COLLIERS RADAR CAPITAL MARKETS & INVESTMENT SERVICES | ASIA PACIFIC

Terence Tang
Managing Director | Capital
Markets & Investment
Services | Asia
+65 6531 8565
Terence.Tang@colliers.com

John Marasco
Managing Director | Capital
Markets & Investment
Services | Australia and
New Zealand
+61 3 9612 8830
John.Marasco@colliers.com

Andrew Haskins
Executive Director | Research | Asia
+852 2822 0511
Andrew.Haskins@colliers.com

ASIA PACIFIC REAL ESTATE: STILL GOOD VALUE IN

A CHANGED WORLD
PART 1 - A COMPARISON OF PROPERTY YIELDS WITH OTHER ASSET CLASSES
June 2020
COLLIERS RADAR CAPITAL MARKETS & INVESTMENT SERVICES | ASIA PACIFIC
USD13.0 trillion
Approximate aggregate global negative-
yielding debt as of January 2020
0.0%-2.8%
Ten-year government bond yields in core
APAC markets: Japan at low end, China at high end
1.9%-4.9%
Range of dividend yields on US S&P 500 and major
Asian equity markets – at risk due to plunge in
corporate profits from present recession
2.8%-5.8%
Yields on prime office assets in core APAC markets as of
Q1 2020 (Hong Kong SAR¹ lowest; Auckland highest)
3.5%-6.1%
Yields on logistics/industrial assets in core APAC
markets as of Q1 2020 (Hong Kong SAR lowest;
Guangzhou and Singapore highest)
2
SUMMARY AND INSIGHTS
This report, Part One of a two-part series, highlights the good value of Asia Pacific (APAC)
real estate by comparing property yields with yields on government bonds and equities.
Two key factors are driving the prices of APAC investments in general. The first is the
COVID-19 recession, which should ease from now on. The second is interest rates, which
have fallen to record lows.
These factors have extended a long global bull market in government bonds. In APAC,
Japanese ten-year bonds effectively yield zero, while among core investment markets
only Chinese ten-year bonds yield over 2.0%.
Dividend yields on major equity markets are higher, ranging from around 1.9% for the US
S&P 500 to an unusually high 4.9% for Singapore. However, dividend yields are at risk
from the recession’s hit to profits.
In comparison, yields of 2.8%-5.8% for prime/Grade A office assets and of 3.5%-6.1% for
logistics/industrial assets in core APAC investment markets look attractive.
Rents are under pressure in certain APAC commercial property markets. However, in the
office and logistics/industrial sectors, the pressure is limited in most cities.
We discuss rent growth prospects and our preferred property asset classes in the
forthcoming Part Two of this series.
¹ Special Administrative Region [of the People’s Republic of China]
COLLIERS RADAR CAPITAL MARKETS & INVESTMENT SERVICES | ASIA PACIFIC

ASIA PACIFIC REAL ESTATE: STILL GOOD VALUE IN A CHANGED WORLD

This report is Part One of a two-part series which explains why we still see good
value in Asia Pacific real estate. In this report, we compare yields on property
assets with yields on other investments, notably government bonds and equity
markets.
In our view, two key factors are driving the prices of APAC investment assets in
general. The first is the recession caused by COVID-19. After a very sharp
downturn, the recovery starting in China should spread gradually to the rest of
the region. The second is record low policy interest rates – the result of a
decade of loose monetary policy and recent emergency rate cuts. Real (i.e.
inflation-adjusted) interest rates are very low or negative in developed APAC
countries, though edging up in certain markets as inflation declines.
In combination, recession and super-low interest rates have prolonged a global
bull market in bonds, creating a pile of negative-yielding debt worth perhaps
USD13.0 trillion. Among core APAC investment markets, government bond
yields range from effectively zero for Japan at the low end, through 0.8%-0.9%
for Australia, New Zealand and Singapore, to 2.8% for China at the high end.
Dividend yields on equities are higher than bond yields. The yield on the US S&P
500 index, the world’s largest equity market, stands at about 1.9%. Dividend
yields for most large Asian equity markets range between about 2.0% and 3.5%;
Singapore is an outlier with a yield of 4.9%. In many cases, these yields are
under threat, because the hit to profits from the recession erodes companies’
ability to pay dividends.
Against this backdrop, yields of 2.8%-5.8% for prime/Grade A office assets and
of 3.5%-6.1% for logistics/ industrial assets in core APAC investment markets
look appealing. While rental income is under pressure in various city office
markets, and even a few industrial/logistics centres, the pressure is generally
lower than in equity markets.
We discuss prospects for rent growth, and highlight our preferred real estate
asset classes, in the forthcoming Part Two of this series.

