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CBRE market update: Alternative sectors the ticket of choice for investors as yield compression peaks

Finance Markets / Market Trends


Mar 26 2018

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Asia Pacific has emerged as the strongest growing economy globally, with property investors increasing their focus on alternative sectors that offer income stability and higher returns in a bid to offset lower growth forecasts over the coming years. 

That was one of the key outtakes at CBRE’s annual Australian Market Outlook event in Sydney this week, where CBRE’s Head of Global Research, Dr Nick Axford, said all major economies globally continued to experience growth - providing a positive context for the real estate sector. 

“All of the major regions globally are expanding. It is difficult to find a major economy that isn’t growing at the moment. However, while the forecast is positive for now, we are late in the cycle, which signals rising interest rates over the coming years,” Dr Axford said. 

“While globally, investor sentiment differs from region to region, there is an overwhelming emphasis on asset diversification and stability of income as we move beyond traditional yield based performance. The world has changed, it’s not just about core markets anymore - there is a bit shift towards alternative sectors.” 

The results of CBRE’s 2018 Asia Pacific Investors Intention Survey reveal a nine percentage point rise (to 74%) in the number of investors actively pursuing alternative assets from 2017. It also showed an upward trend in investors that already own alternative assets such as healthcare, student living and real estate debt. 

CBRE’s Asia Pacific Head of Research Henry Chin said with yields unlikely to compress much further in Sydney and Melbourne, investors needed to shift their focus to asset enhancement. 

“With income growth APAC-wide falling across all of the major commercial real estate sectors, assets need to be enhanced to increase operating income. Landlords can increase revenue by making their building better than its peers, whilst also reducing operating costs by making buildings smarter and leaner,” Dr Chin said. 

The survey also showed 33% of office occupiers identify co-working centres as an ideal strategy for increasing their space requirements over the next two years. By comparison, 42% of investors rate flexible space as the number one occupier trend that will have the most impact on real estate value. 

“Flexibility in the workplace is here to stay and one of the best strategies to improve the attraction of a building. Our results indicate that half of investors surveyed believe that having up to 20% of a building contain co-working space will enhance a building’s value. Given that we are virtually at the end of the yield compression cycle, and that investors see co-working as a means to add value, we expect the number of co-working options will increase over the next few years,” Dr Chin said. 

Dr Axford said the co-working market represented significant opportunity in Australia. 

“While the impact of co-working on real estate value is still being completely understood, flexibility is without a doubt here to stay,” Dr Axford said. 

“In London for example, the number of co-working spaces over the past six years has risen significantly, now accounting for up to 20% of office take-up, while at the same time, the number of 500sqm deals being undertaken in the market has declined.”  

Speaking about ongoing challenges in the global retail environment, Dr Axford said fundamental changes in the way people experience and consume products would underpin a major shift in the landscape over the coming years. 

“There is unequivocally a future for retail – but the future is very different. There is a clear difference between shopping and buying, and the future for physical retail space is about catering to those that buy, and maximising the experience and entertainment for those whom shopping is a leisure activity.  This means truly understanding what drives the consumer,” Dr Axford said. 

Traditional shopping centres as we know them will evolve into mixed use centres that are more community and experience focused. 

“Where there is an experience involved, people are buying. Health and wellness will also be integrated into these centres, with this continuing to become a huge part of everywhere we go,” Dr Axford said. 

Experience will also continue to be a key trend emerging in workplaces, with property managers and facility management staff becoming increasingly more customer focused. 

CBRE Senior Managing Director, Asset Services & Global Workplace Solutions, Pacific, Amanda Steele, said the pace of change in the workplace was rapid. 

“It’s not about tenants and occupiers any longer, it’s about experience and how we can deliver an environment that caters to a complete work/life blend. As a result, our property management and facility management teams are looking very different, with customer service skills more essential than ever,” Ms Steele said. 

“There is a third party at the table now – and that is the end user. Our real estate markets will continue to be defined by that, with everything designed with them as the priority focus.” 

Photo by Seb Zurcher on Unsplash



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