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Knight Frank’s 2017 round-up and 2018 outlook

21 December 2017

2018 sees increasing demand in co-working space; rising interest rates a concern for residential investors

Malaysia – Knight Frank, the independent global property consultancy, today releases its 2017 round-up and 2018 outlook on 10 markets across Asia Pacific. 

ASIA-PACIFIC
Nicholas Holt, Head of Research, Knight Frank Asia-Pacific

Residential: 2017 has been a relatively calm year for mainstream residential markets in the Asia Pacific region, with some of the strongest performers of last year seeing price growth moderate. China and Australia, most notably, have seen sentiment soften, due to measures including restrictions on mortgage lending, significant new supply, and in the case of China stricter home purchase restrictions. Similarly, India continued to suffer from the fallout from demonetisation and the introduction of the Goods and Services Tax (GST), with the market spending much of the year re-finding its feet.

One of the key themes in the major cities in the region continues to be affordability – and we are seeing both policy and market reactions to this issue. On the policy side, we have seen significant house building programmes in a number of markets, restrictions on foreign buyers introduced in New Zealand; while developers in a number of major cities across the region have responded by trending to developing smaller units.

The outlook for 2018 is positive but muted, with interest rate rises and a low probability of the lifting of restrictions likely to keep a lid on price growth in many markets. There will, however, be pockets of stronger sentiment across the region: Singapore is set for a stronger 2018 driven by the buoyant collective sales market; Manila continues to see strength in demand for condominiums; while the Indian residential market could start to emerge from its slumber as it absorbs the policy, regulatory and tax changes of the last 16 months.

Commercial: Commercial occupier markets were buoyed in 2017 by higher than expected economic growth in the Asia Pacific region. Office and logistics markets were especially strong in terms of activity, the former seeing growth in demand from co-working space and technology related companies, and the latter a spill over in demand from online retailing. Traditional retailing formats continued to be challenged in many markets due to the growth of e-commerce, with secondary retail especially under pressure to re-position in order to cater to new market realities.

On the investment side of the equation, the capital controls more stringently applied to outbound real estate investment from China have put a brake on the investments deals in key global gateway cities, while the gathering momentum around the Belt and Road Initiative has opened up another key investment avenue for markets in Southeast Asia, Eastern Europe and the Middle East. Otherwise, total regional investment volumes* in 2017 look to be up on 2016, with transactions recorded in the first three quarters of 2017 hitting USD 540 billion, up 31% on the same period of 2016. South Korea, Singapore and Hong Kong were especially active, with South Korea notably gaining more international attention on the back of attractive yields and solid occupier activity.

Looking forward to 2018, many eyes will be on Chinese policy makers, as to whether the restrictions on outbound investment are eased. Another interesting milestone will be the introduction of the first REIT in India and the potential this has of bringing more transparency and liquidity to the sector in 2018 and beyond.

With a significant weight of money still looking at real estate, we expect capital from a number of geographies and sources, including sovereign wealth funds and privates, to continue to be actively sourcing deals in 2018. Logistics assets along with office markets with sound fundamentals and strong drivers of growth, are both likely to see increased demand over the next 12 months – with China, Australia and Singapore most notably likely to attract significant attention.

* Source: Real Capital Analytics covering Asia Pacific markets

 

AUSTRALIA
Michelle Ciesielski, Director of Research, Australia
 

Residential: Despite residential price growth cooling across the mainstream markets along the Australian East Coast, the prime residential market has continued to attract the wealthy population in 2017. Latest data on high net worth individual migration has followed a similar trend, confirming the strong and growing desire to live in Australia, with demand for prime property outweighing the limited supply being bought to market in both the established and new supply markets. 

With recent changes to legislation in New South Wales, it’s likely 2018 will record a further increase in the number of collective strata site sales encouraging the upgrade of buildings not currently reaching their full potential. This reform provides owners of freehold strata lots with an alternative way to end their scheme by allowing for the collective sale, or redevelopment, of their strata complex in circumstances where at least 75% of owners agree. With this reform, there are many potential development sites that could be unlocked across Greater Sydney. 

