Real estate replacement cost is the focus topic of this month's Asia Pacific Watch. As we undertake our twice-yearly forecasts of total returns there are many variables we consider – this includes the capital markets outlook on appreciation; and for income growth, we consider rental rate and vacancy level change given upcoming expectations of supply and demand in the next five years. Demand is generally picking up, although for some tenants, caution remains in certain markets and segments.
Supply on the other hand is a mixed bag; we see strong supply pipelines in some markets based on construction plans and approvals data but we also note that at some points in the cycle, the delivery of those projects can be pushed out in time, or sometimes abandoned even before commencement if construction costs have risen faster than anticipated than when projects were in their planning phase. Thus, the sizable regional supply pipeline in the next four years is more likely to be reduced rather than increased in an environment where not only borrowing costs are rising but also where replacement cost line items are increasing rapidly - sometimes far above CPI.
Source : CBRE Global Investors