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Which AP office markets outperformed in 2019?

January 23, 2020 / By  

If you were an investor of office real estate in Asia Pacific in 2019, which markets in the region would have given you the best returns? If you’re looking to invest in Asia Pacific office properties in 2020, what does the year have in store?

In short, Southeast Asian and India markets offered the best returns for investors in 2019, and are expected to continue performing well in 2020, especially Vietnam.

For each market, we looked at the scenario where an investor purchases an office property at the beginning of the year, reaps rental income over the year and sells off the property at the end of the year, at prices based on market yields and rents. We then computed an unleveraged internal rate of return (IRR) based on the local currency, and parsed the IRR into three components: initial yield, cash flow change and yield change. In essence, we are then able to dissect how returns on investment are impacted by the initial yield, market rent growth and changes in the market yield over the year.

Based on 2019 figures, markets that outperformed were located in Japan, Southeast Asia, India and Australia.

  • Japan – In Tokyo and Osaka, while initial yields were relatively low, both rent growth and yield compression were significant factors in supporting high returns on investment.
  • Southeast Asia – The emerging markets of Ho Chi Minh City, Hanoi, Bangkok and Manila, in addition to having high initial yields, also offered investors high investment returns via both yield compression and rent growth, supported by favourable demographic profiles.
  • India – Bangalore and Chennai also enjoyed robust returns due to high yields, yield compression and rent growth over 2019, owing to the continued resilience of the IT industry in these markets.
  • Australia – Returns in the Sydney and Melbourne CBDs were also healthy, as vacancy rates in these markets remained relatively low.

Figure 1: 2019 Performance by IRR Component

Note: Bubble sizes are proportional to initial market yield
Source: JLL Research

Figure 2: 2019 Performance by IRR Component

Source: JLL Research

Looking forward into 2020 forecasts, we expect markets in Southeast Asia and India to continue to offer robust returns.

  • Southeast Asia – Ho Chi Minh City, Hanoi, Bangkok and Manila are expected to continue to outperform, especially the Vietnam markets of Ho Chi Minh City and Hanoi, due to favourable economic and demographic fundamentals.
  • India – Bangalore is forecast to show the best performance in India, testament to the continued strength of the tech industry in this IT hub.

We also expect to see continued strength in the Osaka office market, driven primarily by strong rental growth underpinned by a low vacancy rate and limited supply.

Nonetheless, on a regional basis, returns in 2020 are generally forecast to be smaller than in 2019, as rent growth and yield compression may both slow down during the year relative to last year.

Figure 3: 2020 Performance by IRR Component

Note: Bubble sizes are proportional to initial market yield
Source: JLL Research

Figure 4: 2020 Performance by IRR Component

Source: JLL Research

*NOTE: Analysis of the markets here focused on the overall geography for most markets, with the exception of Sydney, Melbourne, Tokyo and Bangkok, where only the CBD or CBA was analysed.

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