Commercial: The trend towards co-working spaces continued to gain traction in 2017. Knight Frank Research has reported the total number of co-working spaces stood at 309 in August 2017, growing 297% between 2013 and 2017. This industry occupies 193,190 square metres across six capital cities, equivalent to 0.6% of total office stock where Melbourne accounts for nearly 50%, followed by Sydney with 38% of the total. Tenants in the Technology, Advertising, Media and Information (TAMI) space and Small and Medium Enterprises (SMEs) will continue to drive demand growth in 2018. The challenge will be availability in the CBD with net supply of office space in Sydney and Melbourne extremely low over the next two years, expected to drive down vacancy and push up both prime and secondary face rents.   

 

CAMBODIA
Ross Wheble, Country Manager, Knight Frank Cambodia
 

Residential: There was a move away this year from developers launching high-end condominium projects targeted at foreign investors to launching more affordable units targeting the domestic market, which is needed for the long-term sustainability of the sector. With the number of condominiums scheduled for completion in 2018, there is likely to be downwards pressure on rental prices which, whilst lowering rental returns for investors, will also make Phnom Penh more competitive in terms of the cost of living, which is comparatively high with its regional neighbours. 

Commercial: The retail sector remains the most dynamic in Cambodia and several new retail formats were introduced into the market in 2017, including container markets. With such a low median population age, the success of these new retail formats underpins the changing face of Cambodia’s retail sector and consumer spending habits. I believe we will continue to see an increasing number of MOUs announced between international hotel operators and local developers as the tourism sector in Cambodia continues to mature. Historically perceived as a backpacker destination, Cambodia is finally moving up the value chain in terms of attracting high-spending tourist which will have knock-on effects across all sectors.

 

GREATER CHINA

HONG KONG

David Ji, Head of Research, Knight Frank Greater China 

Residential: Hong Kong’s luxury residential ranks second in the world after Monaco. It has been a major market for Chinese mainland capital venturing overseas this year despite heavy taxation. In 2018, Hong Kong will see at least three or four US interest hikes that will eventually impact local mortgage interest levels and market demand. 

Commercial: Hong Kong has topped Knight Frank’s Skyscraper Index for the past five years even though there is no indication that demand is relenting. In 2018, co-working space will take larger share of the Hong Kong office market as tech and small to medium ecommerce firms expand their business.

 

CHINESE MAINLAND

David Ji, Head of Research, Knight Frank Greater China 

Residential: Chinese Mainland’s cooling measures are taking effect with house price growth slowing or reducing in major cities and inventory level receding. After the 19th Party Congress, house purchase restrictions will spread to an even wider range of cities. In the meantime, we will see more efforts to be put in developing the rental housing market. 

Commercial: Authorities imposed strict control on outflow of capital and outbound real estate investment this year, which had a major impact on some of the gateway markets around the world. Domestically, two trends will continue: large retailers embracing online platforms, and ecommerce marching into physical retail.

 

TAIWAN
Andy Huang, Associate Director for Research, REPro Knight Frank
 

Residential: Taiwan’s home price shows signs of stabilisation this year, but the number of deals constitutes only 50 percent of the level in 2011 prior to the introduction of luxury tax. In 2018, record low mortgage rate and deregulation of LTV will make the market rebound gradually. 

Commercial: Taiwan authorities continue to apply capital control and new taxes on investment of insurance companies and foreigners. Investors stay on the sidelines and self-use demand underpins the market. New supply of Taipei’s office market is expected to lift rental levels 3% to 5% for prime offices and the land market will perform well.


INDIA
Dr Samantak Das, Chief Economist & National Research Director, Knight Frank India

Residential: Affordable housing has been the trend that became a reality in 2017. While the government started with a slew of incentives in the segment, developers jumped on to the bandwagon with appropriate supply of projects. In 2018, government incentive-backed affordable housing trend will continue to flourish in the peripheral markets. However, smaller ticket size (house value) units made possible by reducing the unit area (apartment configuration) of residential units will redefine affordability even in city areas where prices are considered high. 