3
COLLIERS RADAR CAPITAL MARKETS & INVESTMENT SERVICES | ASIA PACIFIC

ASIA PACIFIC: SNAPSHOT OF YIELDS ACROSS ASSET CLASSES

Ten-year govt National equity mkt Premium/Grade A Industrial/
Ten-yr govt bond
bond yield (%)
Equity mkt Grade A offices
dividend yield (%)
Logistics
office yield (%) logistics yield (%)
7.0%

6.0% 6.1% 6.0%

5.8%
5.6% 5.5% 5.6%
5.3% 5.2% 4.7%
5.0% 4.9%
4.7% 4.7% 4.7%
4.5% 4.6%
4.2% 4.2% 4.1%
4.0% 3.9%
3.5% 3.5% 3.4% 3.4%
3.0% 2.9%
2.8% 2.8% 2.8% 2.8%
2.5% 2.4% 2.4% 2.4%
2.3%
2.0%

1.4%
1.0% 0.9% 0.9% 0.9% 0.8%
0.5%
0.0%
0.0%

Tokyo Seoul Beijing Shanghai Guangzhou Hong Kong Singapore Melbourne Sydney Auckland

Sources: Colliers International, S&P Global Market Intelligence, Financial Times, Hang Seng Indexes for Hong Kong
4
COLLIERS RADAR CAPITAL MARKETS & INVESTMENT SERVICES | ASIA PACIFIC

LOW INTEREST RATES SET TO PERSIST, UNDERPINNING ASSET VALUES

Figure 2: Proportion of global economy represented by major
Growth depressed but set to rebound economic zones (PPP basis)
The global economic expansion that began in 2009 has decisively ended. The United States China Japan Eurozone
COVID-19 pandemic has triggered lockdowns of entire countries and sharply
reduced growth expectations globally. Except for China, most Asia Pacific SARS GFC COVID-19
markets will record negative real GDP growth in 2020. 25%
20% 19%
20% 17% 18%
Figure 1: Real GDP growth forecasts (%) 15% 15%
15% 12% 11%
2019 2020F 2021F 9%
10% 6% 5%
China 6.1% 0.8% 8.3% 4%
5%
Japan 0.7% -6.5% 3.2% 0%
South Korea 2.0% -0.7% 3.2% 2003 2008 2019
Source: Oxford Economics
Hong Kong SAR -1.2% -6.0% 6.4%
Already very low interest rates have fallen further
Singapore 0.7% -6.0% 7.1% There is another silver lining to the COVID-19 recession. Over the past twelve
2.7% -0.6% 3.5% months, APAC central banks have either held policy short-term interest rates
Taiwan
at already low levels or reduced them further. This action has pushed down
India 5.3% -5.7% 10.8% effective or market short-term interest rates to record low levels, in many
cases in a range of 0-2%. Among the five core investment property markets in
Australia 1.8% -5.0% 3.3% APAC (China, Japan, Hong Kong SAR, Singapore, Australia), the effective short-
term interest rate is currently highest in China, where it stands at about 2.3%.
New Zealand 2.2% -5.6% 7.3%
Besides policy rates, it is useful to consider real interest rates, i.e. interest
United States 2.3% -6.1% 6.3% rates adjusted for inflation, since there is some evidence that these are more
Source: Oxford Economics (latest available estimates) important than nominal rates in driving economic activity. Real interest rates
have been negative in Hong Kong and Japan for years, but are set for a near-
term spike to positive territory due to the deflationary effects of the current
More positively, although uncertainty is high, the recovery that is already recession (see Figure 3 overleaf). The Reserve Bank of Australia has been
starting in China should spread gradually to the rest of the APAC region over cutting rates for about two and a half years, but current negative real rates in
H2 2020, with a sharp rebound in growth likely in 2021. Indeed, since China is this market may also turn positive as inflation declines. Conversely, China is set
now the world’s largest economy on a purchasing power parity basis (see to see the sharpest spike in real interest rates as inflation falls from recent
Figure 2), it has the potential to pull not only the region but the world out of high levels, but real rates should trend down again in 2021. In Singapore and
recession, as it did after the Global Financial Crisis (GFC) in 2008-2009. South Korea, real interest rates are falling, and should turn negative by 2021.
5
COLLIERS RADAR CAPITAL MARKETS & INVESTMENT SERVICES | ASIA PACIFIC

