The DTZ Fair Value Index™ (FVI) score for Asia Pacific has risen to 65 from 57 in Q4 2010 (Figure 1). All sector scores have been upgraded, with the office score moving from 60 to 67, retail from 55 to 62, and industrial recording the biggest jump from 50 to 65.

The rental outlook remains strong for Asia Pacific property, with robust demand driving rental growth. Yields, still elevated in the aftermath of the downturn, will experience compression in a majority of markets. This creates opportunities for investors, albeit within a limited timeframe.

Particularly in India, China and Australia, investors have a choice of highyield, high-growth markets available at attractive prices. Elsewhere in the region, investors need to be more selective as underlying fundamentals in some sector-locations do not justify prices.

The strong performance of the Indian economy in late 2010 and early 2011 has led us to upgrade our growth outlook for several Indian markets, including Delhi offices, which we now rate as a HOT market. Out of the 14 office and retail markets in India, 10 are ranked as HOT. Among other non-core locations, industrial markets in Australia and second-tier offices in China provide bargains through strong growth forecasts in rents and values.

Both domestic and foreign investors have targeted prime properties in core locations, often driving prices beyond fair value. Hong Kong is the most prominent Asia Pacific market to have experienced this, with all three sectors ranked as COLD.

Other established markets such as Tokyo and Sydney are rated as WARM and can still offer worthwhile opportunities. Singapore is a core location that has experienced a very strong turnaround since the recession, with all three sectors rated as HOT and all included in the region’s top 20 sector-locations.

Fair Value Index

Asia Pacific Fair Value Index score sits at 65 in Q1 2011

The DTZ Fair Value IndexTM score for Asia Pacific stands at 65, reflecting broadly attractive investment conditions across the region (Table 1).

All sector scores have been upgraded this quarter, led by the industrial sector from 50 to 65, where upwards revisions to rental growth forecasts and a fall in bond yields has improved the fair value classification of several Australian markets.

The Asia Pacific region continues to compare favourably with the other global regions, with investors set to benefit from stronger rental growth associated with a more positive economic backdrop than in the United States or Europe.

Our Fair Value analysis for Q1 2011 concludes that there are currently 28 HOT markets, up from 21 in Q4 2010, while the number of COLD markets has fallen from 13 to 10 (Table 2).

As the index scores indicate, we retain the view that investors in the region taking a medium to long term view can access several high yielding and high growth markets at a discount relative to pricing elsewhere. This is reflected in the favourable findings for China, India and Australia.

There are, however, several COLD markets where we consider that pricing has moved out of line with underlying fundamentals, so investors need to be selective with their approach.



Asia Pacific Market Classifications



Global divergence widens in Q1

The increase in the Asia Pacific score has widened the divergence in global scores (Figure 2). While the Asia Pacific score for Q1 has increased, the index scores globally and for each region have fallen this quarter. In Europe, the lower score reflects a rise in government bond yields which is raising required returns, while in the United States cap rates are now falling from historically high levels as the market
continues its lagged recovery from the downturn.

Across the world, investors are targeting prime property in core locations, driving yield compression and dampening the outlook for expected returns in coming years. While prominent Asian markets such as Hong Kong have experienced this, many non-core Asian markets continue to trade at much higher yields, resulting in a more attractive investment environment for the region overall across all sectors (Figure 3). There are, however, pressures building in China (Box 1).

Several upgrades due to a firmer rental growth outlook

The rise in the Asia Pacific index score in Q1 is the result of the net balance of 12 changes in market classifications, with 11 of these being upgrades, eight from WARM to HOT and three from COLD to WARM (Figure 5 and Table 3).

Three Australian industrial markets have been upgraded from WARM to HOT. This is due to higher forecast rental growth associated with a buoyant business investment outlook in 2012. In addition to this, a moderation in inflation has dampened market expectations for further interest rate hikes, with the government bond yield consequently falling during the quarter.

The strong performance of the Indian economy in late 2010 and early 2011 has led us to upgrade our growth outlook for several Indian markets, including Delhi offices, which we now rate as a HOT market. Guangzhou retail the only downgrade

As highlighted in Box 2, property prices in several Chinese markets have moved upwards in recent quarters. In the Guangzhou retail market, yields have come in to a historic low of 5.8%, down from 6.4% in Q4. In addition to reduced income flow, we expect that this will also dampen capital growth, with yields expected to edge slightly higher in Guangzhou over the next five years. Several core markets still offer good value

As indicated by Table 4, there are many prominent markets in Asia offering attractive returns to investors, with opportunities across all sectors.

Bengaluru, Mumbai and Singapore are expected to experience an upswing in rents in coming years. Bengaluru is still in the early stages of its growth into a major IT and business hub, Mumbai is a rapidly developing financial centre and Singapore is benefiting from a strong recovery after large falls in rents amidst the global downturn.

Upgrades to rental growth forecasts have improved our fair value assessments for Australian markets, while Hong Kong and Taipei remain COLD.



Asia Pacific vs. Global Forecasts

Rental growth forecasts upgraded in Asia Pacific

Asia Pacific all-property rental growth outperformed global rental growth in 2010, resuming the normal pattern of inter-regional growth after two years of underperformance in 2008-09. Across the region, rental growth averaged 6.7% compared to 2.6% globally.

