Investment Market Update Asia Pacific Q2 2011 Slowdown continues

13 July 2011 Authors

Kasia Sielewicz Forecasting & Strategy Research +44 (0)20 3296 2322 Kasia.sielewicz@dtz.com David Green-Morgan Head of Asia Pacific Research +61 (0)2 8243 9913 david.green-morgan@dtz.com

Total commercial real estate investment volumes fell for the second consecutive quarter in 2011. The value of transactions fell by 37% to reach US$25 billion compared to Q1. Investors became more cautious as the debt crisis in Europe and the USA intensified with many adopting a wait and see approach. Lack of investable product also prevailed, hampering trading volumes. Activity slowed down significantly in all countries with double digit declines from Q1. Compared to the same period last year most countries posted a recovery. But in China and Japan the first half of 2011 is much weaker than in 2010. Investors were favouring mixed-use property which accounted for more than half of all transactions in Q2. Outside China, offices still retained the largest share but investments in mixed-use schemes increased over the quarter. The drop off in activity at the top end has reduced the average deal size with domestic investors continuing to secure over 90% of all assets traded. With anti-inflationary policies now well entrenched in most countries across the region, it is expected that investor sentiment will remain muted for the remainder of 2011.
Figure 1

Contacts
Tony McGough Global Head of Forecasting & Strategy Research +44 (0)20 3296 2314 tony.mcgough@dtz.com Hans Vrensen Global Head of Research +44 (0)20 3296 2159 hans.vrensen@dtz.com

Asia Pacific investment volumes Q1 2009 - Q2 2011

US$ bn 60

50

40

30

20

10

0 2009.1 China 2009.2 2009.3 2009.4 2010.1 2010.2 2010.3 2010.4 2011.1 2011.2 Other

Japan

South East Asia

Australia

Hong Kong

Source: DTZ Research

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Investment Market Update

Investor activity slows as global economic worries weigh on sentiment

Total commercial real estate investment volumes fell for the second consecutive quarter in 2011. The value of transactions fell by 37% to reach US$25 billion compared to US$40 billion in Q1. Investors became more cautious as the debt crisis in Europe and the United States intensified. Lack of investable product also prevailed, hampering trading volumes in the region. Activity slowed significantly in all countries with double digit declines from Q1 (Figure 2). When excluding China the activity across Asia Pacific fell by half to US$10.8 billion. Compared to the same period last year most countries posted a recovery. But in China and Japan the first half of this year is much weaker than 2010. A reduction in land supply by some local authorities and restrictive lending to developers impacted property trading in China with volumes falling by 23% to US$14 billion. As expected, there was much less activity in Japan. Investment volumes were down by 86% to US$1.1 billion over the quarter, with no major deals closed during Q2. In general, the market still lacks good investment opportunities with investors continuing to hold assets. Purchasers may have been looking for a price drop after the earthquake, but this is yet to be reflected in actual transacted prices.

Investment volumes in Hong Kong fell by 14% in Q2 and reached US$1.5 billion over the quarter. Limited supply and strong demand continue to drive prices up in the office sector, to potentially unsustainable levels. Investors are now turning to other property types seeking value in higher yielding sectors such as industrial and retail. In Singapore investments reached US$3.3 billion, a fall of 24% on the previous quarter. While there is ample liquidity there are very few core assets for sale. As in Hong Kong, investors in Singapore are increasingly looking at higher yielding sectors.

Mixed use schemes gain more importance

Investors were favouring mixed-use property which accounted for more than half (US$13 billion) of all transactions completed in Q2. This is on the back of several large deals including the sale of the Boon Lay Way development in Singapore for US$782m (Table1). Notably, office sales dropped by 46% (US$6.2 billion) while retail sales fell by 35% (US$3.5 billion) in Q2. Investors are reportedly increasingly looking for higher yielding properties potentially in the industrial sector. This is however yet to be translated into volumes. In Q2 industrial property sales fell by 68% to US$2.1 billion. Outside China, only mixed-use property saw activity growth in Q2 increasing by 7% (US$ 2.4 billion). Its overall share increased from 10% to 22% over the quarter (Figure 3).
Figure 3

Figure 2

% change in investment volumes, Q1 2011Q2 2011

Investment activity by sector, Q1 2011Q2 2011

100% 90%

-14% -23% -24% -24% -27% -37% -47% -54% -49%

80%

70% 60% 50%

40%

30% 20%
-86%

10% 0% 2011.1 2011.2 Asia Pacific Mixed Use Office Retail 2011.1 2011.2

Asia Pacific excl China Industrial Other/Unknown

Note: Thailand is excluded from the chart. Source: DTZ Research Source: DTZ Research

