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TAIWAN

Greater China Real Estate Market Outlook 2020


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TAIWAN ECONOMY
STEADY ECONOMIC GROWTH TO CONTINUE

 

TRADE WAR SPURS INCREASE IN CAPITAL INVESTMENT

The Taiwanese economy grew by 2.64% y-o-y in 2019. Growth was supported by solid domestic demand, with private consumption and investment both trending upward. Household consumption rose by a steady 2.0% y-o-y on the back of a mild 2.2% y-o-y increase in average salaries, coupled with the bullish performance of the TAIEX, which surged by 23% over the year.

Total exports contracted by 1.4% y-o-y in 2019, due mainly to U.S.-China trade conflict. However, gross fixed investment by private enterprises increased by 7.61% y-o-y, thanks to robust capital investment by semiconductor companies and China-based manufacturers reshoring operations back to Taiwan.


PRIVATE INVESTMENT TO continue Driving ECONOMIC GROWTH

Taiwan’s Directorate General of Budget, Accounting and Statistics expects GDP to rise by 2.72% y-o-y in 2020, supported by a continued increase in private investment in the development of 5G networks. Authorities expect the coronavirus outbreak to have a limited impact on the Taiwanese economy, with GDP growth anticipated to slow by less than 0.3%.

Growth in the next three to six years will be supported by China-based Taiwanese manufacturers relocating production lines back to Taiwan. The Ministry of Economic Affairs estimates that a total investment amount of NT$226.7 billion will be realised in 2020. Business confidence among foreign firms is expected to be stable.

Despite the more positive GDP growth outlook, the Taiwanese central bank will likely keep policy rates unchanged amid moderate economic growth and limited inflationary pressure. The prolonged low interest rate environment will favour real estate investors, with owner-occupiers to remain in buying mode.


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TAIWAN OFFICE
RENEWALS TO DOMINATE LEASING ACTIVITY

 

STRONG DEMAND ENSURES STEADY RENTAL GROWTH IN 2019

Grade A office net absorption in Taipei stood at 98,073 sq. m. in 2019, the third highest annual total in the past 20 years. The period saw solid relocation activity arising from upgrading demand, with the three new Grade A office buildings completed in 2018 all achieving occupancy of over 90% within 18 months of opening.

Leasing demand was driven by multinationals, primarily those in the TMT and financial services sectors. Flexible space operators also emerged as a major source of demand in 2019, with selected international brands expanding their footprint in Taipei.

Grade A office vacancy fell to 5.1% in 2019 from 7.0% in 2018. Relatively low vacancy ensured landlords gained the upper hand in negotiations, with many property owners adopting a firmer stance towards rents and terms. Grade A office rents rose by 3.1% y-o-y to NT$2,790 per ping in 2019, the strongest annual growth for 11 years.


LEASING MOMENTUM SET TO REMAIN STABLE

Companies’ hiring intentions are expected to remain stable in 2020, supported by steady economic growth. A survey conducted by the Ministry of Labour in Q4 2019 found that 21% of employers surveyed displayed a willingness to add headcount in the coming months, with only 3% planning to reduce headcount. This points to stable leasing momentum over the coming quarters.

Enquiry levels from medium-sized enterprises are expected to be robust during 2020. However, falling space availability will drag on leasing activity, with Grade A office net absorption forecast to decline to around 37,000 sq. m. in 2020. Leasing activity in the first few quarters of 2020 will be dominated by renewals.


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TAIWAN OFFICE
TAIPEI TO REMAIN A LANDLORD'S MARKET

 

LOW VACANCY TO IMPEDE RELOCATIONS

The absence of new office supply combined with stable leasing demand is expected to push down Grade A office vacancy to 2.6% by the end of 2020, the lowest level since 2001. The scarcity of medium and large-sized office units will hinder relocation activity, forcing more tenants to remain in their current location.

Technology companies and financial institutions will continue to drive leasing demand in 2020. Large occupiers, particularly foreign banks, are expected to embark upon relocations over the next three to five years to accommodate growing spatial needs.

International flexible workspace operators will also remain active in opening new centres as they seek to enlarge their market share. However, their rate of expansion will decelerate due to the lack of available space.


