Tech startups a key source of demand for real estate in APAC: JLL

Startups have emerged as a new category of urban occupiers, with more tech firms adopting unconventional formats such as coworking and industrial spaces, say JLL, a professional services firm that specialises in real estate and investment management.

Mobile devices, e-commerce and the rise of fintech have driven rapid growth of the technology sector in Asia Pacific, supporting occupier demand for both commercial office and business park space, the property specialist said. India and China in particular are rapidly adopting innovative mobile shopping, financial and payment platforms, reflected by the fact that the Asia Pacific region is home to seven of the 22 global fintech unicorns – startups valued at more than US$1 billion.

In China, there is increasing demand for coworking spaces from these fast-growing companies, with a new trend of coworking operators becoming anchor tenants in retail malls. The number of coworking spaces in China has grown rapidly: in 2016, there were more than 500 coworking sites in Shanghai and Beijing alone, compared to just a few in 2015.

“While there is a greater utilisation of coworking space, tech startups are a future source of Grade A office leasing demand and this is an opportunity for real estate investors and developers to create space that will meet this need,” says Dr Megan Walters, Head of Research, Asia Pacific at JLL.

“Technology companies continue seeking high quality office space to attract talent, and we’ve seen a significant number of tech occupiers upgrading their premises from serviced to proper offices, and from Grade B to Grade A space. Landlords are sitting up and taking notice of what this new category of occupier wants,” she adds.

Source: JLL website. Tech is hot in the Asia Pacific region, affecting demand for real estate.

Continued tech sector growth, however, faces a number of challenges. Recent data from JLL reveals that rising labour and operational costs, skills gaps, lack of supportive government policies, as well as real estate and infrastructural development remain the key tests to the burgeoning industry.

“High and rising labour and operating costs were frequently cited by our leasing experts as obstacles to future growth of the tech sector,” says Christopher Clausen, Associate Research Director, Asia Pacific at JLL. “High home prices and cost of living were also mentioned as key considerations in some markets, while a shortage of talent and skills gaps may hold back tech development in others.”

When searching for office space, tech firms look for reliable power supply, and room for future expansion within the same building. “The importance of a high-quality and stable power supply to tech companies cannot be overstated,” says Clausen. “Many tech firms continue to store large volumes of data onsite meaning they are housing a large number of server racks within their office.”

“Tech firms also want large floor plates that allow them flexibility in layout,” adds Clausen. “In addition, these companies are putting a priority on quality of life for their employees, so transport connectivity is another important factor.”

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Japan and Australia to be real estate investment magnets in 2016

Real estate activity in Asia next year will continue trends seen in 2015 - an abundance of capital flowing to core spaces, as well as a flight to safe havens in the region's most developed and liquid markets, according to Emerging Trends in Real Estate Asia Pacific 2016, a real estate forecast jointly published by the Urban Land Institute (ULI) and PwC. 

Japan and Australia remain the favourite countries for investment and development, with Tokyo, Sydney, Melbourne and Osaka taking four of the top five spots for promising markets in the Asia Pacific region. Ho Chi Minh City, rated fifth, rounds out the list of most favoured markets.

"Asia's real estate markets are the product of almost eight years of easy money from the world's central banks. Although easing in the US may be ending, both Japan and the European Union continue to provide liquidity, while interest rates in many Asian countries are lower than one year ago," said ULI North Asia Chairman Raymond Chow, Executive Director, Hongkong Land in Hong Kong. "This, combined with an allocation of capital from both local and global institutional investors, is resulting in more and more money chasing fewer and fewer real estate assets. This is pushing up prices across most markets and sectors, even as the current industry cycle appears to be winding down. We can expect this to continue throughout 2016, with the most attention being paid to markets perceived as offering certainty in terms of low risk and satisfactory returns."

"As the bull market in Asian real estate enters its seventh year, the positive atmosphere is encouraging investors to sell assets purchased years ago in the wake of the global financial crisis. Our report finds that investors are increasingly opting to take profits and exit from deals made in recent years. Opportunistic returns lie in Japan, where cheap debt and high leverage provide outsized profits, and in China, where developers are in need of capital and liquidity is in short supply. Meanwhile, investors with an eye on a possible peak in the cycle are attracted to the safety of core assets in gateway cities," said KK So, Asia Pacific Real Estate Tax Leader, PwC. 

"In terms of capital flows, investors continue to see increases in capital movements from Asia to real estate markets elsewhere in the world. The main contributor to this trend is China, where institutional, corporate, and private capital is buying mainly in Australia, Japan and the US."

Emerging Trends provides an outlook on Asia Pacific real estate investment and development trends, real estate finance and capital markets, and trends by property sector and metropolitan area. It is based on the opinions of 343 real estate professionals, including investors, developers, property company representatives, lenders, brokers and consultants.

The top five investment markets for 2016 are: 

Tokyo, ranked first for investment and development, ticks all the boxes for investors given its status as Asia's top gateway city, and the market with the greatest depth and liquidity. Despite the continuous heavy activity fuelled by easy credit and low interest rates, some are wary that the market is slowing. While the short-term outlook is favourable, a slowdown, accompanied by price stagnation or declines, could prove problematic for those needing to refinance high loan-to-value loans in the future, the report cautions.

Sydney, ranked second for both investment and development, is a draw for institutional investors seeking core office properties. The shortage of those assets and an influx of new investors competing for the properties, coupled with a depreciated local currency, is resulting in strong property yields. Real estate in Sydney is also benefiting from the transformation of Australia's economy from a commodities-driven to a service sector-driven model. A significant number of office-to-residential conversions and redevelopment projects have drawn investor interest. 

Melbourne, third for investment and development, is perceived as offering a similar environment to Sydney. However, even with double-digit price increases in 2015, properties in the city remain more affordable than those in Sydney, mainly because more land is available for an expansion of the central business district (CBD). 

Osaka, fourth for investment but fifth for development continues to benefit Tokyo's spillover demand. The market's growth "marks the end of a long period of oversupply that plagued the city for years," notes the report.

Ho Chi Minh City - fifth for investment and fourth for development - was in 19th place in 2014. The report attributes its surge in popularity to successful efforts by the government to stabilise the local currency and keep inflation in check, coupled with a revival of real estate lending by banks. In addition, improved market access for foreigners is drawing outside investors, who could significantly boost purchases of both residential and commercial properties.

Across the Asia-Pacific region, the industrial/logistics sector continues to be the most popular property type for investment prospects. "Shortages of modern distribution facilities across almost all markets ensures that demand will continue to grow, especially in China," says the report. It notes that demand is being driven by the need for rapid delivery resulting from the e-commerce boom, buildout in the cold-food chain, and structural changes in regional manufacturing as operations move to emerging markets such as Vietnam.