Is The Easy Property Money Outside Asia?

Source : The Business Times, June 25, 2008

In the property world, the momentum appears to be with Asia. Funds designed to buy offices in Tokyo or build homes in China and India are sucking up money from Western investors eager to enter a region so far only grazed by the global credit crunch.

But is the easy money to be made elsewhere? Maybe in the ravaged London market, in the United States in a few months if price declines slow, or even in undervalued Asian property stocks rather than in bricks and mortar?

Less attractive glow: Many Asian office markets, like Tokyo's (left), are slowly approaching cyclical peaks, and are then expected to hold steady

At this week's Reuters Global Real Estate Summit, fund managers ING Real Estate and LaSalle Investment Managers, the property arm of British insurer Prudential and Dubai's ETA Star Property Developers all said they were raising new funds this year to invest in Asia.

Hailing strong regional growth and a more mature investment landscape in Asia, where the advent of real estate investment trusts (Reits) has brought more transparency to the murky world of property development, the funds are aimed at pension funds and insurers.

And many investors are buying it.

Property investment in Asia reached a record US$121 billion last year, up 27 per cent from 2006.

While the credit crunch took its toll in Europe and North America in the second half of the year, pushing down global transaction value by 8 per cent from the same period of 2006, investment in Asia surged 22 per cent in the last six months.

Much of the flow from the West to Asia is about balancing portfolios. For example, German open-ended funds such as Union Investment Real Estate and grundbesitz global are starting to buy in Tokyo to diversify away from Europe.

'Among institutional investors, there's incremental appetite for Asia,' said Richard Price, Asia head of ING Real Estate, as he told Reuters about plans for a US$750 million fund for China and another of up to US$500 million for Japan. 'But the question is, as their home markets reprice, will Asia be as compelling?'

Funds raised for Asia are excited about the prospect of Japanese landlords selling offices at discounts and of a potential shake- out among Chinese developers that could release cheap land and unfinished projects.

The credit crunch has made Japanese banks more conservative in their lending for property deals, threatening to soften prices of small and second-grade buildings. Yields on Grade B office blocks have risen by 50-100 basis points in the last year.

In China, government attempts to cool the economy include cutting back loans to developers, who now are starting to struggle for finance because of a dismal market for public share offerings. Firms with little cash on hand and few other funding options will be under pressure to sell assets.

But many Asian office markets are slowly approaching cyclical peaks, and are then expected to hold steady.

Meanwhile, in Britain, office values have slumped 18 per cent from their peak last year, and investors believe they are free from the headaches of red tape, corruption and dodgy land titles of some emerging markets.

'I'd be a buyer of London offices now,' said Asieh Mansour, chief strategist at Deutsche Bank's property investment arm, RREEF.

In Europe, fund managers and analysts are putting their faith in the continent's inflation-linked rental contracts to boost yields, which are already widening because of falling values.

US commercial buildings are also starting to attract interest from around the world, with prices seen dropping a further 10 per cent in the next year after a roughly 5 per cent fall since mid-2007. -- Reuters