According to M&G’s global outlook report, green assets will be in demand more than ever. This highlights major trends that are affecting global property investment. The result will likely be a growing value diversion based on asset quality, occupiers’ sustainability needs and asset quality. It states that tenant-landlord relationships will be redefined as a result of net zero and will require unprecedented cooperation.
Asia Pacific has seen green real estate take off and it is “gaining a lot more momentum”, Richard van den Berg, M&G Real Estate’s Asia fund manager, said in a panel discussion discussing the real estate outlook in Asia Pacific for 2022.He says that the Covid effect has made people realize how important it is for them to live and work in a healthy and safe environment. This is evident in the demands for high-efficiency particulate filters, better ventilation, and crowd control measures at work.
M&G says that the “green revolution” in Asia will offer significant opportunities for investors, especially through the financing and delivery of green energy, as well as the construction and manufacturing of projects.These are evident in initiatives like Singapore’s CleanTech Park or South Korea’s Pangyo Technovalley 2. They offer investors the chance to tap into clean tech growth and longer-term structural changes related to ESG through direct investment in real estate facilities.
M&G states that buildings with poor environmental, governance, and governance (ESG), features will be under greater pressure. It adds that asset managers will have to balance the delivery of ESG enhancements with the need to weigh up medium- and long-term performance benefits against short-term costs.CBRE predicts that future ESG regulations will be more stringent. CBRE’s market outlook report highlights that “more countries are pledging to achieve carbon neutrality by 2030 or 2060,” and that occupiers will be under greater pressure to adhere to ESG standards for sustainability disclosure.
It adds that companies will be more careful in selecting offices based upon sustainability and wellness features, as well as landlord ESG performance, this year.Hybrid working guidelines are likely to have an impact on the office sector. CBRE says that while occupiers want to save money by using less space they are concerned about the impact on productivity, engagement, and corporate culture. “Occupants will have to redefine their office role while accurately measuring space usage and creating an agile office network that supports a dispersed workforce.
Rebound in office expansion
CBRE predicts that Asia Pacific offices will reopen by 2H2022. According to data from Google Mobility Index, traffic in offices districts of Hong Kong, South Korea, and Taiwan have all returned to pre-Covid levels. According to it, Asian companies will most likely return office-based work. North Asia’s initial response showed that, despite Covid-19 spreading, most companies continue to work in-office with some restrictions on occupancy and team rotation.
The new Grade-A office supply for Asia Pacific will rise 15% yo-y to nearly 67 million square feet in 2022. This is the highest number in more than a decade. CBRE notes that China will account for almost half of all new supply, and cities such as Shanghai and Shenzhen are likely to experience a supply peak by 2022. The majority of supply pressure will come from non-CBD regions, which account for 90% of the new space.CBRE forecasts that leasing activity will rise in Hong Kong and Japan, Australia and South Korea, but new supply will limit demand in Singapore and South Korea.
It adds that there will be “major drivers of demand” for flight-to-quality relocations this year. This is due to the emphasis on sustainability as well as wellness.CBRE recommends that office landlords invest in smart, green buildings and retrofit older stock to achieve this end. By incorporating sustainability features at every stage of a building’s life cycle (planning, design, construction, and operation), new ESG requirements can be met.CBRE suggests that landlords consider incorporating flexible space into their office portfolios or forming partnerships with co-working operators to cater for uncertainty.
There are bright spots for select retail
Although e-commerce has been greatly accelerated by the pandemic, brick-and mortar stores still exist. This is evident in the need for omnichannel sales, and delivery. As part of the “click-and-collect” model, physical malls also fulfill online orders. M&G observes that many online retailers have partnered with physical retailers to enhance the customer experience. Additionally, goods returns are being processed more frequently in physical retail assets.
CBRE anticipates that experiential retail will be more prominent. It says that the shift to online shopping during the pandemic has meant that retailers and shopping centers must offer a unique experience in order to entice shoppers back to brick-and mortar stores. You can use promotional events, expand display areas, set up more thematic shops, and implement new F&B concepts to attract shoppers.M&G predicts that the retail sector may be at a “turning moment” in its cycle. It cites early signs of rising capital values and better sentiment in certain parts of the market. It says that retail rents could stabilize or grow as the economy recovers. This could potentially lead to the return of yield-hungry investor,”CBRE warns that although recovery is expected to continue this fiscal year, the expansionary momentum will be driven by select outperforming street shops, malls, and other retail outlets. It states that secondary retail, even properties in core areas, is unlikely to face further rental cuts and tenant outflows.It anticipates that China will see retail rental growth accelerate from last year in Hong Kong, but it will remain low single digits.
In the meantime, Taipei’s high-end shops and many CBD districts in Australia will see a rental correction in 2022. However, it is expected that this will be milder. It is expected that this will continue in the face of high vacancy and a shortage of international tourists and students, but it could quickly reverse once international travel resumes.CBRE expects that the retail leasing market will favor tenants in the future, but it believes landlords will adopt a risk-sharing model of leasing, which includes more rent clauses, fit-out subsidies, and tenancy improvement.Pop-up and shorter leases are gaining popularity among general retailers. This would allow them to test consumer reaction, while landlords would have the ability to renew their tenant mix more frequently, CBRE points out.