Cap Rate Movement and Investment Activity in the Asia Pacific Office Sector
The office sector in the Asia Pacific markets has experienced significant movement in cap rates during the second quarter of 2024, as per the Cap Rates Report released by Colliers. Despite relatively low sales transaction volumes, lease transactions have accounted for the majority of the volume in the APAC region.
Office and Retail Sectors Flourishing in Mumbai
Mumbai has witnessed healthy movement in the office and retail sectors. Office rentals have witnessed a promising increase of 1-2% quarter-on-quarter (QoQ). Premium micro markets in the city have even recorded rentals that are 20% higher than the average. This surge in rentals is attributed to superior construction quality and global amenities provided in these areas. This positive momentum in the Mumbai real estate market is expected to continue, with increased interest from both domestic and international investors.
Moreover, there has been a noteworthy drop in the Consumer Price Index (CPI) inflation rate, dipping below 5%. In line with the Reserve Bank of India (RBI) targeting an inflation rate of 4.5% for FY-25, consumer spending is forecasted to rise. The increased spending power of consumers is likely to benefit retail landlords in Mumbai, enabling them to negotiate better lease terms.
Bangalore: Stable Cap Rates for Logistics and Warehousing Assets
In Bangalore, the cap rates for logistics and warehouse assets have remained stable, showing no significant quarter-on-quarter fluctuations. Volume in lease transactions has contributed significantly to this stability. On the other hand, rental rates and capital values for Grade A commercial office spaces have remained flat, indicating no substantial changes in this market segment. Although the interest rate regime has remained stable, its impact on cap rate movement has been limited due to stagnant transaction volumes and no significant perceived changes in risk.
Investor participation in the organized retail segment in Bangalore has been subdued, except for high street retail, which has recorded some traction. However, this traction is mostly limited to leasing, resulting in stable cap rates for this sector.
According to Ajay Sharma, Managing Director of Valuation Services at Colliers India, the increase in rentals in Mumbai and stable cap rates in Bangalore reflect the current market trends. Tenants in Mumbai are willing to pay a premium for well-equipped, premium spaces, leading to increased rental rates. In Bangalore, the overall stable market is sustained by limited investor participation and stability in rental rates.
As we enter the second half of 2024, it is anticipated that an increase in investment activity will be witnessed in the APAC region, driven primarily by stable interest rates and an optimistic outlook for the coming months. The real estate markets in Mumbai and Bangalore are poised for growth in their respective sectors, with several factors contributing to their positive trajectories. The findings of the Cap Rates Report released by Colliers shed light on the current state of these markets and offer valuable insights for investors and stakeholders alike.
