JLL Research Report

Southeast Asia | 1H17

Southeast Asia outlook 1H17

2 | JLL

• Continued improvements in net office take-up Due to stronger than expected rental growth, we upgraded our office rental forecasts in 2018 for Singapore by 10%. Online gaming operators are contributing to strong office take-up in Manila while technology, fintech and coworking operators are expanding in Jakarta. Marina One, the largest single office development in Singapore that is completing in 3Q17 is now 70% pre-committed.

• Rising interest from Chinese and Hong Kong Groups In Singapore, Hong Kong groups dominated commercial transactions in 1H17. In Indonesia, Vietnam and Philippines, we see rising interest from large-scale mainland Chinese groups looking to tap into Indonesia’s attractive economic and demographic profile.

• Keen interest for development sites Developers are still keen on commercial development sites. In Singapore, a tender for a commercial site at Beach Road will close on 22 September 2017, with a minimum price of SGD 1.32bn. In Jakarta, we expect forward purchases of office assets under construction to remain the most likely point of entry.

• More REITs in Thailand likely to result in more transactions In April 2017, the GLAND Office Leasehold REIT sponsored by Grand Canal Land was listed with a portfolio of THB 5bn. More property funds are expected to convert to REITs in 2017. These REITs are able to take on leverage and acquire more assets to improve their earnings growth profile. This could result in more transactions and potentially some cap rate compression for Thailand commercial properties the medium term.

• Continued strong interest in industrial and logistics assets In Indonesia, Logos Property, backed by Ivanhoe Cambridge and CPPIB, are a recent logistics market entrant and are likely to grow their footprint.

What we expect over the next six to twelve months

Southeast Asia Outlook 1H17 | 3

Investments in 1H17: Singapore attracted more Hong Kong and China investors, GIC increased weight in Jakarta

In 1H17, Hong Kong and China investors invested over SGD 3bn in Singapore office assets and over SGD 2bn in residential land in Singapore. Office investments include FWD Insurance taking a 50% stake in One George Street, Hongkong Land’s investment in a 33% stake in the Central Boulevard site and other Hong Kong and China investors’ acquisitions of Tripleone Somerset and GSH Building. Nanshan Group and Logan Property Holdings invested over SGD 1bn in a government land sale site at Stirling Road while MCL, a subsidiary of Hongkong Land paid SGD 766m for an enbloc redevelopment site in Eunos.

In Jakarta, GIC announced a joint venture with Intiland in April. Intiland is the owner of South Quarter, a mixed use

complex at TB Simatupang in South Jakarta. Phase 1 of this project, comprising three office towers and a retail mall is already completed while phase two will consist of two condominium towers. Logos Property with Ivanhoe Cambridge and CPPIB entered the Indonesian logistics market.

Retail malls including Jurong Point in Singapore and Empire Shopping Gallery in Kuala Lumpur were sold in 1H17. Retail assets are generally tightly held in Southeast Asia and these transactions could be indicative of the challenging conditions in these mature markets.

5.5

6.0

5.0

4.5

4.0

3.5

3.0

2.5

2.02012 2013 2014 2015 2016 1Q17

5.6

4.34.1

4.4 4.34.1

Indonesia Thailand Philippines Singapore

30.0

25.0

20.0

15.0

10.0

5.0

0.0

-5.0

-10.0 2013 2014 2015 2016 1Q17

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.02012

5.0

3.8 3.8

2.7

3.7

4.3

2013 2014 2015 2016 1Q17

8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0.02012 2013 2014 2015 2016 1Q17

Indonesia Thailand Philippines Singapore Malaysia

4 | JLL

Southeast Asia economies are benefitting from stronger exports, capital investments

In 1H17, Southeast Asian economies recovered from the slow-down in 2014-2016. The region’s economy grew by 4.8% in 1Q17, from 4.5% in 2016. Singapore grew by 2.5% (from 2.0% in 2016) and Malaysia expanded by 5.6% (from 4.2% in 2016).

In Singapore, the manufacturing sectors grew by 8.3% yoy in 1H17, after being flat for 5 years.

Southeast Asia GDP yoy growth (%)

Source: Oxford Economics

Southeast Asia Manufacturing GDP growth (%)

Source: Oxford Economics

Southeast Asia retail sales gowth (%) Southeast Asia private consumption growth (%)

However, consumer sentiment across the region is still weak. Indonesia’s retail sales grew at 4.7% yoy in 1Q17, down from 10.5% in 2016. Philippines retail sales grew 6.5% in 1Q17, slower than 7.2% in 2016. In Singapore, retail sales has declined for three years but saw a marginal improvement, growing by 0.6% in January to May 2017.

Bangkok Jarkarta KL Manila SG

16.0%

4Q15 1Q16 2Q16 3Q16 4Q16 2Q17 2Q17

14.0%

12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%

-2.0

Bangkok Jarkarta KL Manila SG

6.0%

4.0%

2.0%

0.0%

-2.0%

-4.0%

-6.0%

-8.0%

-10.0% 4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.01H13 2H13 1H14 2H14 1H15 2H15 1H16 2H16 1H17

5.6% 5.4%4.9% 4.9% 5.0%

5.9%

4.3%3.8%

4.6%

4.0%

3.0%

2.0%

1.0%

0.0%

-1.0%

-2.0%

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

Southeast Asia Outlook 1H17 | 5

Office take-up improved in 1H17 after a slower 2016

In 1H17, occupied office space in Southeast Asia increased by 4.6%, a significant improvement from the 4.0% in 2016. Leasing demand by e-commerce firms, business services and financial firms increased. In Manila, more online gaming companies are setting up operations amid a mild slowdown in the Business Process Outsourcing (BPO) sector. In Jakarta, even though new supply is very high, the new buildings are experiencing healthy pre-commitment levels as tenants relocate from older assets into the modern new buildings.

