Southeast Asia 2019 Outlook

Southeast Asia to benefit from domestic consumption and shifts in global supply chains

Southeast Asia 2019 Outlook 2 3Southeast Asia 2019 Outlook

Key investment themes in Southeast Asia for 2019

1. Mild downgrade in growth expectations

The IMF downgraded global growth expectations for 2019 to 3.5% from 3.7% previously, as advanced economies are expected to expand slower and trade challenges escalate. Southeast Asia is expected to grow by 4.8% in 2019-2023, down from 5.0% previously, as the outlook for Indonesia and Philippines are scaled back. Higher oil prices will weigh on fuel importers but benefit Malaysia, a net exporter.

2. Rising trade barriers dampen exports in near term but benefit mid-tech countries in medium term

Higher trade tariffs on China exports could impact imports of components by China from Southeast Asia in the short term. However, in the medium term, manufacturers are likely to expedite the relocation of operations to Southeast Asia. This process has already started in the last five years as wages in China rose. For Vietnam, its exports to the United States accelerated in 2H 2018, and the number of FDI projects from China, Korea, Singapore and Japan grew 17-37% yoy in 3Q2018. We also expect countries with mid-tech skills such as Thailand and Malaysia to benefit. We expect higher demand for industrial property in Southeast Asia.

3. Technology companies continue to expand rapidly in Southeast Asia

We estimate that technology companies leased about 15-20% of total gross office space in 2018 in Southeast Asia, compared to 5-10% just three years ago. We continue to expect these firms to potentially take up 15-25% of annual office leasing volume for the next decade. In 2H2018, office take-up surprised on the upside in Singapore and Bangkok, growing by 6% yoy, while demand moderated in Manila and Jakarta after rapid growth in the prior few quarters. Downsizing in Kuala Lumpur led to a shrinkage in occupied office space in the city.

4. Global retailers expand in Southeast Asia, integrate online and physical points of sale

Domestic consumption continues to grow in Southeast Asia due to urbanisation and higher incomes. Global retailers such as Uniqlo, IKEA and Apple continue to expand their footprints. E-commerce companies such as JD.com and Alibaba are collaborating with local groups to integrate online and physical points of sale to tap on young consumers who are both tech-savvy and continue to prefer shopping as a leisure activity. The World Bank has raised the rankings for the logistics sectors in Vietnam, Indonesia, Philippines and Thailand significantly in the last two years.

5. Tourist arrivals and hotel room rates continue to grow

In 2018, tourist arrivals across Southeast Asian cities grew 9% yoy, with international tourists visiting Vietnam and Indonesia rising 20% yoy and 16% yoy respectively. Upscale hotel revenue per available room also grew by 5% yoy in 3Q2018, after rising 6% in 2017. More hotel investment sales were observed in Singapore, with capital values significantly above expectations.

6. Changes to our view

We upgraded our prime office rents forecasts for Singapore after accounting for the higher-than-expected take-up in 2H2018. We now expect rents to rise 15% over 2019-2020. Office rents are expected to decline in Kuala Lumpur in 2019-2021E. Our Jakarta office rents forecasts for 2019-2021E are now 6% lower than our previous estimates as the city’s vacancy rate remained above 30% by 4Q2018. We expect rents in Jakarta to compress further but stabilise beyond that. We have also mildly downgraded our Jakarta retail rents for 2019-2021E as rents grew just 1.8% yo in 2018, down from 4% yoy in 2016-2017.

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46

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Southeast Asia 2019 Outlook Southeast Asia 2019 Outlook 4 5

Expectations for Thailand and Malaysia continue to improve

Southeast Asia expected to grow 4.8% annually in 2019-2023

The IMF downgraded global growth expectations for 2019 to 3.5% from 3.7% previously as advanced economies are expected to expand slower and trade challenges escalate. Southeast Asia is expected to grow by 4.8% in 2019-2023, down from 5.0% previously, as the outlook for Indonesia and Philippines continued to be scaled back.

Both Indonesia and Philippines are expected to continue to face dampened exports as red tape, bureaucracy and poor infrastructure continue to hamper progress. However, strong domestic consumption is expected to keep growth above 5%. In particular, Indonesia’s strong domestic demand makes it highly resilient and the only economy in the region which is not expected to grow any slower in 2019-2020 compared to 2018.

