Asian economies escaped the worst ravages of the global financial crisis, giving a boost to property markets. But is a bubble developing? Paul Benjamin finds out
While it remains to be seen if this really does become the much vaunted ‘Asian century', there's no doubt that Asia's real estate markets have kicked off the new decade in far better shape than those in the US and Europe.
Asian economies were relatively quick to rebound from the global financial crisis, helped by massive stimulus packages financed by governments with deep pockets, and Asia's financial institutions stayed out of the worst sub-prime exposures.
These factors, backed by the solid fundamentals of large populations, rising household incomes and rapid development in the global powerhouses of India and China, leave many analysts upbeat on the outlook for Asia over the coming two years.
Simon Treacy, CEO of Asia Investments with MGPA, says: "Asia is certainly off the bottom and growth should be in evidence by the end of 2010 in commercial office markets. The talk now is that various parts of Asia are experiencing a bubble, but I don't think that's the case.
"It will take another 12 months for sustainable growth to return regionally. The key issue for 2010 and 2011 for the real estate markets is the pace of employment growth. Current employer intentions seem positive and are backed up by feedback from headhunters and employment agencies, which go particularly well for markets like Tokyo, Hong Kong and Singapore."
Andrew Ness, executive director of research, CBRE Asia, says: "Domestic investors will continue to dominate most of the activity and snap up properties for long-term investment. Those recapitalised international institutional investors, including private and public equity funds, are also returning to the market and scouting for suitable investment opportunities.
"The Asian real estate investment market will remain relatively stable in the first half of 2010. In particular, investment activity in the China, Hong Kong, Japan and Singapore real estate markets is likely to firm up, as these markets are traditionally the centres of investment activity, and made up the largest proportion of capital inflow over the past
Asia holds a giddying range of cultural, economic, political and geographic diversity. For investors the many markets can be broken down into a few groupings. Japan stands apart as Asia's largest and most mature economy. China and India are the superpower high-growth success stories of the past two decades, both with massive populations and aggressive construction programmes.
Beyond that are what used to be more widely known as the Asian tigers - a group of four countries and city states which posted high growth from the 1960s onwards. These are effectively quite mature markets now, especially Hong Kong and Singapore, while Taiwan and South Korea are also of interest. Across Southeast Asia there are several smaller, less advanced economies such as Vietnam and Indonesia, which can offer a riskier play. And finally, Australia is the ‘western' market of greatest interest in the region.
Turning to China, which most forecasters expect will post GDP growth of near 10% this year, Treacy says: "China's economy and real estate markets are literally ‘on steroids' as a result of a US$580bn (€425.77bn) government stimulus package. In early February however the government moved to curtail lending, which is reducing sales of residential properties. Bubble or not, what's clear is that China's growth will continue for many years to come and recent changes promoting RMB funds and REITs will only spur markets, hence making it more difficult for expensive foreign capital to compete with local capital and developers. China's urbanisation programme over the next 20 years of 200m people flooding into the cities provides long-term growth. Moreover, if the Chinese start spending a fraction of their savings then China could become the world's largest real estate market by 2020."
Core interest in China has focused on Beijing, Shanghai, Guangzhou and Shenzhen, with a slew of regional capitals and second tier cities, such as Hangzhou and Dalian, also fighting for attention. Differences across Chinese cities and sectors can be great so, as with India, sound local knowledge of regional markets and regulatory attitudes is vital.
Ness expects that ongoing worries that the stimulus is inflating a bubble, especially in residential property, will result in more state regulation over the first half of 2010. This should lead to more stabilised activity in the second half of the year, he says.
The retail sector remains very attractive to investors as Chinese consumer power continues to grow. Competition for prime first tier sites is intense, and there is a shortage of quality investable malls in second tier cities. CBRE sees the latter markets maturing over the coming years and attracting growing involvement from foreign developers.
Ness says: "Insurance funds have increasingly been searching for suitable investment targets after October 2009's rule change allowed them to invest in real estate. Despite the fact that such companies have yet to finalise any pure investment transactions, the capital being set aside to be deployed by insurance funds for real estate investment in the future is expected to be substantial."
Asia's other great economic driver is India, which may have weaker infrastructure and less impressive growth rates than rival China, but nonetheless shares its massive urbanising demographic and growing, aspirational middle class. Core cities include Mumbai and Delhi, and the IT and outsourcing hotspots of Bangalore and Hyderabad. The real estate picture varies among these cities, but overall the economy is in a good place, with the IMF foreseeing GDP growth of 7.7% in 2010.
Abhishek Kiran Gupta, head of research, Jones Lang LaSalle Meghraj, says that residential housing fared better than other asset classes during the downturn and that commercial real estate was severely affected - gross rental values declined in the range of 25-40% during 2009.
