Wait-And-See Stand In Property Plays

Source : The Business Times, March 27, 2008

The impact of the US economy would play a big part in deciding the course of the property market here this year, says CHUA CHOR HOON

PROPERTY markets in Asia-Pacific were largely insulated from the US sub-prime fallout last year, basking in strong economic growth and sustained demand.

Going into 2008, market conditions appear stable and the region's economies are holding up well. Still, much will depend on how the problems in the United States play out.

With the attraction of lower prices and growth opportunities, investor interest in regional property was high last year. This translated into investments worth US$118 billion for Asia-Pacific. Singapore attracted the highest quantum of investments, followed by Australia.

Singapore's investment sales last year stood at a record $41.5 billion, 68 per cent more than in 2006. In the first nine months alone, sales had already surpassed that of 2006 by 38 per cent. This was due mainly to the robust economy, good property market performance and active collective sales in the first half of 2007. Although there was a 30 per cent quarter-on-quarter decline in investment activity in the fourth quarter of 2007, local factors seemed to hold more sway in investment decisions than the US sub-prime crisis.

For example, in the office sector, prices of prime space in Raffles Place have more than doubled, leading to yield compression. In the residential sector, prices in prime districts have also risen more than 50 per cent. The withdrawal of the deferred payment scheme added to the cautious mood.

Collective sales, which drove the investment market in the first half of 2007, also slowed due to a tightening of regulations which lengthened the process of putting a development up for tender.

Among Asian countries, Singapore's office rental grew the most due to strong demand, mainly from the financial sector, coupled with limited supply. Hong Kong and Shanghai were the next strongest markets. Prime residential rentals in Singapore saw the biggest jumps too, due to high expatriate demand amid a reduction in supply as many developments in the prime districts underwent collective sales. In contrast, prices of luxury units in Kuala Lumpur and Shanghai fell due to oversupply. Retail rentals were stable for most Asian countries, except for Shanghai which saw tremendous growth of almost 120 per cent. Singapore's prime retail rents rose moderately by 6.6 per cent.

2008 outlook

For now, market conditions seem stable and most of the Asia-Pacific economies are holding up well. However, if the sub-prime fallout persists and the US and European Union economies continue to slow, both export-driven economies and tertiary economies will be affected. The GDP growth rates for the Asian countries are forecast to fall slightly, with the exception of Thailand which is likely to see better GDP growth now that the elections are over. In the Asia-Pacific region, China and India are expected to be most immune to the sub-prime crisis as they have strong domestic demand to buffer the fall in export demand.

There is evidence that European and US funds are directing their attention to this region where they see growth opportunities in countries such as China, Vietnam, India, Thailand, Hong Kong and Singapore. With rising affluence and a wealthier middle class, there is strong domestic demand for housing in China, India and Vietnam. Vietnam's official accession to the World Trade Organization (WTO) in 2007 will pave the way for a more open market economy and attract more foreign investments. Thailand's property market has not risen as much as other Asian markets in the last two years due to its political situation and prices are relatively attractive.

Hong Kong and Singapore are still attractive despite higher prices and rentals because of their more developed infrastructure and connectivity. On the other hand, some Asian funds are also looking at Europe and US now that their prices have become more competitive.

On the whole, there is increasing investor interest from Japan, Korea, China and the Middle East. The Japanese are reviewing options to lift restrictions for Japan real estate investment trusts (J-Reits) to invest in overseas real estate. The rise of sovereign wealth funds from Asia and the Middle East will also contribute to the investment market.

The fundamentals supporting the Singapore property market are strong, with low interest rates and many exciting events and economic investments coming on stream. These would bring in more tourists and jobs. However, for the moment, many property investors and developers are adopting a wait-and-see stance. Developers in Singapore are holding back launches and some funds are holding off making investments at least for the first half of 2008, before the extent of the slowdown in the US economy and its impact globally are clearer.

The impact of the US economy would therefore play a big part in deciding the course of the property market this year. Although fundamentals are strong, sentiment plays a big part.

Nevertheless, there is a silver lining to the caution brought about by the sub-prime problem. Many property markets around the world are in bubble territory on the back of strong economic performance and many investors are getting carried away with the notion that prices will keep rising. If the sub-prime woes had happened later, prices and rentals would have continued to rise. And any fall, happening much later in the property cycle, would have been more painful.

Chua Chor Hoon is senior director at DTZ Research, Singapore