Asia-Pacific economies continue to outpace other regions of the world, whose growth prospects have weakened over the first half of 2013. The impact of this can be seen on the real estate demand in the two largest economies of the region.
India and China stand out with the largest future supply of office space in Asia Pacific. According to Knight Frank's Asia Pacific Markets Review, both regions are set to witness between two–four million sq metres of supply till 2015.
The report states New Delhi, Mumbai and Bangalore are among the top destinations in Asia Pacific with future office supply close to three million sq metres despite a slowdown in prime office occupier markets.
While India's economy is struggling, it is growing at a faster rate than in 2012, and the office markets have shown solid net absorption. Rents have moved sideways and are expected to continue this trend, given the significant new supply that is expected to come online over the next 36 months, it added.
In China, the general slowdown of the economy has trickled down to the office market, where prime rents in Beijing, Guangzhou and Shanghai declined over the first half of 2013.
"Not surprisingly, the two giants of the region, China and India, stand out with the largest future supply. While Shanghai has proven to be the largest market in terms of net absorption over the last decade, the significant supply pipeline raises questions as to the ability of developers to meet local demand without creating an oversupplied situation in specific localities," said the report.
Property, however, continues to be attractive, thanks to its income appeal and hedge against inflation. Prime yields have compressed across nearly all markets over the first six months of 2013, as significant capital is chasing limited stock. Secondary yields where tenancy risk is deemed more significant have remained stable in the majority of markets. Bangalore, Mumbai and Delhi are top destinations in Asia Pacific with prime office yields of around 10 per cent.
"Investors continue to take a cautious view on the Indian economy, which is currently running a high current account and fiscal deficit with a forecast for a relatively slower growth in 2013. While weak consumer demand, high cost of funds and regulatory hurdles may serve as impediments in the way of investments within the real estate sector, city-level market dynamics will be the ultimate factor determining the way forward," said Rajeev Bairathi, executive director- capital transactions & north- Knight Frank India.