Looking at the coming years, he says: "There's huge demand in the affordable housing segment. The share of capital flows in the sector has steadily increased since the second half of 2008 and this is likely to be the trend in the entire recovery process. Office real estate sector would follow the recovery in the residential sector, primarily because of the emergence of sectors such as telecom, pharmaceutical and domestic business process outsourcing at a time when the IT sector has slowed down significantly. The retail real estate market may continue to be sluggish for the better part of 2010-11 and may be the last to witness signs of recovery. Also, we may see a synthesis of high street and mall structure, which may lead to a paradigm shift in retailers' profile in the malls."
Japan's mature market has long-standing appeal for investors, who focus on Tokyo and a number of major cities such as Osaka and Nagoya. Retail tastes are highly evolved, infrastructure is developed and, while foreign investors sometimes complain about cultural barriers and troubles sourcing opportunities, it is a relatively stable market that's impossible to ignore.
However, Japan is currently the exception to the Asian growth story, and the economy remains in a fragile state, with weak consumer demand and low capital investment. A number of recently released high-end office developments in Tokyo have performed disappointingly, but activity is expected to pick up with a trend in developers demolishing B-grade offices and replacing them with higher quality offerings. Improvements in earthquake proofing also allow taller developments.
CBRE's Ness says: "While Tokyo is not expected to witness a strong rental rebound at any time in the near future, the city is expected to grow at a much brisker pace than Japan overall. Once we get past the present down cycle, office rentals can be expected to resume their slow but steady rise. Tokyo, as perhaps Asia's most mature office market, is not prone to violent or sudden changes in the supply-demand dynamic."
Treacy says: "Demand in the domestic economy and real estate market, including lending, has been sluggish. Tokyo is starting to recover but other cities like Osaka have fallen off a cliff. That said, Japan has many competitive advantages and it would be short-sighted to ignore the world's second largest economy. Tokyo in particular looks like a buy in terms of the office market where prices are at 10-year lows and below replacement cost."
Australia only saw one quarter of GDP contraction during the downturn, thus ducking a technical recession, and last October it was the first G20 country to raise interest rates. Its ongoing growth story, rising population fed by immigration, and English-speaking environment continue to draw investor interest.
Simon Storry, director of international investments with JLL in Australia, says: "The big theme that has been present for the past six months is the large flow of capital coming in - into equities and into property.
"The Australian market is currently attractive to foreign investors due to its high level of transparency, low interest rates, lower hedging costs, relatively stable returns, lease tenure and strong covenants which offer an attractive market for investors who are seeking to lower volatility in their portfolio.
"Sydney and Melbourne will continue to be the most attractive cities for foreign investors because of their role as financial services hubs and because they have the largest property markets in Australia."
Weak housing supply, an improving jobs market, and low interest rates helped residential prices rise 12.1% in 2009, according to Australian Property Monitors, although that is set to moderate over 2010. There has been a revival of interest in retail expansion, and the strong commodities base should ensure logistics facilities remain attractive. However, higher interest rates, the lack of affordable residential, and a persistently strong Australian dollar could challenge various markets.
Scott Girard, chief investment officer with PRUPIM, said that of the many smaller markets
scattered across Asia, Indonesia is particularly eye-catching.
He says: "Economically the country has held up well and the government finances are in reasonable shape. There's strong population growth over the medium term and it's relatively stable politically. The downsides are that it's an emerging market."
Indonesia enjoyed full-year GDP growth of 4.5% in 2009, which was slightly higher than the government's forecast, and largely due to strong exports and resilient consumer spending. The IMF has raised its estimate for Indonesia's GDP growth rate to 5.5% this year.
Girard says: "Residential opportunities are going to grow, while office is quite limited and not overly liquid. It's also a market where we expect an increase in retail. GDP is now reaching a level where you will see an increase in aspirational consumption."
Indonesia's growth has been hobbled by its woeful infrastructure. Traffic congestion - a big issue in many Asian cities - is nightmarish in the capital, Jakarta, where most of the country's investable real estate is focused. Ageing ports and railways hamper logistics, and power cuts affect many parts of the country. The government reckons US$214bn of physical investment is needed over the next five years, and plans for a subway system in Jakarta are underway.
Indonesia also suffers from high corruption and low transparency - issues which are a factor in many Asian markets, including the regional powerhouses of India and China. The threat of political instability has also put investors off Southeast Asian nations such as the Philippines, Indonesia and, more recently, Thailand, but PRUPIM's Girard says the overall climate has improved markedly over the past five years.
While GDP expectations for the region are being continually revised upwards, and 2010 looks like a year of certain recovery, risks do remain. Barriers to entry in many markets are high, the cultural landscape can be bewildering for newcomers, and there are pockets of oversupply, particularly in office, that will soak up growth this year.
The biggest question mark for 2010 and beyond is how the private sector will fare once the government cash starts to fade, and whether Europe and the US will falter, dragging Asian exports with them. Investors are also wary that legislators will overdo regulatory controls in 2010, which could damage recovering markets.
Girard concludes: "The true challenge for Asia will be how the economies perform once the stimuli start to be removed over 2010. They need to avoid turning into an asset bubble and to get to sustainable growth in 2010. That will be challenging for policy-makers and investors."