Figure 3: Real interest rates (2019 – 2023): major APAC developed markets plus China

China Hong Kong Japan Singapore South Korea Taiwan Australia New Zealand

2.0%

1.0%

0.0%

-1.0%

-2.0%

-3.0%

Source: Oxford Economics as of 14 May 2020

While interest rates have been falling in both developed and emerging APAC Developed property markets therefore look safer than emerging markets
markets, interest rates are significantly higher in emerging markets. For in the present environment. So far as developed markets are concerned,
example, the effective short-term rate in India as of Q2 2020 is about 5.5%, record low policy interest rates:
and even with CPI inflation of 3.9% the real short-term interest rate stands at > push up bond prices, and therefore reduce bond yields
1.6% - a level which looks set to rise over the next few quarters. Likewise, in
Indonesia, the effective short-term interest rate is currently about 4.8%, and > reduce the risk-free rate used in the capital asset pricing model (CAPM)
the real short-term interest rate is 2.2%, with little scope to fall. of equity values
An important problem for emerging markets is that considerations of financial > moderate upward pressure on the cap rates used in commercial
stability reduce scope for further interest rate cuts. This is especially true with property valuations
regard to exchange rates. For example, the Indonesian rupiah depreciated
significantly over February and March against the US dollar (which traditionally
strengthens in times of crisis), although it has firmed again since then. If the
Bank of Indonesia cuts interest rates again, it risks renewed rupiah weakness.
6
COLLIERS RADAR CAPITAL MARKETS & INVESTMENT SERVICES | ASIA PACIFIC

LOW YIELDS ON BONDS AND EQUITIES INCREASE RELATIVE ATTRACTION

OF REAL ESTATE
Very low or negative bond yields now commonplace
Since the GFC, developed economies around the world have kept
interest rates low to stimulate dull growth. As also noted, since the
Figure 4: Ten-year government bond yields in Asia and US (%)
advent of the COVID-19 recession, central banks in APAC and other
USA China Japan
regions have cut interest rates further from already very low levels.
South Korea Australia Singapore
It is an old rule of professional investment that, if interest rates fall,
bond prices rise and bond yields decline. Globally, the decade of low 4.0
rates has stimulated an unprecedented bull market in government
3.5
bonds. Upward pressure on bond prices has persisted over most 2020,
since investors traditionally buy government bonds for security of 3.0
income if they expect recession – and the COVID-19 pandemic has
prompted the steepest recession since the 1930s. The corporate bond 2.5
market has fared less well, due to concern about the impact of
2.0
recession on companies’ cash flows.
A bizarre outcome of the bull market in government bonds has been 1.5
the accumulation of bonds with negative yields to maturity – i.e.
1.0
securities which guarantee a nominal loss for investors. The global pile
of negative-yielding government and corporate debt stood at USD13.0 0.5
trillion as of end-January 2020¹. This total may well have increased
since that time. 0.0