On the other hand, expectations for Malaysia and Thailand continue to improve as these governments take steps towards attracting more foreign direct investments. As a net exporter of oil/gas, Malaysia is also likely to benefit from higher global oil prices.

Limited downside to currencies after sharp corrections in 2018

In 2018, Indonesia raised its policy rates six times and by 200bps as it sought to stabilise the rupiah, which depreciated c.10% against the US dollar in the first three quarters of 2018. Similarly, Philippines tightened monetary policies to protect the Peso as markets were concerned about its current account deficits.

In 4Q18, both the Indonesian Rupiah and Philippines Peso stabilised as expectations on the pace and magnitude of rising global interest rates moderated. Most economists now expect the US Federal Reserve to raise interest rates just twice in 2019, compared to thrice previously. While the ECB intends to end quantitative easing in 2019, it is unlikely to raise interest rates immediately. We expect these trends to be supportive of investor sentiment in Southeast Asia in 2019.

Source: Oxford Economics

Fig 1: 2019 GDP growth forecasts Fig 3: Indonesian Rupiah vs US dollar

Fig 5: Current account surplus as % of GDP

Fig 2: GDP forecasts for 2019-2020 Fig 4: Current account surplus as % of GDP

Source: Oxford Economics

Source: IMA Asia

2016 2020 Change in rank (RHS)

USChina

Germany

JapanIndia

South Korea

Mexico UK

Taiwan

Canada

Singapore

Vietnam

Malaysia

Thailand

-3-2-101234

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and ClothingFootw

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Mobile phones

and parts

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wood products

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Southeast Asia 2019 Outlook Southeast Asia 2019 Outlook 6 7

Southeast Asian economies with higher skills to benefit from US-China trade tensions

In the medium term, we think manufacturers are likely to expedite the relocation of operations to Southeast Asia, which has already started as wages in China rose. The American Chamber of Commerce in Shanghai undertook a survey in September 2018 to gauge the impact of new US tariffs on American companies in China. Of the 430 companies who responded, 61% are in manufacturing-related industries. Around 70% of the companies expect a negative impact on their profits, production costs and reduced demand for products. Most respondents are adjusting their supply chains in response to the tariffs, seeking to source components and assembly outside of China and delaying investment decisions. While 64.6% of respondents are not considering relocating their manufacturing facilities out of China, 18.5% of respondents are considering relocating these to Southeast Asia.

Amongst the countries in Southeast Asia, Vietnam has already seen an acceleration of exports to the US as well as the number of FDI projects in 2H2018, potentially due to the trade tensions between the US and China. Vietnam’s exports to the US grew 17% yoy in 2018, including substantial growth in machineries/equipment, steel and steel products and wood and wood products, where new tariffs by the US have been imposed. The number of FDI projects registered in Vietnam also started to pick up in 3Q2018, with China FDI projects growing 37% yoy, Korean FDI projects growing 21% yoy and Singapore and Japan growing 17% yoy.

Source: Vietnam Customs

Fig 7: Exports from Vietnam to the US

Fig 6: Preferred destinations for relocation of China-based manufacturing facilities Fig 8: Global Manufacturing Competitiveness Index

In the last decade, China has become a key partner of Southeast Asia, with the establishment of the ASEAN-China Free Trade Area (ACFTA) in 2010. The framework lowered the average tariff rates on both imports and exports of ASEAN goods to China to 0.1-0.6%. The ACFTA is the third largest by trade volume after the European Economic Area and the North American Free Trade Area.

Today, China is Southeast Asia’s largest trading partner, making up 14% of ASEAN’s exports in 2017. 48% of Southeast Asia’s exports to China are in electronics, machinery and mineral fuels. Trade tensions between the US and China may impact Southeast Asia’s exports in the short term. As intermediate goods make up over 50% of China’s imports from Southeast Asia, a decline in China’s exports is likely to reduce China’s demand for such exports from Southeast Asia in the short term.

Source: American Chamber of Commerce, Shanghai, Sep 2018

Source: Global CEO Survey by Deloitte, 2016

Outside of Vietnam, we also see Malaysia and Thailand as potential net beneficiaries in the medium term. According to Deloitte’s Global Manufacturing Competitiveness Index, CEO respondents were asked to rank nations in terms of current and future manufacturing competitiveness. The 2016 study found that Vietnam, Malaysia, Indonesia and India are expected to become more competitive over the next few years while countries such as China and South Korea could become less competitive.