RENTS POISED FOR FURTHER GAINS

The Taipei office leasing market is set to continue to favour landlords in 2020. The lack of new office supply over the next three years will encourage Grade A office landlords to maintain asking rents at record highs. Tenants seeking renewals will face the prospect of higher rents, with occupiers in Xinyi-Jilong Area likely to experience increments in excess of 10%.

Although rents for existing tenants will likely be raised to market levels upon renewal, rents for new leases will be less aggressive as many tenants are unwilling to chase prices higher. Grade A office rents in Taipei are therefore expected to grow moderately by 2.3% y-o-y in 2020.


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TAIWAN RETAIL
FIRM DOMESTIC DEMAND SUPPORTS STEADY RETAIL SALES GROWTH

 

RETAIL SALES RECORD SOLID GROWTH

Domestic retail sales rose by 3.1% y-o-y in 2019 on the back of robust sales at general merchandise stores. Sales of general merchandise retailing increased by 4.1% y-o-y, which prompted operators of shopping centres, convenience stores and big-box stores to open new stores.

E-commerce continued to grow, with online sales surging by 9.7% y-o-y over the course of 2019. While some online retailers opened physical stores, an increasing number of brick-and-mortar retailers launched omnichannel platforms to broaden their customer base.

F&B receipts rose by a steady 4.4% y-o-y in 2019, underpinned by strong demand for eating out. The increasing popularity of online food delivery platforms also fuelled F&B sales growth, which encouraged F&B retailers to further add to their footprint. Several mall operators increased the percentage of F&B tenants in their properties as they sought to attract local consumers. The year also saw several Asian restaurant brands open their first outlets in Taiwan.


INBOUND TOURISM CONTINUES TO GROW

Foreign visitor arrivals to Taiwan increased by 7.8% y-o-y to 10.72 million in the first eleven months of 2019. According to preliminary estimates, total visitor arrivals in 2019 are expected to reach 11.7 million, the highest in history. However, arrivals from mainland China fell by 51% y-o-y between September and November following a travel ban imposed by Beijing in August.

Souvenir shops and duty-free stores were negatively affected by the fall in Chinese tourists, posting sales growth of -3.7% y-o-y in the period between September and December 2019. Luxury watches and jewellery retailers reported a -3.9% y-o-y decline in sales in the final four months of 2019 despite stronger demand for luxury goods from local shoppers amid the bullish stock market.

Consumption expenditure by non-residents accounted for 3.3% of total retail sales in Taiwan in 2019. While a selected number of retailers will experience weaker sales in the next few quarters as a result of the decline in Chinese visitors, the retail industry is expected to remain stable in 2020 on the back of firm buying intentions among local consumers.

Other headwinds include the coronavirus outbreak, although the impact on the local retail market is expected to be short-lived. Restaurants may be hard hit in the short term but sales of e-commerce could increase as shoppers spend more time indoors.


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TAIWAN RETAIL
HIGH STREET RENTS EXPECTED TO STABILISE

 

RETAILERS TO RESUME EXPANSION IN H2 2020

Domestic retail sales are forecasted to grow by 2.9% y-o-y in 2020 as consumer confidence strengthens on the back of the positive labour market and a 3.0% increase in the monthly minimum wage, effective from January 2020. Local consumers are expected to remain in buying mode for the foreseeable future, encouraged by the wealth effect resulting from the strong stock market.

Taipei high street retail rents fell by 3.8% y-o-y in 2019 as some landlords lowered asking rents significantly to fill vacant space. In light of lower vacancy in selected shopping districts, average high street rents are set to stabilise in the coming months, rising by 0.2% y-o-y over 2020. Landlords in shopping districts with higher vacancy will continue to adopt a less aggressive stance towards asking rents to attract potential tenants. However, many retailers will remain cost conscious in the coming months, with some opting to wait until H2 2020 to open new stores.


RETAILTAINMENT TO REMAIN POPULAR

Leasing activity this year will continue to be driven by F&B retailers – especially large F&B groups launching new brands – amid strong consumer demand for dining out. Retailers in the beauty and personal care segment will be active, with many groups seeking to open experience-based stores. Leisure and entertainment retailers, particularly fitness centres, will also comprise a major source of leasing demand.

Retailtainment is being widely adopted by retail landlords in Taipei. Many shopping mall operators have increased the frequency of tenant mix adjustments to keep up with consumers’ rapidly changing tastes, while others are expected to carry out small-scale refurbishment projects in 2020 as part of a broader focus on placemaking.