Over the forecast period, Asia Pacific rents will continue to beat the global rate of growth (Figure 6). Average rental growth during 2011-15 is estimated to be 3.7% p.a. while global all-property rental growth is forecast to be 2.4% p.a. over the same period. Both figures have been upgraded from the previous round. Overall, rental growth going forward is expected to be less volatile (and also somewhat weaker) than it was during the pre-recession boom. Capital growth opportunities frontloaded in 2011

Asia Pacific capital values also recovered strongly in 2010, growing by 15.1% (Figure 7). This is more than double the growth rate of 7.4% recorded for global property. Further value increase of 8.2% is expected in 2011. However, beyond this year, overall capital growth becomes increasingly limited. The main impact comes from a handful of high-value markets. For example, Hong Kong office and retail (both among the region’s priciest markets) are trading at historically low yields at the moment. As interest rates move higher, we expect yields in these markets to normalise in the medium term. This will in turn affect the headline figure for region-wide capital growth.



Average capital value growth during 2011-15 is forecast to be 3.3% p.a., compared to 2.5% p.a. globally. However, as mentioned, the growth is frontloaded, with barely 2% annual growth forecast for the years 2012-15. Capital increases will be most pronounced in the office sector while growth will be weakest in the industrial sector. Asia Pacific returns comparable to global returns

We forecast stable positive returns in the Asia Pacific region, broadly similar to the returns available from global property. Over the period, Asia Pacific total returns at 9% p.a. just edges out global returns at 8.8% p.a. (Figure 8). Market fundamentals are expected to be more important in determining returns than the re-emergence of a “wall of money”. The office sector will once again deliver the strongest returns at around 10.2% p.a., followed by retail (8.5% p.a.) and industrial (7.8% p.a.).

Office Market Forecasts

Rising demand drives strong office rental growth

The office occupier market is expected to maintain its strong upward momentum in 2011. Following two successive years of declines, overall office rents experienced a robust recovery in 2010 with 9.2% rental growth. A number of markets have seen further gains in the first quarter, and overall rental growth in 2011 is expected to be around 7%. However, developers are responding to booming demand, and future supply levels are likely to be nearly as high as the pre-recession peaks seen during 2007-08. This will exert a restraining influence on rental growth in the latter half of the forecast period.

Our top three rental markets over the period are Bengaluru, Singapore and Beijing (Figure 9). In keeping with recent forecasts, Indian and Chinese cities account for a large number of the region’s growth markets. For instance, in Shanghai and Delhi, take-up grew by 67% and 107% respectively in 2010, and demand is expected to double again by 2014. Among the established markets, Singapore and Hong Kong have emerged resurgent from the recession. Competition for space in prime districts has led to rapidly rising rents in other submarkets,e.g. a 10% jump in Hong Kong Island East rents in Q1. Given enduring space constraints, strong upward pressure on rents will continue. However, rental prospects remain poor in Tokyo, with rental growth of just 1.1% p.a. forecast over the period. Yield compression leads to higher emerging market returns

There is a clear distinction between prime yield trends in the more developed markets in the region and the developing markets. Current yields in Hong Kong, Singapore and Taipei are exceptionally low, but this situation is expected to gradually correct itself as global interest rates normalize in the medium term. Chinese and Indian yields are significantly higher in contrast but as their markets become more mature, with their strong underlying fundamentals, we expect yields to decline (Figure 10).



Overall office returns in 2011 are forecast to be 17.1%, following on from 19.7% returns in 2010 (Figure 11). The top three markets over the forecast period in terms of returns are Bengaluru, Beijing and Chennai, with Indian markets delivering on average 16% returns p.a. through 2015. In part this reflects higher risk premium for India, but even mature markets such as Sydney and Melbourne are expected to generate double digit returns on the back of sustained rental growth and yield compression.

Retail Market Forecasts

Indian cities dominate retail rental rankings

Prime retail rents increased by 5.9% in Asia Pacific in 2010, and the outlook remains positive over the forecast period. Economic growth is driving employment and wage gains, while rising asset prices provide a further boost to household wealth. Consumer spending is forecast to grow by 4-5% p.a. in South East Asia in the medium term, while the figure is double that in India and China. The emergence of a mass middle class (estimated to be 300 million strong in China alone) is the engine of the formal retail sector in the latter countries.