> Globally, the most extreme case of negative yield is Switzerland, -0.5
where the ten-year government bond yields at –0.47%, followed by 2018 2019 2020
Germany on –0.43% (as of 12 June). The UK broke new ground on
Sources: S&P Global Market Intelligence, other, as of 9 June 2020
20 May by issuing three-year bonds with a negative yield for the
first time (–0.003%).
> In APAC, the Japanese ten-year government bond yield has hovered at around
> In the US, after a series of rate cuts by the Federal Reserve, as of 12 zero for three years. As of 12 June, ten-year yields in other big Asian markets
June the 30-year and 10-year government bond yields stand at range between 0.42% for Taiwan and 2.78% for China, but are nevertheless low
1.41% and 0.68% respectively. While the ten-year yield has risen by historic standards. A series of rate cuts by the Reserve Bank of Australia has
significantly from this year’s low point of 0.32% as hopes of pushed the ten-year bond yield in that market to 0.89%, versus 2.40% three
economic recovery have gradually increased, on a long-run view it is years ago.
still not far from the lowest level for over a century.
Source: Financial Times, “Negative-yielding debt sends investors scurrying into gold” (30 January 2020).

7
COLLIERS RADAR CAPITAL MARKETS & INVESTMENT SERVICES | ASIA PACIFIC

Dividend yields in equity markets under threat

The long global bull market in bonds had helped fuel a global bull market in equities. However, this bull
market in equities was heavily dominated by the US and was unevenly spread across other
markets. Moreover, equity markets have reacted differently to the COVID-19 crisis: the US market initially
fell sharply but has since largely recovered, whereas other markets remain well below their peaks.
> At the present level of 3,002 (11 June), the US S&P 500 equity index has risen 4.4x since its low point
during the GFC. After rallying 34% since late March, the index is now about 11% below its all-time high.
The yield on the S&P 500 index stands at about 1.9%, but we suspect that this figure is not sustainable
given the damage that the COVID-19 recession is widely expected to inflict on US corporate profits and
hence dividend income. We assess the outlook for corporate dividend payments further in Part Two of
this report.
> Returns on Asian stock markets have been less impressive than in the US, with Chinese markets showing
particular volatility. As of early June, dividend yields for major Asian equity markets range from about
2.0% for India through 2.5% for Japan to a more generous 4.9% for Singapore. Again, however, these
yields look questionable because corporate profit forecasts have been lowered sharply during the
current recession.

Figure 5: Dividend yield of major Asian stock markets plus US (%)

S&P 500 (US) FTSE Hong Kong FTSE China Index
7.5
S&P JPN BMI SINGAPORE BMI S&P/ASX 200

6.5

5.5

4.5

3.5

2.5

1.5
2018 2019 2020
Note. In this chart, we show the FTSE Hong Kong index, whereas on page 4 above we cite the dividend yield for the Hang Seng Index.
Sources: S&P Global Market Intelligence, other, as of 1 June 2020

8
COLLIERS RADAR CAPITAL MARKETS & INVESTMENT SERVICES | ASIA PACIFIC

REAL ESTATE OFFERS MORE APPEALING YIELDS

Compared to low or negative yields on government bonds and the possibility government bonds. The highest yields are in South China and then East
of falling dividend yields for equity markets, the yields offered by real estate China, while the highest rent growth is in North China (4.6% on average
assets in APAC markets look attractive. For example: over five years).
> As shown in Figure 6 overleaf, yields in the office sector in developed APAC > Also attractive are logistics assets in Singapore (yield 6.0%, spread over
markets range between 2.8% for prime grade Hong Kong offices at the low bonds 5.1pp) and logistics/industrial assets in Melbourne and Auckland
end and 5.8% for Auckland at the high end¹. Yields on Grade A office assets (yield 5.5-5.6%, spread over bonds 4.6-4.8pp). Seoul is another market
in emerging markets are higher, ranging up to about 9.0% for Indian cities where logistics yields exceed 5.0%, while for Sydney and greater Tokyo
(and even higher in markets like Vietnam and the Philippines). While it may they lie between 4.0% and 5.0%. Medium-term rent growth prospects for
be true that rental income for office assets is under threat, the pressure is the sector remain solid in most of these markets.
generally less than that on corporate profits in equity markets. We discuss > Yields on retail assets in in China and Singapore lie in a range of about
this point further in Part Two of this report. 4.2%-6.5%. Retail yields are lower in Tokyo and Hong Kong SAR, in a range
> In the office sector, in developed APAC markets, the yield spread over ten- of 2.7%-4.5%. However, in the case of retail property there is a greater
year government bonds varies between about 1.7pp for Beijing at the low question over prospects for medium-term rental growth than for office and
end and 5.0pp for Auckland at the high end, followed by Sydney and logistics assets, and in our view even than for hotels.
Melbourne on 3.7-3.8pp and Tokyo on 3.5pp. Again, please see Figure 6. Please see the forthcoming Part Two of this report for further information on
> As shown in Figure 7, logistics assets in China offer yields ranging from rent growth prospects and our recommended property asset classes.
5.2% to 5.9%, implying a spread of 2.4pp to 3.1pp over ten-year

