Slow start to 2024

Net absorption fell significantly in 1Q24 because of seasonal factors and subdued sentiment. Tier 1¹ cities saw a drop in net absorption of around 688,000 sqm, in contrast to the 1.7 million sqm in 4Q23. This represents the lowest reading since 4Q19. With the exception of Singapore, activity slowed considerably across most of these Tier 1 cities.

Beijing’s activity slowed down during the Chinese New Year, compounded by weak sentiment. The holiday period resulted in fewer enquiries, while competition from Langfang and Tianjin added further pressure to the market. Seasonal effects also impacted Shanghai. Although net absorption declined from the previous quarter, demand and sentiment were generally more stable. Demand wavered in Hong Kong, with slowing activity from domestic groups. Among the limited new leases, most came from 3PL occupiers.

In Tokyo, e-commerce groups, 3PL players, and retailers (excluding supermarkets and drug stores) dominated demand. The pre-commitment rate for the next 12 months dropped to around 30%, down from the previous 40%. New completions continued to support take-up in Seoul. Leasing demand for some of these new completions attracted tenants from various industries, including cosmetics and fashion tenants.

New enquiries eased in Singapore. Nonetheless, available pockets of space arising from non-renewals or pre-termination were quickly taken up by occupiers with immediate space needs. Activity fell in both Sydney and Melbourne. High rents and limited availability restricted greater take-up.

Slowing rental growth

Rental growth continued to decelerate, as weaker demand and high vacancy rates hindered landlords’ ability to raise rent levels. The pressure on rents was most evident in Greater China, where quarterly rents declined once again in 1Q24 due to low occupier sentiment and ongoing macroeconomic challenges.

Despite an increase in supply, Tokyo recorded marginal rent growth. This was driven by upward pressure from rising land prices and persistently high construction costs. However, incentives are growing as vacancy levels continue to rise. Seoul rents rose modestly over the quarter, while Singapore rents maintained its upward trajectory for the 12th consecutive quarter. Still-low vacancy rates coupled with steady demand pushed both Sydney and Melbourne rents higher in 1Q24.

Patchy capital market activity

Investment activity throughout the region remained inconsistent, with many investors adopting a selective approach because of still high debt costs. There was a scarcity of major deals across Greater China. Beijing and Shanghai saw no significant transactions, while Hong Kong investment volumes were again down on a q-o-q basis.

Despite the Bank of Japan’s shift to a more hawkish monetary policy stance, Tokyo’s logistics market remained relatively attractive to investors. Nonetheless, activity remained subdued. In Seoul, activity was also relatively limited, with a major deal being the transaction of the Logiport Osan Logistics Center for KRW 125 billion.

Singapore remained an appealing market, with investors banking on rent growth and wide yield spreads. Both Sydney and Melbourne recorded robust investment activity, showcasing the resilience of the logistics sector.

Investment yields were either stable or decompressed across all major markets in 1Q24. Greater China yields rose again amidst a challenging investment environment. Offshore capital generally remains on the sidelines. Stable market conditions translated to flat yields in Tokyo, Seoul and Singapore, while the pace of decompression slowed in Sydney and Melbourne.

Challenging conditions ahead, but upside in some markets

The outlook for 2024 is influenced by persistent macroeconomic challenges, although there is a potential upside with the possibility of rate cuts in the future. However, rate cut expectations are continually being revised further back, and many (not most) forecasts now do not expect a rate cut until 2025.

Rental growth is expected to decelerate because of high vacancy rates. The upside is that there are indications that vacancy has stabilised, particularly as supply begins to moderate. The challenging development financing environment is still causing delays across multiple markets. This could help demand catch up in the next 1-2 years.

Investment markets will remain broadly challenging in 2024. With a more distant and shallower interest rate cut cycle, investment activity will likely be further tempered this year. Hurdle rates will remain high, making capital deployment difficult across core strategies. Value-add and opportunistic strategies will continue to be a focus for many groups. The yield cycle continues to broadly converge across the region, with yields forecast to continue to rise across most markets in 2024.

¹ Beijing, Shanghai, Hong Kong, Tokyo, Singapore, and Seoul (net absorption is not currently tracked in Sydney or Melbourne)