Compared to JLL’s expectations, office absorption surprised on the upside in Bangkok, Kuala Lumpur and Singapore. Office take-up in more mature markets like Singapore and Kuala Lumpur has been weak in 2016 due to economic slowdown. These market saw a significant pick-up in tenant demand in 1H17 compared with 2016.

Source: JLL Research

Net absorption of office space in Southeast Asia1

Source: JLL Research

Net absorption of office space

Source: JLL Research

Prime office rental growth qoq

Source: JLL Research

Prime office rental growth in Southeast Asia qoq2

We now expect Singapore prime office rents to rise 20% over the next four years

Due to stronger demand across the region, average prime office rents in Southeast Asia rose for the first time in nine quarters. Rents surprised on the upside in Bangkok, Kuala Lumpur and Singapore. We upgraded our 4Q18 rent forecasts for Singapore by 10% and now expect Singapore prime rents to rise 20% over the next 4 years.

Prime office rents in Marina Bay, Singapore had declined 27% over eight quarters while Kuala Lumpur rents fell 3% over a similar period. Rents in these cities increased for the first time in 2Q17. Jakarta office rents have declined 16% over the last two years and we expect rents to continue to slide over the next 18 months due to high supply in the pipeline.

2012 2013 2014 2015 2016 2Q17 2018E

7.0

6.0

5.0

4.0

3.0

2.0

1.0

-1.0 Manila Bangkok KL SG Jakarta

0.0

Prime office yield 10Y SGD bond yield

7.0

4.96

4.37

3.56 3.532.92

3.322.92

3.362.88

2.78 2.37 2.402.09

1.462.06 2.36 2.44 2.50

2.20

5.22 4.92

4.07 4.23

5.13 5.255.52 5.87

4.34 4.17 4.033.56 3.65

4.153.83 3.62 3.55

6.0

5.0

4.0

3.0

2.0

1.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Jun-

17

0.0

6 | JLL

Office yields in Manila, Bangkok and Singapore compressed by 8-26 bps in 1H17, in line with our expectations. We continue to expect yields in these markets to compress by 5-15 bps over the next 18 months. Manila and Bangkok continue to enjoy the highest office yield spread over their respective 10Y government bond yields.

Singapore prime office yields are now at 3.55%, about 135bps above the 10Y Government bond yield. Excluding the 2006-2008 period when the market experienced a severe supply shortage followed by the Global Financial Crisis, office yields have traded about 160bps above the 10Y bond yield. Based on our forecast of a 20% increase in prime office rent till 2021, we believe the market has accounted for some 30-50bps increase in base rates over the next few years.

Source: JLL Research

Spread of prime office market yield over domestic 10Y government bond yield

Spread of prime office market yield over domestic 10Y government bond yield

Notes:1. Debt costs are based on investment grade borrowers; 2. Assuming A-grade building and strong credit rating borrower;3. Loan terms of three to five years;4. Upfront fee amortized across the typical debt term.

Debt costs across the region have been stable over the last 6 months.

Market Typical cost of debt (%)

Typical loan-to-value

Jakarta 10.0% 60%Kuala Lumpur 5.3% 50%Bangkok 5.0% 60%Manila 4.0% 50%Singapore 2.9% 40-60%

Authors

Notes:1. Office take-up data refers to the Central Business District (Central Business Area for Bangkok)2. Office rent data refers to prime rents in Bangkok Central Business Area, Kuala Lumpur City Centre, Singapore Marina Bay, Jakarta CBD, Ho Chi Minh City, Manila CBD and Bonifacio Global City3. Retail rent data refers to prime grade centres in Bangkok, Kuala Lumpur City Centre, Singapore Orchard Road, Metro Manila

7.0%

6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

1Q13

2Q13

3Q13

4Q13

3Q14

4Q14

1Q14

2Q14

3Q15

4Q15

1Q15

2Q15

3Q16

4Q16

1Q16

2Q16

1Q17

2Q17

0.0%

Bangkok Jarkarta KL Manila SG

12.0%10.0%

8.0%6.0%4.0%2.0%

-2.0%-4.0%-6.0%-8.0%

-10.0% 3Q15

4Q15

1Q15

2Q15

3Q16

4Q16

1Q16

2Q16

1Q17

2Q17

0.0%

Retail rents are improving after a challenging 2016

Southeast Asia Outlook 1H17 | 7

In 1H17, retail rents in Southeast Asia increased by 1.3% yoy, after a tepid 2016, in line with our expectations. The improvement came mostly from slower rental declines in mature markets Singapore and Kuala Lumpur. In Jakarta, Manila and Bangkok, international and local retailers are still expanding, especially those in F&B and fast fashion.

In 1H17, Jurong Point in Singapore and Empire Shopping Gallery in Kuala Lumpur were sold. Retail assets are generally tightly held in Southeast Asia and these transactions could be indicative of the challenging conditions in these mature markets.

Source: JLL Research

Prime retail rents yoy growth in Southeast Asia3

Source: JLL Research

Prime retail rents yoy growth in Southeast Asia

Regina Lim

Head of Capital Markets Research, Southeast Asia regina.lim@ap.jll.com

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