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TAIWAN CAPITAL MARKET
MARKET SENTIMENT TO REMAIN POSITIVE

 

INVESTOR INTEREST STRENGTHENS IN 2019

Commercial real estate investment turnover in Taiwan amounted to NT$105.1 billion in 2019, the second highest annual total in the past five years. The high transaction volume was largely due to improved investor interest amid increased business confidence resulting from reshoring by Taiwanese manufacturers. Local owner-occupiers displayed robust purchasing demand, collectively accounting for NT$49.8 billion worth of deals, representing 47% of total transaction volume.

Domestic insurance companies turned more active in 2019, completing NT$13.5 billion worth of deals, an increase of 126% y-o-y. The lack of investable core assets in prime locations prompted many local insurers to consider to other asset classes generating long-term stable income, such as logistics centres and medical offices.

Strong demand from owner-occupiers ensured industrial assets were the hottest sector in 2019. Total investment turnover of factories across major industrial parks in Taiwan rose by 17.3% y-o-y to NT$28.9 billion. Office properties remained keenly sought after, with total transaction volume standing at NT$27.8 billion. The lack of large contiguous space available for sale encouraged several large domestic occupiers to purchase office assets currently under development – a trend that is expected to continue in 2020.


NEW OFFICE DEVELOPMENT PROJECTS IN THE PIPELINE

Land investment volume increased by 83.5% y-o-y in 2019 as local developers aggressively added to their land banks. The upbeat office leasing market is stimulating developers’ interest in constructing new office buildings. Several developers are also seeking to diversify their operations by embarking upon development projects in the hotel and retail sectors.


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TAIWAN CAPITAL MARKET
INVESTORS TO FOCUS ON INCOME PRODUCING ASSETS

 

MANUFACTURERS EYE INDUSTRIAL PROPERTIES

The Central Bank of Taiwan has kept benchmark interest rates unchanged for the past three-and-a-half-years, a policy that it is expected to retain in 2020. The low interest rate environment will support solid purchasing demand for commercial properties from owner-occupiers. However, low interest rates will place property owners under little pressure to sell, enabling them to hold asking prices firm. Negotiations may lengthen as the price gap between sellers and buyers increases over the course of 2020.

The government has launched a three-year programme, commencing in 2019, to offer support and incentives for Taiwanese manufacturing firms intending to relocate production from China to Taiwan. An increase in returning manufacturers, along with local electronics companies seeking expansion, will continue to drive interest in industrial properties in 2020.

However, the already high prices for industrial assets in northern Taiwan may inhibit investment activity in the area, and encourage owner-occupiers to consider buying industrial land and facilities in the central and southern regions.


OFFICE INVESTMENT ACTIVITY TO REMAIN ROBUST

Office properties will remain popular among institutional and private investors given the sustained upturn in the leasing market. However, limited availability of en-bloc offices has forced investors to purchase strata-titled offices and development projects.

CBRE expects selected developers to pre-sell office and I/O units in decentralised areas of Taipei in 2020 to local enterprises hunting for headquarters space. Local asset management firms and selected insurance companies are likely to display strong interest in acquiring strata-titled office floors in CBDs.

Local insurance firms will remain active in the investment market in 2020, mainly focusing on income-producing properties. Commercial properties with long-term lease agreements will attract interest from insurers, of which some are increasingly willing consider properties located in major cities other than Taipei. A few insurance companies will continue to invest in logistics facilities and warehouses to obtain higher returns.

Pricing will largely remain stable in the next few quarters as most buyers are price sensitive and reluctant to pay above market values. Prime office yields are forecast to rise marginally to 2.64% in 2020 on the back of modest rental growth. Despite limited investable stock, retail capital values may decline over the coming year as some landlords lower prices to attract investor interest. Average retail yields are expected to increase slightly to 3.15%.


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Greater China Market Outlook 2020

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Contacts

Ada Choi
Ada Choi, CFA
Head of Research, Greater China
& Head of Occupier Research, APAC
+852 2820 2871
+852 2810 0830
$name
Sam Xie
Head of Research
China
+86 21 2401 1318
Ping Lee
Ping Lee
Head of Research
Taiwan
+886 2 7706 9552