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Investment Market Update

Chinese government continues to divest

Once again this quarter the public sector was a major net seller of commercial property, divesting over US$14 billion. The majority of this divestment comes from within China where the government continues to offload long leasehold development opportunities to the open market. In a reversal of the market dynamics we witnessed at the height of the financial crisis private investors have become net sellers of property. For over two years private investors were net buyers of commercial assets but with the recovery in the market they have looked to offload and take profits. Replacing them as net acquirers in the quarter were private property companies and corporates, who together built up almost US$10 billion of new assets. Quoted vehicles are starting to become more active in the market adding over US$4 billion worth to their portfolios in Q2.

the lack of deal flow at the larger lot size. The average deal size is now at its lowest since the global financial crisis when it hovered in the low US$20m range (Figure 4).

Domestic buyers dominate

In a continuation of the trend that we have seen over the last two years, domestic investors continue to be the most active buyers in commercial property markets around the region (Figure 5). Although the ratio improved slightly in Q2, domestic buyers have been responsible for over 90% of all deals since the market cycle started to turn at the end of 2008.

Outlook
This quarters transactional volumes are a further indication that the global economic problems are affecting the regions economies and property markets. Although the markets are still well above the lows we saw in late 2008, the bounce back recovery of 2009 and 2010 seems to be at an end. The strong economic growth we witnessed in 2009 and 2010 has now translated into higher inflation in almost every country in Asia Pacific. While policy measures were introduced quickly and have been in place for some time, it is taking longer than expected to bring inflation back under control. This coupled with the on-going debt issues in Europe and the USA means that investor sentiment looks set to be muted for the rest of 2011.
Figure 5

Lack of US$1 billion+ deals brings average down

For the first time in two years there were no individual deals over US$1 billion in the quarter, primarily due to the sharp fall in volumes in Japan. The number of deals over US$500m also reduced from the preceding quarters, with only the mixed use scheme on Boon Lay Way in Singapore (Table 1) breaching this milestone. The average deal size was reduced to US$40m due to
Figure 4

Investment activity by deal size, Q1 2007Q2 2011

US$ bn 70

Investment activity by investor origin, Q1 2007Q2 2011

100% 90%

60

80% 70% 60%

50

40

50% 40%
30%

30

20

20%

10%

10
0%

0
Domestic Foreign

Source: DTZ Research

Source: DTZ Research

www.dtz.com

Table 1

Significant deals
Address Town/City Property type Purchaser Capita Land. CapitaMall Trust . Capital Malls Asia SOHO China Canadian Pension Plan Investment Board Charter Hall REIT and Telstra Super United Urban Investments The Link Vendor Price (US$m)

Boon Lay Way

Singapore

Mixed-use

URA

US$782m

The New World Changning Commercial Centre Northland Shopping Centre

Shanghai

Mixed-use

New World China

US$492m

Preston

Retail

Gandel Group

US$483m

Woolworths Centres

Multi-city

Retail

Woolworths

US$283m

Arena Tower Retail Podium of Nan Fung Plaza

Source: DTZ Research

Yokohama Hong Kong

Office Retail

Arena Tower YK Nan Fung

US$116m US$150 m

Table 2

Investment market
Q2 2010 Total investment volume (US$ bn) Total purchasing activity (US$ bn) Offices Retail Industrial Mixed Use Other Domestic Cross Border 27.47 Q3 2010 38.22 Q4 2010 49.87 Q1 2011 39.73 Q2 2011 24.98 Yr to Q4 2010 158.37 Yr to Q1 2011 155.30 Yr to Q2 2011 152.80

6.81 6.36 2.28 11.49 0.53 24.98 2.49

9.57 10.55 2.94 13.89 1.27 33.97 4.24

8.99 10.07 3.64 25.47 1.70 45.41 4.46

11.52 5.34 6.44 15.63 0.80 37.55 2.18

6.18 3.48 2.07 12.98 0.27 22.68 2.29

35.05 33.75 11.93 72.32 5.32 143.61 14.76

36.90 32.32 15.30 66.48 4.30 141.92 13.38

36.26 29.44 15.09 67.97 4.03 139.62 13.182

*Due to lag of received data. investment volumes in China have been revised from US$12 bn to US$18 bn in Q1 2011. Source: DTZ Research

This report should not be relied upon as a basis for entering into transactions without seeking specific, qualified, professional advice. Whilst facts have been rigorously checked, DTZ can take no responsibility for any damage or loss suffered as a result of any inadvertent inaccuracy within this report. Information contained herein should not, in whole or part, be published, reproduced or referred to without prior approval. Any such reproduction should be credited to DTZ. DTZ July 2011

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