Knight Frank launches Global Cities: The 2016 Report

Knight Frank launches Global Cities: The 2016 Report

Kuala Lumpur, October 27 – Knight Frank, the independent global property consultancy, launched its Global Cities: The 2016 Report yesterday, which examines the market performance of 20 global cities across the world, of which 10 are in Asia Pacific. 

The UN is forecasting the world’s cities to increase in population by 380 million people in the next five years.  Consequently, the planet will need to build the equivalent of five cities the size of Los Angeles every year between now and 2020, and all the supporting infrastructure. 

This year, the report has a new section titled the “Watch List” which lists cities with the potential to become a Global City in the future, and Kuala Lumpur is one of the five cities to watch, with infrastructure investment a key to the city’s future growth.

Sarkunan Subramaniam, Managing Director, Knight Frank Malaysia, said, “Future improvements in urban mobility such as the Mass Rapid Transit line in Malaysia is expected to revitalise the economic, business and social activities within the city centre while countering the pace of office decentralisation. There will be renewed interest in the city – to live and work and also as a destination for entertainment and tourism.“The impending entry of upscale hotel brands such as Four Seasons, Fairmont, Kaminski and Jumeirah in the city will further catapult Malaysia into the global tourism market.”

Nicholas Holt, Head of Research, Asia Pacific, Knight Frank Asia Pacific, said, “The level of infrastructure in a market is a useful indicator as to the level of development while also a guide to the potential for catch-up.  We must distinguish between different levels of infrastructure; national, intra-regional, and local.  While airports, national rail networks and interstate highways are all indispensable elements of transport infrastructure; urban mass transit systems, within a city’s boundaries, have a more obvious impact on a local, residential and commercial level.

“Despite the slowdown of China and its impact on the region’s economies, the Asia Pacific region will still see relatively strong economic growth over the coming years.  Coupled with the huge forces of urbanisation in India and China, the next three years are still very much a growth story for the Asian Global Cities.”

On a kilometre per million of population basis, Malaysia, at the 10th position out of 14 cities in Asia, has 9km of metro line provided to every million residents, compared to Seoul which tops the chart at 40km.

Kilometres of metro system per million of population (with Kuala Lumpur in focus: projection to 2022)

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Source: Local Transport Authorities, Public Sources, Knight Frank Research

New investors into Malaysia real estate

James Buckley, Executive Director, Capital Markets, Knight Frank Malaysia, said, “We continue to see foreign buyers entering the market from Japan, Singapore, the Middle East, Indonesia and China hunting for opportunities in Malaysia, particularly Kuala Lumpur.  These investors are attracted by the relative ease of transacting in Malaysia, the favourable foreign ownership rules relative to other Southeast Asian markets, and the weakness of the Malaysian ringgit which has fallen 29% against the USD during the last 12 months.”

On Asia Pacific as a whole, Neil Brookes, Head of Capital Markets, Asia Pacific, Knight Frank Asia Pacific, highlighted, “We are experiencing record transaction levels in the core markets of Asia Pacific such as Sydney and Tokyo, driven by investor demand from the US, Singapore and China. Investors are attracted to these markets by the relatively high returns achievable and the recent weakening of the currencies against the USD.”

Destinations attracting Asian outbound capital

A growing wave of Asian outbound capital is targeting core real estate assets in Western markets.  Over the last 24 months, Asia investments into the US, UK, Australia and Continental Europe totalled US$78.4 billion.

Holt commented, “The last two years have seen a tremendous surge of capital, emanating from Asia, targeting real estate assets in mature western markets.”  

Destination markets from Asia investment (Q3 2013 – Q2 2015)

Destination

US$ million

US

31,032

UK

22,245

Australia

16,283

Continental Europe

8,835

 Buckley explained, “There is a strong desire from Malaysian investors to diversify their wealth into overseas  markets. There has been a slight shift in outbound capital with Malaysian investors focussing more on the  Australian market compared to the UK.  This has largely been driven by the value of the Malaysian ringgit  relative to the AUD which has weakened 6.6% versus 24% relative to the pound.”

 

 

 

 

 

Source: Real Capital Analytics / Knight Frank Research


To the US

To the UK

To Australia

To Continental Europe

Origin

US$

million

Origin

US$

million

Origin

US$

million

Origin

US$

million

Singapore

  10,684

Singapore

    6,443

Singapore

     6,849

South Korea

      2,762

China

8,935

China

    5,625

China

     6,263

China

      1,271

Japan

    4,373

Hong Kong

    2,559

Malaysia

     1,371

Singapore

      1,128

Hong Kong

    3,164

Malaysia

    2,229

Hong Kong

     1,183

Thailand

      1,050

South Korea

    2,365

Taiwan

    1,900

South Korea

       306

Malaysia

      1,033

Malaysia

    1,007

India

    1,420

Japan

       241

Hong Kong

      1,024

Other

      504

Japan

       808

Taiwan

         60

Other

         567

 

 

Other

    1,261

Brunei

         10

 

 

Source: Real Capital Analytics / Knight Frank Research

Capital markets opportunities

Jeremy Waters, Head of International Capital Markets, Knight Frank, commented, “We expect advanced industrial nations to drive the global economy in the next three years; with the Global Cities in those nations offering the strongest opportunities for real estate investors.

“With the US moving closer to a rate rise, the dollar is strong, and American private equity investors are already buying more stock overseas.  We see this trend accelerating in 2016. They tend to be more comfortable with a higher risk profile, so we expect increased interest in sites and short income assets.

“In Europe, thanks to low bond yields and signs of economic turnaround, we are predicting more opportunist money will come into the market. In general, we see investors casting the net wider, with specialist property rising up the agenda. In part, this reflects a growing desire to seek diversity in a portfolio. 

Over the longer term, commercial real estate has proved its value within a mixed investment portfolio, notably during times when other asset classes have been unstable. 

Prime Yields – end of 2015 forecast

Ranking

Global City

Prime Yields

1

Bengaluru

10.50%

2

Mumbai

10.00%

3

Delhi

9.50%

4

Mexico City

7.00%

5

Shanghai

6.30%

6

Beijing

6.30%

7

Melbourne

6.10%

8

Kuala Lumpur

6.00%

9

Sydney

5.75%

10

Chicago

5.40%

11

Washington DC

5.00%

12

Los Angeles

4.90%

13

Frankfurt

4.50%

14

San Francisco

4.00%

15

New York City

4.00%

16

Madrid

4.00%

17

Tokyo

3.70%

18

Singapore

3.70%

19

London

3.50%

20

Paris

3.50%

21

Hong Kong

2.90%

Source: Knight Frank Research, Newmark Grubb Knight Frank Research, Sumitomo Mitsui Trust Research Institute

Subramaniam concluded, “With the Malaysian market for income producing properties thinly traded, buyer and seller yield expectations are not necessarily in line for prime assets. While buyers are typically looking for a minimum income yield of 6% in the prime office market, many potential vendors have yield expectations perhaps 50 to 100 basis points lower. We see that in order to bridge this pricing gap, some flexibility is required between buyer and seller, which we are now starting to witness in the market.

“Looking at the Southeast Asian markets, at 6.00%, Kuala Lumpur has some of the most attractive prime office yields in the region.”

 

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