India takes six of the top seven spots in the rental tables, led by Bengaluru with growth of 9.2% p.a. during 2011-15 (Figure 12). The sole non-Indian market is Chengdu, recording 6.4% average growth. The supply of prime retail stock in Indian cities, although rising steadily, is lagging behind demand. New shopping centres continue to redefine the prime market upwards. Thus rents in Bengaluru jumped by 10% in Q1, and in Hyderabad by 5.5%. At the other end, Auckland and Bangkok are among the most sluggish retail markets in the region. Divergent yield trends As with offices, retail yields show diverging trends between developed and developing markets. Hong Kong is the most expensive retail market in Asia, with yields falling as low as 2% (Figure 13). This is an unsustainable level, driven largely by short term trading by private money. Over the period, we expect that yields will move out again in Hong Kong (and to a lesser extent in Shanghai and Melbourne). Regional interest rates are heading upwards, putting pressure on property yields. On the other hand, Indian retail yields are fairly high but heading downwards. Most Indian retail markets trade between 9-11% at the moment. With strong rental growth prospects and greater market maturity and liquidity, we expect retail yields to fall to 8-9% by 2015. Hong Kong overpriced, negative returns forecast



Indian markets dominate the returns tables with their combination of high income yields, forecast capital growth, and rental growth (Figure 14). Average returns in Indian retail are expected to be about 17.8% p.a. compared to 8.5% p.a. for overall Asia Pacific retail. At the other end of the table, poor prospects for capital appreciation will hold back returns. In the case of Hong Kong, we expect capital declines of -7.6% p.a. during the forecast period, with the main impact concentrated in 2012-13. Forecast returns in Hong Kong is therefore negative at -5% p.a.

Industrial Market Forecasts

Rental prospects strongest in Singapore, Australia

With the global economy in recovery, prospects for Asia Pacific industrial are better than they have been in some time. The US, the region’s biggest trade partner, is expected to post strong growth over the next couple of years, and intra-regional trade ties are also more robust. The long-range forecast for export growth in traditional trading powerhouses like Taiwan, Singapore and South Korea lies between 7-9%, although during the recent recovery, growth rates have been much higher, between 15% and 25%.

Singapore, a key hub in the regional trading network, is expected to record the best rental performance over the forecast period, at 3.6% p.a. (Figure 15). The key Australian ports of Brisbane and Melbourne are also expected to outperform, with average rental growth over 3% p.a. Growth in Australia, partly driven by demand for its commodities, is on an upward trajectory. The weakest performer among our forecast markets is Hong Kong. Industrial demand is being undercut by cheaper locations in the Pearl River Delta (e.g. Shenzhen, Guangzhou) while scarcity of land is resulting in higher value usage replacing industrial space. Overall, the Hong Kong rental growth trend is flat. Mixed prospects for yields

Australian industrial yields are expected to decline gradually over the next five years, with compression of 50-75 bps in most markets (Figure 16). Yields are still elevated in the aftermath of the recession driven correction. In contrast, Hong Kong and Taipei industrial yields have reached historically low levels and are expected to move out again over the period. Fundamentals in Taipei are robust, but pricing in Hong Kong lacks support from the occupier market. Australian markets lead the total returns tables



Overall total returns are expected to average 7.8% p.a. over the next five years. The Australian markets take all the top places, led by Brisbane with annual returns of 13.5% (Figure 17). Returns are driven primarily by high income returns, supported by steady rental gains. Singapore also delivers double digit returns, while Hong Kong and Taipei are among the region’s underperformers. Income returns are weak thanks to elevated prices; moreover, softening yields will result in net capital declines in both markets over the forecast period. Returns in Hong Kong are forecast to be 1.8% p.a., and 1.1% p.a. in Taipei.

Economic Drivers

Risk factors to growth are increasing

Asia Pacific output grew by 6.8% in 2010, the fastest rate of GDP growth in more than two decades. This provides solid evidence of the region’s healthy recovery from the financial crisis. Going forward, growth prospects remain solid but there are a number of risks, including commodity price spikes, political unrest and natural disasters. The region is expected to record average growth of 5.2% p.a. over the next five years, well ahead of the US (3.2%) and Europe (2.2%).

The strongest growth is forecast in the emerging giants China and India, at an annual average of 8.7% and 8.4% respectively (Figure 18). Elsewhere, the recovery is maintaining its momentum and even accelerating in key exporting nations such as Australia and South Korea. Both will experience significantly stronger growth in 2012 on the back of a global recovery in full swing. The key concern is Japan, where the natural disasters of March have combined to wipe out any prospect of economic growth this year. However, the consensus view is that the impact of the disasters on Japan’s medium term growth prospects will be limited.

Consumption and exports show strong recovery

The consumer outlook remains strong across Asia Pacific. Unemployment in Australia, Taiwan and Korea is headed back to cyclical lows, while wage growth in China is running at double digits. Spending is expected to be strongest in China and India, growing at an annual rate of 8-10% (Figure 19). The vast expansion of the middle class in both countries will continue to support retail sales. Consumption in the other major economies is forecast to grow at a more moderate pace of 3.5%-| 4.5%, with the rapidly aging economy of Japan a significant exception.



Another key driver of regional growth is exports. These too experienced a sharp V-shaped rebound in 2010, growing at an average rate of 25% in China, Japan and Taiwan. However, export growth is expected to fall back to more sustainable levels.

Inflation worries persist across region

The key worry for many policymakers is inflation. This is being fuelled by commodity prices as well as capacity constraints. The Chinese government in particular has made inflation fighting a top priority, using a mix of higher interest rates, higher reserve ratios and price controls. Nonetheless, inflation will climb higher in both China and the region in 2011 (Figure 20). Although consensus forecasts predict a fall thereafter, significant uncertainty remains with respect to the inflation outlook.