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DTZ Foresight

Asia Pacific Fair Value : investors need to be more selective - Q3 2013

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The DTZ Fair Value Index TM score for Asia Pacific fell against this quarter, down from 76 in Q2 2013 to 65 in Q3 2013. While the US and Europe have shown positive signs of recovery, the outlook in Asia Pacific is plagued by the slowdown in emerging markets. This has led us to make some downgrades this quarter.

India alone accounts for 7 of the 14 downgrades amid disappointing economic growth and weak tenant demand. Expected returns have therefore been revised downwards, which combined with a rise in required returns, has resulted in bigger downward revision in market attractiveness. Downgrades were also made in other emerging markets such as China.

While not all markets or sectors can consistently outperform, some markets in the region are still expected to provide investors with good value propositions. Currently 27 markets are rated Hot, with another 25 rated Warm, meaning a majority of the markets remain an attractive destination to investors.

In fact, despite the retreat, the current score (65) still compares reasonably well to historical levels, driven by low cost of capital as well as continued strength in investor interest in the region.

Going forward, we expect the Asia Pacific Fair Value score to continue to fall over the next two to three  years as required returns increase, meaning that the overall degree of undervaluation will  gradually declin. Therefore, instead of applying a blanket buy to all markets in the region, investors will become increasingly selective over which markets to enter and when to enter. In addition, it is noteworthy that the rise in bond yiels will continue to continue one of the biggest risks to pricing in Asia Pacific.

Source : DTZ (Groupe UGL)