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Southeast Asia 2019 Outlook Southeast Asia 2019 Outlook 8 9

For manufacturing companies seeking to relocate their operations from China to Southeast Asia, more developed countries with the requisite mid-tech skills such as Thailand and Malaysia could be more likely to benefit, in our view. Wages in these countries are now about 60% lower than in China, compared to 33% in 2010.

IMA Asia expects China’s exports to grow 3-4% p.a. over the next few years, decelerating from 15% p.a. in 2010-2014. In comparison, Thailand and Malaysia’s exports are expected to grow faster at 5% p.a. in 2019-2023.

Source: IMA Asia

Source: IMA Asia

Office take-up tapered off in 2H2018, mainly due to slowdown in Kuala Lumpur, Manila and Jakarta

In 2H2018, office take-up in the region grew by 3% yoy, sharply slower than the 5% yoy growth in the prior four quarters. This was mainly due to negative net absorption in Kuala Lumpur as well as slower growth in Manila and Jakarta. In Kuala Lumpur, downsizing by some financial institutions and government linked companies reduced occupied office space in the city centre by over 500,000 sqft in 2H2018.

In Jakarta and Manila, office take-up has been strong, matching the high supply of new completions and expanding by 16% yoy in 1H2018, but this moderated to 13% yoy in 2H2018. We continue to expect office take-up in Jakarta to grow at 11% CAGR in 2019-2023E and take-up in Manila and Bangkok to grow at 4-5% CAGR in the same period.

Source: JLL Research

Source: JLL Research

Fig 9: Manufacturing wages in Southeast Asia compared to China Chart 11: Office net absorption in Southeast Asia (yoy)

Fig 10: Exports growth in Malaysia, Thailand to grow faster than China Chart 12: Office net take-up in Southeast Asia (yoy)

Kuala Lumpur Manila Singapore Jakarta Bangkok HCMC

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10 11Southeast Asia 2019 Outlook Southeast Asia 2019 Outlook

Technology companies now a key office occupier group in Southeast Asia

Technology companies have been expanding swiftly in Southeast Asia and have become a key office occupier group in the region in the last five years. We estimate that these companies leased around 15-20% of total gross office leasing volumes in Southeast Asia, compared to 5-10% just three years ago. We expect technology companies to continue to expand in Southeast Asia, potentially taking up 15-25% of annual gross office leasing volume for the next decade.

Technology hardware manufacturers such as Dell, Intel, Apple, Ericsson and Siemens have been operating in the region for decades and new players are investing in the region. In Bangkok, Huawei opened its Southeast Asia Research and Development centre in 2017 and is now the largest technology occupier in Bangkok, taking up more than 15,000 sqm of space, up from just 1,000 sqm in 2013.

In the last ten years, internet companies such as Google, Amazon and Facebook started to operate in Southeast Asia. For instance, Google started its Singapore office with just 24 people in 2007 but this Asia Pacific headquarters had grown to over 1,000 employees by 2017. As of 2018, Google is the largest corporate occupier in Singapore, taking more space than any financial institution.

In the last two years, investments into e-commerce companies in Southeast Asia accelerated. For instance, Singapore-based Sea, which operates Garena gaming and e-sports platform and Shopee e-commerce site, just raised over USD 1 billion in 2017 through an initial public offering and a further USD 575m in June 2018. Tencent, China’s largest video games and social media operator has been investing in Garena for several years. In early 2018, Alibaba increased its investment in Lazada by USD 2billion, bringing its total investment to date to USD 4billion. This was in addition to its USD 1billion investment in Tokopedia, which operates in Indonesia. As gaming and e-sports markets grow in Southeast Asia, we think gaming companies such as Garena, Ubisoft, Quest Drop and Blizzard will start to expand quickly. The number of PC and mobile gamers in Southeast Asia is projected to reach 400 million by 2021, according to Niko Partners.

Both international and local coworking companies are also rapidly increasing their presence in Southeast Asia, at pace with the global trend. WeWork acquired Spacemob as part of its entry into Southeast Asia in August 2017 and has been expanding at breakneck pace since then. Justco started in Singapore in 2015 and expanded into Bangkok and Jakarta.

Source: JLL estimates

Fig 13: Estimated gross office space leased by technology companies

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Southeast Asia 2019 Outlook Southeast Asia 2019 Outlook 12 13

Where are the largest technology companies in Southeast Asia?

