Behind the office boom
Tech stocks may be out of favour as pandemic wanes but technology is powering recovery in Asia’s commercial property sector
In global equity markets, sentiment towards the technology industry has cooled markedly since the Covid-19 vaccine breakthrough last November. Having been the biggest beneficiary of the lockdown-induced shift to work and play at home, tech stocks are suffering from a reallocation of capital towards sectors that benefit most from the reopening of the global economy.
Other headwinds for tech shares include the sudden rise in benchmark US government bond yields, mounting pressure from regulators and dangerously high valuations.
In a sign of the extent to which investors are more cautious towards the sector, the New York Stock Exchange’s FANG+ index – which tracks some of the world’s largest tech companies – is down 10 per cent since February 16, having surged more than 100 per cent last year. However, there is little consensus in markets on what the new normal will look like once the pandemic ends.
Technology was a disruptive force long before the virus struck and has become more potent in the past year. In the commercial real estate industry, the tech sector is a crucial source of demand for office space, while digitisation is one of the most popular themes in investment markets.
Nowhere is this more apparent than in Asia, the world’s fastest-growing e-commerce market. Data in February by eMarketer shows that 52 per cent of China’s total retail sales will come from e-commerce by the end of this year, the first country where online transactions will account for the bulk of retail spending.
In Asia’s office leasing markets, the tech sector – which had already overtaken traditional office-occupying industries such as finance and professional services as the leading source of demand before the pandemic erupted – has emerged as the engine of recovery.
In mainland China, which is enjoying the sharpest pickup in leasing volumes, companies in the tech, media and telecoms (TMT) sector accounted for a record 42 per cent of leasing activity in the first quarter of this year, according to CBRE data.
More tellingly, tech districts – locations where the TMT sector has accounted for at least 30 per cent of leasing transactions in recent years – continue to outperform the rest of China’s office market, particularly in rental growth, according to CBRE.
As Asia’s tech sector grows both in size and prominence, it is attracting the best talent and acting as a catalyst for a “flight to quality” in the office market as companies favour workplaces that will appeal to, and help retain, top talent in the post-pandemic world.
The pandemic has put the design, performance and location of properties under close scrutiny. Technologically advanced occupiers who require high-specification buildings, amenities and campus-style spaces that can accommodate growth are helping set benchmarks for the market.
“Technology is an enabler for landlords to secure the best tenants and rents,” said Tim Graham, head of capital strategies for AsiaPacific at JLL in Singapore.
Chinese tech firms, which are growing rapidly across the region and buying properties for owner
occupation, are part of a wave of international demand for business parks and high-quality office space in Asia’s main cities that is attracting increasing levels of institutional investment.
A transaction that is illustrative of the appeal of tech-driven occupier markets is last month’s acquisition of The Sandcrawler, a business park in Singapore, by private equity fund Blackstone for US$132 million. Inspired by the Sandcrawler fortresses in the Star Wars films, the building houses tech and media titans including Walt Disney and Lucasfilm.
The attraction of digital content, especially in a relative safe haven like Singapore, reflects the increasing popularity of thematic investing. It aims to identify and capitalise on companies and sectors that benefit from longterm secular trends in the global economy.
In commercial real estate, the virus-induced acceleration of digitisation is the common thread running through the flows of capital into the sector.
In the first quarter of this year, transaction volumes in Asia’s industrial and logistics sector, which has seen demand for warehouses surge as the pandemic pushes more consumers online, increased 26 per cent year on year. It has outperformed all other asset classes, according to JLL data.
Data centres, the warehouselike facilities that power all kinds of online products and services, are even more attractive to certain investors and are increasingly perceived as a mainstream asset class.
In a sign of the extent to which digitisation is driving investment activity across Asia and the degree to which deploying capital in the region is proving difficult for many buyers, experienced logistics developers have begun investing in data centres.
Last week, ESR, the largest Asia-focused logistics property group, announced it had made its first acquisition in Hong Kong by purchasing a building it intends to convert into a 40-megawatt data centre. As an experienced logistics developer, ESR is well positioned to expand into the technically demanding data centre market.
Tech stocks might have lost some of their shine of late. When e-commerce-driven warehouse developers start pouring money into digital infrastructure, though, it is clear that technology is powering the recovery in Asian commercial property.
The tech sector is a crucial source of demand for office space, while digitisation is one of the most popular themes in investment markets