¹ For Asia, we define property yields as “effective rents” (i.e. headline rents less incentives such as rent-free months) divided by capital values. For Australia, we cite “market/reversionary yield”, defined as assessed net market
income divided by the sum of the sale price or the adopted value plus any capital adjustments to the core value such as letting up allowances, capital expenditure and present value of reversions.

9
COLLIERS RADAR CAPITAL MARKETS & INVESTMENT SERVICES | ASIA PACIFIC

FIG. 6: APAC OFFICE MARKETS - YIELDS, YIELD SPREADS, RENT GROWTH

Premium/Grade A office yield (%) Yield spread over 10-year bonds (percentage points) Annual average rental growth rate (%, 2019-2024)

%
8.5
8.0
YIELDS 8.0
5.8
6.0
4.5 4.7 4.7 4.7 4.6 5.0
4.2 3.9
4.0 3.53.5 3.8 3.7
2.8 3.2
2.3
2.8 2.5 3.0
2.2
1.7 1.9 1.9 2.1
2.0

0.0

Beijing Shanghai Guangzhou Hong Kong Seoul Taipei Tokyo Singapore Mumbai Bangalore Melbourne Sydney Auckland

RENT GROWTH %
4.0 3.3 3.2 2.9
3.0 2.4
1.9 1.8
1.5 1.2
2.0 0.8
0.6
1.0 -0.2
0.0
0.0
-1.0
-0.7

Sources: S&P Global Intelligence, Financial Times, Colliers International, other

10
COLLIERS RADAR CAPITAL MARKETS & INVESTMENT SERVICES | ASIA PACIFIC

FIG. 7: APAC LOGISTICS/INDUSTRIAL MARKETS: YIELDS, YIELD SPREADS,

RENT GROWTH
Logistics centre yields (%) Yield spread over 10-year bonds (percentage points) Annual average rental growth rate (%, 2019-2024)

%
5.9 6.0
6.0 5.5 5.6 5.3 5.5 5.6
YIELDS 5.2
5.1
4.6 4.7 4.8
4.24.2
4.0 3.5 3.9 3.8
3.1 3.0
2.7 2.8
2.4
2.0

0.0

South China North China West China East China Hong Kong Tokyo Seoul Singapore Melbourne Sydney Auckland

%
RENT GROWTH
6.0 4.6
4.0 2.7 2.7 3.0
1.5 1.9 1.8
1.1 1.3
2.0 0.2
0.0
-1.7
-2.0
Note. The yield for South China is an average for Shenzhen and Guangzhou.
Sources: S&P Global Intelligence, Financial Times, Colliers International, other.

11
Primary Author:
Andrew Haskins
Executive Director | Research | Asia
+852 2822 0511
Andrew.Haskins@colliers.com

Contributors:
Terence Tang
Managing Director | Capital Markets & Investment
Services | Asia
+65 6531 8565
Terence.Tang@colliers.com

John Marasco
Managing Director | Capital Markets & Investment
Services | Australia & New Zealand
+61 3 9612 8830
John.Marasco@colliers.com

Anneke Thompson
National Director | Research | Australia
+61 3 9940 7241
Anneke.Thompson@colliers.com

Chris Dibble
National Director | Colliers Partnerships, Research &
Communications | New Zealand
+64 9 357 8638
Chris.Dibble@colliers.com

Date of publication
15 June 2020

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