We find that the largest global technology companies in Southeast Asia currently take up between 20,000 sqm and 50,000 sqm in total, spread amongst three to five cities:

All of them have some presence in Singapore, Bangkok and Jakarta.

In many cases, the companies have grown their headcount by 30-50% CAGR over the last 5-10 years.

Internet companies Google and Facebook have most of their office footprint in Singapore, which acts as a regional headquarters and a base for marketing, sales, and research and development operations.

In Southeast Asia, flexible work spaces have grown by c.40% CAGR in the last three years and now take up 2% of the office stock, from 0.5-1.0% in 2015. Singapore enjoys the highest penetration rate, with flexible work spaces taking up 4.2% of JLL island-wide office stock. The growth of flexible work spaces in Southeast Asia is in line with the rapid growth in Asia Pacific, where flexible space stock recorded a compound annual growth rate of 35.7% in 2014-2017, much higher than in the United States (25.7%) and Europe (21.6%) over the same period. JLL predicts that as much as 30% of corporate portfolios could be flexible space by 2030. What initially began as a platform for freelancers and startups, flexible space providers are now tailoring their offering to accommodate corporate users.

Source: JLL estimates Source: JLL Research

E-commerce companies such as Sea (which operates Garena, Shopee and Airplay) and the Alibaba group (which operates Lazada, Alipay and UC Web) are operating out of more locations in Southeast Asia and take up substantially more office space in Jakarta than Singapore, followed by Bangkok. We believe these companies are set up to serve the large and growing domestic markets of Indonesia, Thailand and Vietnam where personal consumption expenditure is growing by over 6% annually.

Flexible office space operator WeWork has expanded rapidly in the last two years and now take up over 50,000 sqm across the region.

Fig 14: Where are the largest technology companies in Southeast Asia? Chart 15: Flex space penetration in Southeast Asia

15Southeast Asia 2019 Outlook 14 Southeast Asia 2019 Outlook

Global retailers to continue to expand in Southeast Asia

Domestic consumption continues to grow in Southeast Asia due to urbanisation, rising employment in the manufacturing and services sectors and growth in the middle-income household population. While online retail makes up 30% of retail sales in China, it is currently just 5% in Southeast Asia where shopping is still seen as a leisure activity, as customers have a strong preference to touch and feel the product. Due to the young and tech-savvy population in Southeast Asia, global retailers see the region as an ideal place to expand and integrate online and physical retail points of sale.

For example, some outfit retailers in malls have created ‘virtual shelves’ that allow customers to order the items they want for delivery, if the store does not have the items in stock. Other retailers use ‘magic mirrors’ that allow users to try new makeup looks with the help of Augmented Reality, and then buy items

from a vending machine. Modern grocers can provide in-store chefs that cook a shopper’s groceries on demand, with deliveries made in under two hours from initial order.

One example of a retailer that is expanding in Southeast Asia is Uniqlo, which said it would double its Southeast Asia network over the next four years to 400 stores by 2022 and treble sales to USD2.7 bn from USD 0.9 bn in 2017. Uniqlo has opened its first store in Thailand and is targeting suburban stores in Thailand, Malaysia and Philippines. It will also start to open stores in Vietnam, Laos and Myanmar. IKEA, the Swedish furniture maker, is currently operating in Singapore, Malaysia, Indonesia and Thailand. It targets to double its business and enter new markets in Southeast Asia in the next few years. The new IKEA store in Manila (in partnership with SM Group) will

be the largest IKEA in the world. Apple has opened its second retail store in Southeast Asia in Bangkok, and is considering Jakarta and Vietnam next. It is also planning additional stores in Bangkok and Singapore.

E-commerce companies from China, such as Alibaba and JD.com, continue to expand in Southeast Asia. Potentially, there are several similarities between China and Southeast Asia in terms of consumption growth rates and technology adoption by youths. JD Central, a joint venture between JD.com and Thailand’s largest retail firm Central Group, aims to provide e-commerce and fintech services and accelerate omni-channel retail growth in Thailand. The two firms will also collaborate to provide IT solution services for supply chain development for small businesses and developing e-commerce skills among

tertiary students in Thailand. Alibaba currently has a presence in all six countries in Southeast Asia and targets to open high-tech stores in the near term. The company is collaborating with Malaysia and Thai governments on logistics hubs and e-commerce parks.

