Most of Asia's banks are still in the picture having avoided securitised debt during the boom. However, the global bust is making them much more cautious, as Lynn Strongin Dodds reports

While the property markets in the US, UK and pockets of continental Europe continue to reel from the sub-prime crisis, Asia has held its own in terms of pricing and loan conditions. However, this is now beginning to change and the region is feeling the pinch. First-quarter figures showed both a slowdown in transactions and a stricter lending environment, reflecting the global economic turmoil.
In 2007, Asia Pacific managed to ride out the storm and activity was buoyant throughout the year unlike in Europe and North America where investment dramatically slowed in the second half of the year. In fact, direct commercial real estate investment in the region scaled new heights to $121bn (€77bn) in 2007, up 27% on 2006 figures, according to a recent report published by Jones LaSalle Lang, a property and investment management services firm. Japan led the market, accounting for 50% of total deal flow, followed by Australia, Hong Kong, China and Singapore. Cross-border transactions also increased to $57bn, accounting for 47% of total transactions. All major markets enjoyed the boon, except the Philippines and Thailand, which were constrained by rigid foreign ownership legislation and a lack of available investment-grade assets being offered for sale.
The saving grace was that Asian financial institutions are fairly conservative and did not participate to the same extent as their Western counterparts in the sub-prime party. The property boom was not fuelled by complicated asset-backed and commercial-backed mortgage securities but more conventional bank lending. This might explain why according to Japan's regulatory Financial Service Agency, Asian banks, as of year end 2007, had exposure to only about 7% of the $215bn of sub-prime debt that had been written down.
Kurt Roeloffs, Asia Pacific chief executive officer of RREEF Alternative Investments, says, "ABS and CMBS were not a big feature of the property markets in Asia. The exceptions were Japan, Australia and Singapore but it was still not on the same magnitude as in the US and Europe. The region has many large domestic balance sheet lenders and I think they will continue to do bilateral lending although pricing has become tighter. The credit crunch has created reflux in the region but so too has Basel II and local regulations."
The international Basel II accord requires banks to improve their ability to identify, measure, price and disclose risk in their lending books. The framework came into force in Europe in early January and is due to be adopted by larger US banks next year. In Asia Pacific, the Australian, Singaporean, Hong Kong and Japanese banks are at the forefront while countries such as China, India, Thaliand, South Korea and Malaysia are adopting a more gradual and phased implementation approach.
Youguo Liang, managing director and head of research for Pramerica Real Estate Investors, also believes that the credit crunch is just one factor impacting the Asian real estate picture. Rising inflation and a slowdown in global growth is also taking its toll, prompting both investors and banks to adopt a much more vigilant stance. This means that while overall Asian property investment is likely to be more resilient than the west, volumes will not be as robust as last year's impressive figures.
 "It varies from market to market but we estimate that commercial property transaction volumes will be down between 50% to 65% across the region. South-east Asia, by and large, depends on exports to the US and Europe, and the economic situation is impacting performance in countries such as South Korea, Taiwan, Malaysia, Singapore and China. These factors combined have led to an overall tighter lending environment. In property, average loan to value ratios have dropped by about five to ten points from where they were before the sub-prime problems which is still less than in the US where there has been a correction of between 10 and 15 basis points," says Liang.
Not surprisingly, the drop has been more severe in the region's hottest real estate markets. For example, the April report from Pramerica shows that average LTVs in Japan have declined to about 60% in the first quarter of 2008 compared with about 80% and even higher before the credit crunch. LTVs slumped to about 65% in both South Korea and Hong Kong, while they dropped to about 60% from 70-80% in Singapore. China, on the other hand, has held steady at 50% due to regulatory constraints.
Paul Hart, executive director, Knight Frank Hong Kong, says: "There is no doubt that the cost of money has become more expensive as there is a lot of upward pressure on the inter-bank lending rates. Banks are looking for greater margins and as a result, they have become more cautious. They are now looking long and hard at the quality of the properties and what security the investor is relying on to cover the assets."
Richard Price, managing director for ING Real Estate in Asia, believes that  "people who have a lot of leverage and need to refinance may find it difficult to get funding. For example, they will have trouble if they borrowed at LTVs of 80% when it is now difficult to secure debt at much more than 60% to 65%. I think we will see a combination of equity and mezzanine debt being offered to plug the gap."
 The other cause for concern is Chinese developers who had been flush with funds through generous bank lending and successful initial public offerings on the Hong Kong Stock Exchange. There is a fear that thousands could go bankrupt as the stock market plunges and bank loans dry up. It is unlikely that the Chinese government will ease their plight as it has spent the past few months trying to cool an overheated real estate market.
Last year, banks cut back on lending to developers as well as home buyers as the People's Bank of China lifted the ratio of deposits that must be set aside as reserves. Additional governmental measures included tightening controls over the banking system to make it more difficult for developers to use funds from presales of projects to aid expansion. The clampdown also affected remittances on offshore financing, making it harder for firms to access cash from foreign private-equity firms and hedge funds.
Hart says: "There has been a raft of regulations which have been designed to remove the speculative element out of the real estate market. The biggest risks are the Chinese developers who are not only facing tighter lending conditions but also higher building costs due to rising inflation."