub-regional level. The greatest rental pressure is seen in Australia’s eastern seaboard markets, led by Sydney at 24% y-o-y with Brisbane and Melbourne at 13% and 11% respectively. Elsewhere, strong growth has also been evidenced in Hanoi, Bengaluru, Hyderabad, Singapore and Hong Kong ranging from 5% to 20% y-o-y.
Figure 2: Average industrial rent growth in Asia Pacific* (% q-o-q and % y-o-y), 2018-22
*Comprises 22 Tier 1 & Tier 2 markets across Asia Pacific
Source: Moody’s; Cushman & Wakefield
The industrial investment market in Asia Pacific has set consecutive records for total investment volume over the past two years. Having averaged USD38bn in 2018-19, industrial investment rose to USD44bn in 2020 and then soared to USD70bn in 2021. On paper, the ~30% y-o-y decline in volume in H1 2022 looks dramatic, however the USD23bn invested in the first half of the year is still well above trend and mainly looks stark in contrast to the record of 2021. While the pullback was widespread across the region, it has been steeper in Japan, Singapore and mainland China with the latter no doubt affected by intermittent movement restrictions in the first half of the year.
The macroeconomic environment is having an effect: consumer and business confidence has been dented, while rapid interest rate rises in most markets have significantly impacted investment metrics, including the cost of debt and property yield to bond yield spreads. Over the past 18 months industrial yields across the region have compressed by 170 basis points on average, while 10-year government bond yields have softened such that spreads have decreased from around 200-250 basis points to nearer 100 basis points. On this metric, it should be noted that both Japan and mainland China still have comparatively attractive spreads. Notwithstanding, both vendors and purchasers have seemingly taken pause to assess the current environment and consider the options, which is true of the investment market in general.
To date, pricing has not been affected, industrial property yields have remained firm over the year-to-date, while recent rental growth has also supported capital values. Australia and mainland China have seen especially strong capital value growth of up to 50% since the end of 2019. Growth has been slightly more muted in South Korea and Singapore, with both showing early evidence that gains are now starting to plateau (Figure 4).
Figure 3: Asia Pacific rolling annual industrial investment volume (USDbn)
Source: RCA; Cushman & Wakefield
Figure 4: Indexed rolling 12-month hedonic industrial capital values (Q4 2019 = 100)
Source: RCA; Cushman & Wakefield
On balance the outlook for the region’s industrial market looks favourable. Long-term growth drivers include ongoing population growth and a rising middle class which will drive increased demand for goods manufactured in the region. In line with this, online retail sales are forecast to grow by USD1trn between 2020-2025. Together these will likely see the redesign and optimisation of supply chains to be more focussed on intra-regional trade and so drive demand for both manufacturing and logistics space. As a region, Asia Pacific arguably remains underserved by built industrial land.