Commercial: Co-working space is witnessing increasing momentum as seen in not just the volumes of space taken up but also the diversity of players that are now queuing up to serve occupiers in this quality starved office space market. In 2018, shrinking availability of quality leased office assets coupled with yields reaching historic lows will push investors to look at alternative segments like retail and warehousing. On the other hand, signing built to suit deals will become imminent for office occupiers.

 

INDONESIA
Hasan Pamudji, Senior Associate Director Professional Consultancy, Knight Frank Indonesia
 

Residential: With the ongoing efforts to improve public transportation networks, including the rapid light transit rail line (LRT) and the mass rapid transit project (MRT), we now foresee a growth trend that is primarily based on mixed-use developments, many of them new, built along transportation lines. New urban development will increasingly follow public transport lines. More and more integration among residential townships in the fringe of Jakarta will be in trend connecting with the upcoming public transportation networks such as high-speed trains, light-rail trains and toll roads.

Commercial: The growth of co-working spaces for commercial office because of technology and internet developments. Logistics spaces for warehouses as internet on-line businesses have been growing rapidly. We will see those new sectors being developed and affecting the market trend at a steady pace. 

 

MALAYSIA
Judy Ong, Executive Director Research & Consultancy, Knight Frank Malaysia
 

Residential: Housing affordability remains a key issue in Malaysia, particularly in the capital and key cities. House prices which have been trending up since 2010 continue to outpace the rise in income levels and with that, the prevailing median house prices are beyond the reach of most Malaysians. Coupled with the slew of cooling measures implemented progressively since 2012 to curb excessive speculation in the property market, sales volume has continued to decline. To address weaker sales number and falling revenue, many developers have turned their focus to the affordable housing segment, while under Budget 2018, the government has increased allocation to address rising cost of living and affordable housing issues among the lower to middle income segments of the population. 

In 2018, the recent freeze on four components of the property market that include condominiums and serviced apartments priced RM1 million and above is expected to provide a breather to the challenging luxury residential sector. Developers are expected to take stock of the situation by reviewing and re-planning their proposed products and may further defer property launches. We expect to see more bite-size units which translate to lower quantum pricing (< RM1 million) coming into the market although moving forward, there may be risk of oversupply in this category of units. 

Commercial: Completion of the Sungai Buloh–Kajang [SBK] mass rapid transit line (MRT Line 1), with full operations (for both Phases 1 and 2) since 17 July 2017. Together with the existing LRT and KTM lines improving connectivity within the Greater Klang Valley region, we continue to see positive demand for office space in established and upcoming decentralised locations along the rail transportation routes. The development and infrastructure progression at the upcoming international financial district of Tun Razak Exchange (TRX) is expected to revive demand for office space in the KL city. The TRX MRT station is one of the two interchanges between the SBK and the upcoming MRT Line 2 (Sungai Buloh–Serdang–Putrajaya [SSP] line). Kuala Lumpur offers opportunities that parallel other western and regional markets, supported by improving pool of premium and good grade office space and transport infrastructure, a multi-lingual educated workforce and competitive cost of doing business amongst others.

With changes in technology supporting flexible working culture, the serviced office and co-working segments are gaining popularity. With strong government-led initiatives by MDec, leading to the launch of Malaysia Digital Hub and the Malaysia Tech Entrepreneur Programme (MTEP), demand for serviced office and co-working space is expected to grow across a diverse mix of industries and professions such as technology start-ups and SMEs. Greater Klang Valley continues to see the expansion of global as well as the emergence of local co-working operators.