We expect the transformation of the retail business to spill over into higher demand for industrial and logistics space in Southeast Asia. In Philippines, Lazada doubled its plant in Cabuyao, Laguna to 60,000 sqm in 2018. Zalora plans to move to a four-storey warehouse facility in Cavite in 2019 that can accommodate 5 million product inventory, or five times more than the 1 million product inventory capacity of its existing warehouse. JD Central targets to increase the number of warehouses in Thailand to five in early 2019.

Southeast Asia 2019 Outlook 16 17Southeast Asia 2019 Outlook

Logistics performance in Southeast Asia continues to improve

Southeast Asian countries continue to improve the performance of their logistics sectors. According to World Bank’s Logistics Performance Index (LPI), Vietnam’s logistics performance is now ranked 32nd globally compared to 64th in 2016 and now is just slightly behind Thailand. Indonesia also moved up to 46th from 63rd rank. Singapore, Japan and Hong Kong are still the most efficient logistics hubs.

The index measures six components including (1) efficiency of customs and border clearance; (2) quality of trade and transport infrastructure; (3) ease of arranging competitively priced shipments; (4) competence and quality of logistics services; (5) ability to track consignments and (6) frequency where shipments are delivered on schedule. Vietnam and Indonesia improved the most on their logistics quality and competency.

Source: World Bank

Source: World Bank

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Strong tourist arrivals to boost hotel investments in the coming 24 months

In 2018, tourist arrivals surged across Southeast Asia, growing 9% yoy. The number of international tourists visiting Vietnam and Indonesia rose 20% yoy and 16% yoy respectively, while Thailand attracted 12% yoy more tourists. Investor interest in hotels is rising and we expect more hotel assets to be sold in the coming months in the more developed Southeast Asia markets.

Upscale hotel revenue per available room (RevPar) also grew by 5% yoy in 3Q18, after rising 6% yoy in 2017. Over the last four quarters, hotel RevPar rose 5-6% yoy in Kuala Lumpur and Bangkok. Singapore’s hotel RevPar finally recovered in the last four quarters after declining for five years.

Source: JLL estimates

Source: JLL estimates and various country tourism boards

Fig 16: Logistics Performance Index (global ranking)

Fig 17: Logistics Performance Index – Competence and quality of logistics services (global ranking)

Fig 18: Tourist arrivals grew 9% yoy in Southeast Asia 2018

Fig 19: Change in hotel revenue per available room yoy

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Southeast Asia 2019 Outlook Southeast Asia 2019 Outlook 18 19

Key changes to our views for 2019 Authors

Singapore prime office rents rose 22% over 2017-2018 and we now expect rents to continue to rise 15% over 2019-2020, slightly higher than our previous forecast. The upgrade to our Singapore office rents forecasts was made on the back of stronger than expected office take-up in 2018 and the withdrawal of some aging stock expected in 2019. Our Jakarta office rents forecasts for 2019-2021E are now 6% lower than our previous estimates as vacancy rate in the city remained above 30% despite strong net absorption in 2018. Despite improving office demand over the past couple of years, we expect Jakarta office rents to compress further in 2019, extending the downward trend since mid-2015.

However, after 2019 supply volumes are expected to be more manageable and as vacancy rates come down from their current level we are likely to see some stability in rents.

In 2018, retail rents across Southeast Asia continued to increase slightly by 2.8% yoy on average. Bangkok rents rose the fastest, rising 3.4% yoy. Singapore retail rents finally grew yoy after three years of decline. We have mildly downgraded our Jakarta retail rents for 2019-2021E as rents only grew just 1.8% yoy in 2018, down from 4.0% yoy in 2016-2017. We expect Jakarta retail rents to grow 3% yoy in 2019.

Source: JLL Research

Source: JLL Research

Regina LimHead of Capital Markets Research Southeast AsiaRegina.lim@ap.jll.com

Andrew GulbrandsonHead of Research ThailandAndrew.gulbrandson@ap.jll.com

Janlo de los ReyesHead of ResearchPhilippinesJanlo.Delosreyes@ap.jll.com

Trang LeHead of ResearchVietnamtrang.le@ap.jll.com

Veena LohHead of Research MalaysiaVeena.loh@ap.jll.com

Tay Huey YingHead of Research SingaporeHueyying.tay@ap.jll.com

James TaylorHead of ResearchIndonesiaJames.taylor@ap.jll.com

Chart 20: Office rental compound annual growth rate (%)

Chart 21: Prime retail rental growth yoy

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