Wednesday, May 19, 2010

The attractiveness of Asian real estate

Investors are drawn to region's underlying economic growth, stable yields, expansion of diverse market segments

POST-RECESSION, international property investors are turning their attention to Asia in pursuit of new investment opportunities.

Benefiting from the lessons learnt during the 1997 crisis, Asia was relatively less impacted by the global credit crisis of 2008 and 2009. Today, the region is an exciting investment destination. Relatively stronger fundamentals and a lack of dependence on foreign demand have helped mitigate the impact of the severe recession that has hit much of the rest of the world.

Today, we are seeing a growing trend of institutional and private investor capital flowing into the region's real estate markets. Investors are lured by the underlying economic growth, stable yields, expansion of diverse market segments, as well as the need to broaden their investment portfolios.

Asia's huge demographic shifts, with strong urbanisation and a rising middle class, also present opportunities for developers in diverse sectors ranging from housing, retail, commercial, industrial as well as leisure and tourism. The trend in commercial real estate perhaps best illustrates the point. While global commercial real estate transaction volumes have bottomed, property demand in Asia has visibly risen.

Rising property demand

The average Asian has a higher propensity to save compared to their Western counterparts and given the current low yields on fixed income products and the high volatility of equity markets, this presents a strong motivation for Asians to be attracted to the relative value-benefits of real estate investing.

In addition, succession planning is often a key factor in investment decision-making in Asia where family-controlled businesses are prevalent. The current climate has encouraged many to invest in property markets, which can allow for a more orderly transfer of assets and wealth from one generation to the next.

Asia has relatively well-capitalised financial systems: its banks have not required massive bailouts, and consumer and bank debt levels are lower than in the US, UK and Europe. Under these conditions, investors and businesses have been more willing to borrow, lend and spend.

In recent months, Singapore, Hong Kong and China have witnessed high transaction volumes and pricing, largely fuelled by low interest rates. In some countries, cooling measures have been undertaken to ensure price growth is in line with the rate of economic expansion.

In Singapore, the private property market continues to show resilience with close to 4,000 private homes sold in the first quarter of 2010, according to statistics from CB Richard Ellis (CBRE) . Similarly, Urban Redevelopment Authority data showed that demand for private homes in prime areas continued to be strong in the first quarter of the year

In Hong Kong, real estate prices reached a 12-year high in the first quarter of this year after increasing 7.5 per cent from the end of last year. According to a housing index compiled by Centaline Property Agency, this was largely due to a combination of low interest rates, limited supply and increasing confidence in Hong Kong's economic recovery. Office rents in Hong Kong climbed 5.1 per cent in Q1, exhibiting the largest percentage increase out of 25 Asia-Pacific cities, according to Colliers International, which expects rents in Hong Kong to surge 20 per cent in the next 12 months due to the limited supply of new stock in core locations.

The Seoul office market is one of the best positioned office markets in Asia to ride out the downturn. South Korea benefits from the strong economic ties with the world's fastest growing countries/regions such as China, Asean, Hong Kong and Latin America, which account for nearly half of the South Korean exports.

The economic growth translates into demand for Seoul's office space, particularly the expansion needs from those corporations that have strong business ties with China and other fast growing emerging countries. The structurally stable rental growth (which normally benchmarks to inflation) and the relatively attractive yield of 6.0-6.5 per cent set Seoul office market apart from the high growth but volatile emerging markets (for example, China, Hong Kong) and the stable but low growth markets (for example, Japan, Australia).

Japan, and in particular the Tokyo office market, continues to play a significant role in real estate investment in the region. Tokyo, behind only London, led all cities worldwide in the volume of commercial real estate transactions closed last year. After posting a steep decline in economic activity last year, with a contraction of 5.2 per cent, Deutsche Bank economists expect a rebound of the Tokyo economy with a 2.8 per cent growth rate this year. With the significant amount of short term debt and CMBS rollovers, coupled with high commercial yield spreads, the Tokyo office market will continue to present attractive buying opportunities over the coming 12-24 months.

That being said, countries such as Indonesia and Vietnam are upcoming markets to look out for.

Indonesia is the largest property market in South-east Asia. Although traditionally a closed market, the government has plans to further deregulate the industry. This move will allow foreigners to purchase homes and commercial real estate with direct ownership

Vietnam's growth story in recent years is second only to China in Asia. The property market, particularly in the mass to mid-tier residential market, is largely driven by strong demographic factors. These include the growing rural to urban migration, almost two-thirds of its population being under 35 and higher income levels.

Ho Chi Minh City and Hanoi are also expected to see a doubling of population over the next decade. Similarly, a relaxation in property ownership rules to extend the tenure of foreign buyers from 50 to 70 years will further provide incentives for residential projects of higher quality by overseas developers

In the case of Malaysia, office rentals in Kuala Lumpur continue to fall as more supply will come on-stream over the next three years. But foreign investors have gradually begun to flow in, thanks to the Malaysian government's market liberalisation initiatives made last year.

While China did not come out of the 2008 global recession unscathed, early government intervention and lower levels of debt compared to its western counterparts have helped it weather the storm better than most.

Today, it remains an attractive investment destination for investors due to the sheer size of the country, its strong real estate fundamentals, substantial urbanisation rates, growing middle class and its rise as an economic powerhouse.

Rapid recovery

Since October 2008, the Chinese government has implemented aggressive macro-economic expansion policies, along with fiscal stimulus packages and monetary expansion. These policies have led to the rapid recovery of the domestic market and also signs of a recovery in investment.

The rapid growth in the China economy has led to a 8.7 per cent annual economic growth rate last year. Among the world's major economies, China is surging at an unmatched pace with a nearly 12 per cent growth rate in the first quarter of this year.

Furthermore the number of high net-worth individuals is increasing in China. The number of people with a personal wealth of more than one billion yuan (S$204 million) has risen rapidly since 2004. At that time, there were 100, but as of last year, the number has expanded to 1,000.

Coupled with rising income levels of the middle class, this spells significant opportunities for the real estate sector to grow. Corporate investment and the increase of private sector investment in real estate will also support this growth and sustain the next phase of recovery. The recent approval of domestic insurance companies to invest in real estate as well as the expectation of the development of a China Reit market will continue to foster the institutionalisation of real estate in China.

Undoubtedly, the rise of China will be one of the greatest macro trends of the 21st century. Today, we are already witnessing China's economic growth and its transformative implications across Asia and around the world. I am sure future decades will see an even greater increase in Chinese influence.

The rate of development in Asia today, combined with increasing economic growth and the expanding depth, maturity and diversity of its real estate markets will naturally translate to greater opportunities to come.

The writer is the chairman of the Cityscape Asia Conference 2010, the world's largest B2B real estate investment and development exhibition and conference. Cityscape Asia is taking place from May 18-20, 2010 at Suntec City, Singapore

Source: Business Times, 19 May 2010

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