 

SINGAPORE
Alice Tan, Head of Consultancy & Research, Knight Frank Singapore
 

Residential: The collective sales fever has gained rapid traction in Singapore since May 2017, with a total of 25 collective sale deals achieving a total of over S$7.9 billion in sales value. The property developers’ hunger to replenish their land bank amid the record low unsold inventory this year of below 17,500 units for the past two quarters, has further contributed to the wave of investment sales at higher than expected prices. The prospect of a continuing price recovery of private residential properties in Singapore, fueled by high land bid prices, could gradually erase the past price decline of 11 per cent over four years that the government has tried to achieve. We foresee that the price increase of private homes could range between 3% to 7%, year-on-year by Q4 2018. 

Commercial: The office market saw an injection of renewed confidence with the sale of Asia Square Tower 2 for S$2.094 billion to CapitaLand, yet another big-ticket deal and a reflection of certainty in the prospects for office property. 

As the nature of office space needs evolves rapidly with new ways of business operations and engagement, we foresee the demand for flexible, activity-based working (ABW) spaces to gather pace for the office property market in 2018. ABW is expected to be a predominant workplace strategy going forward, adopted not only by the technology sector, but by all organisations looking to foster knowledge sharing, collaboration, staff well-being and productivity in a flexible and inspiring workplace environment. 

Plans for rejuvenating existing precincts that matter to Singapore’s image and future could be on the cards in 2018 as the Singapore government continues designing the country’s map of transformation.


THAILAND

Lalita Siriboon, Valuation and Advisory Manager, Knight Frank Thailand 

Residential: Significant growth in the number of domestic developers and foreign investors/developers partnerships boosted demand from abroad. In 2017, the market witnessed more Asian investors purchasing condominiums for capital gain and rental investments. Mainland Chinese buyers have increased considerably in the last few years. This could continue as property market restrictions in China may prompt more mainland Chinese buyers to turn their attention overseas. 

The extension of mass transit routes will continue to play a big role in supporting urbanisation throughout Bangkok, especially those within the radius of BTS Light Green Line Extension (Mo Chit – Kukot and Bearing – Samrong), MRT Blue Line Extension (Charansanitwong – Petchkasem), MRT Orange Line (Rama 9 – Ramkamhaeng), and SRT Dark Red Line (Bang Sue – Rangsit). 

Commercial: Growth in community mall supply in Bangkok has seen a marked slowdown since the failures of several community malls have discouraged new development. According to our commercial team, community mall occupancy rates continuously drop, resulting from vacating tenants. To draw more traffic and boost revenue, developers will continue to focus more on mixed-use development where commercial space is considered as a core component.

 

END

 

 

For further information, please contact: 

Mr Nicholas Holt, Head of Research for Asia-Pacific

nicholas.holt@asia.knightfrank.com +86 10 6113 8030 @nholtKF

 

Ms Rachel Loke, Head of Marketing, Communications & Digital, Asia-Pacific

rachel.loke@asia.knightfrank.com +65 6429 3587 @knightfrank

 

Mr Clement Tan, Manager, Public Relations & Communications, Asia-Pacific

clement.tan@asia.knightfrank.com +65 6429 3599 @knightfrank

 

Ms Seline Soo, Marketing & Communications Manager, Knight Frank Malaysia 

seline.soo@my.knightfrank.com +603 2289 9669 @KnightFrank_my 

 

Notes to Editors

Knight Frank LLP is the leading independent global property consultancy. Headquartered in London, Knight Frank has more than 15,000 people operating from 418 offices across 60 countries. The Group advises clients ranging from individual owners and buyers to major developers, investors and corporate tenants. For further information about the Company, please visit knightfrank.com. 

Knight Frank has a strong presence in Malaysia with its headquarters in Kuala Lumpur as well as branches in Penang, Johor and Kota Kinabalu. The company offers high-quality professional advice and solutions across a comprehensive portfolio of property services and is registered with the Board of Valuers, Appraisers and Estate Agents. The Company is licensed to undertake property, valuations / consultancy, estate agency and property management and is also on the panel of all leading banks and financial institutions. For further information about the Company, please visit www.knightfrank.com.my.