Asia’s Property Market Shines

Source : The Business Times, April 1, 2008

Global investors are showing a lot of interest in Asia because of the region’s strong economic fundamentals, reports UMA SHANKARI

THE future for investment markets across the world is mixed, but Asia should emerge from the current turmoil as the most attractive location, property analysts say.

Coming off the sub-prime crisis in the US, global investors are showing a lot of interest in Asia because of the region’s strong economic fundamentals and problems in other markets.

According to Donald Han, managing director of Cushman & Wakefield (C&W), 20-30 per cent of the investors looking at Asia have dropped off since the sub-prime crisis - but the rest are still interested.

‘If there were 10 investors looking at an allocation of assets into Asia before the sub-prime problem, now there are six or seven still looking,’ he said.

Ong Choon Fah, executive director and regional head of consulting and research at property firm DTZ, agrees.

‘Concern over the US and global economies, as well as the credit squeeze, will continue to impact sentiment in the investment market,’ she said. ‘But prospects remain cautiously optimistic as institutional funds look towards Asia for growth opportunities.’

Citigroup economists Huang Yiping and Chua Hak Bin pointed out similarly - in a recent note - that capital inflows into Asia could increase because of the region’s robust fundamentals and resilient growth.

This growth is set to continue. Asian Development Bank president Haruhiko Kuroda said recently he sees Asia’s growth overall growth moderating to only 7.5-8 per cent this year, from 8-8.5 per cent last year.

But the difficulty of finding good stock to invest in, combined with different regulatory and property rights regimes in different countries, remains a challenge for investors looking at Asia, a recent report from C&W noted.

‘The majority of office stock in most Asia countries is owner-occupied,’ it said. ‘Compared with London and New York, the proportion of investment stock is low. Even Tokyo, the largest market in Asia, is only one third the size of London or New York by floor area.’

Development opportunities in Asia also vary greatly from country to country, and regulations governing foreign investment can change at short notice. China, for example, restricted entry to its real estate market in June 2007 in a bid to avoid hot foreign money creating bubbles in its property market.

Foreign investors now have to establish a real estate company before they can invest in a China project. Establishment, however, is heavily restricted, and investors cannot bypass regulations by acquiring or controlling a domestic real estate company.

But difficulties for foreigners in developing markets may mean increasing interest in Singapore and Hong Kong, which are perceived as easier Asian cities to invest in, C&W believes. Relatively transparent property rights and land registration systems - compared with other Asian cities - mean lower risk.

However, there is a downside of certain classes of investor - especially those with high gearing - falling by the wayside in amid tight credit markets.

For example, the lending squeeze has meant that traditional buyers such as real estate investment trusts (Reits) are holding off.

Reit managers in Singapore and the rest of the world have been growing their portfolios by using cheap credit.

But now, amid a volatile climate and liquidity squeeze, they are finding it more difficult to raise new funds by way of debt or equity, according to DMG & Partners analysts Terence Wong and Brandon Lee.

‘Most notably, rising capital values of properties and higher costs of capital cannot only erode yields, but also lead to dilutive acquisitions,’ they said in a recent note.

C&W’s Mr Han reckons the pace of collective sales will also slow. ‘The en bloc market will be a little quieter this year. It is yet to be seen if vendors will become more reasonable when it comes to pricing their properties, which will make them more attractive to buyers,’ he said.

This could have an significant impact, especially in Singapore, where investment sales in 2007 were boosted by active Reit-related acquisitions and buoyant collective sales in the first half of the year.

‘Investment sales in Singapore and Malaysia increased, driven by strong interest for income-generating buildings and the listing of several new Reits in 2007,’ said DTZ. ‘They were also boosted by strong collective sale of residential properties in Singapore during the first half of 2007.’

Although sentiment has turned, there are still buyers in the market. ‘In the US, there are mainly sellers, not buyers,’ said C&W’s Mr Han. ‘Here, there are still buyers looking to put money into Asia, as the potential for growth remains.’

In particular, investors with stable income - such as pension funds - are likely to be keen on Asia, analysts say.

Strong fundamentals mean the investment market will continue to do well in 2008, they believe.

For example, strong bidding at recent government sales of mass-market residential sites in Singapore shows there is still demand, Mr Han notes.

And DTZ believes investors in Singapore are likely to look towards non-traditional asset classes as yields of ‘core’ and ‘core-plus’ investment assets continue to compress.