Go boldly, tread carefully
Investors in residential would do well to consider opportunities globally but, as Gail Moss reports, the picture is very mixed, not least in Asia
Residential property prices are booming in the Far East - if you know where to look. Hong Kong rose 15% in value over the past 12 months, while Singapore, with strong GDP growth in 2010 and two new casinos in place, has attracted foreign investors, pushing up prices by 15-20% in the past year, according to Knight Frank in Hong Kong.
One of the outstanding property transactions has been the successful marketing of the D'Leedon complex of 36-storey condominiums located in prime District 10, 85% of which was sold in the first launch early last year.
"Singapore should remain strong as a currency appreciation opportunity, and as economic growth remains strong from the two casinos," says Amous Lee, director of international property investment, Knight Frank Hong Kong. "Furthermore, there are government targets to increase the population, both by birth rates and the foreign talents programme. This will attract more foreign investment."
However, prices in Kuala Lumpur have been static, although Knight Frank says this creates more favourable opportunities for growth than some neighbouring countries.
"It remains very attractive to investors from Singapore, Hong Kong and China, and is also seeing more investment from Dubai and Abu Dhabi," says Lee.
However, there might be problems with China. "In mainland China, local investors have become more nervous about keeping money in their own country after outstanding credit rose by 30%, and in at least seven Chinese cities new home prices surged more than 50% over the 12 months to March 2010," says Lee.
"We believe there's a bubble in the Chinese residential market," says Alan Patterson, head of European research and strategy, AXA Real Estate. "There is great demand from the emerging middle class, but occupancy is not necessarily matching supply, and we are seeing many empty apartments. The argument is that the government controls what's happening, giving comfort that interest rates will be regulated and the bubble won't burst, but we don't know what will happen."
In spite of these concerns, ING Real Estate Investment Management continues to investigate the scope for a second China Opportunities Fund, perhaps via a club deal with investors.
"Although the mass residential market in parts of China may pull back over the next 12 months, with some negative movement in prices in the top tier cities, if it does we think it will likely rebound in 2012 to 2013 because the underlying end-user demand for housing is strong," says Tim Bellman, global head of research and strategy, ING REIM.
And he also expects a 5-10% uplift in Hong Kong residential values for 2011, although he cautions that along with Singapore, the Hong Kong luxury residential market is one of the more inherently volatile markets in the region, partly because leases are short, and partly because much of the demand for luxury apartments is driven by the expatriate community.
"We think the prospects are pretty good for most Asian rental markets because the influx of expats, particularly in Singapore, is driving up rents as far as the budgets of multinational corporations will allow," he says.
If residential in the Far East is experiencing something of a roller-coaster ride, the multi-family market on the other side of the Pacific goes from strength to strength.
Multi-family units - garden apartments in one- or two-storey suburban blocks, or units in high-rise buildings in New York, Washington DC and San Francisco, rented on a year-to-year basis - have been a large, established market for years.
In contrast, the single-family market - detached houses largely in middle America - has become relatively weak, as mortgage underwriting has become more stringent.
Furthermore, the multi-family market is a more stable market than the office sector: the low-rise nature of suburban apartments means construction is more sensitive to market changes, so there is less danger of oversupply.
"The last six to 12 months has seen a firming up of rents in multi-family properties," says Ed Casal, chief investment officer, global real estate multi-manager group, Aviva Investors. "There is still a big unemployment problem in the US, and that benefits the rentals market. Even when things start to get better, people will not want to commit to buying a home."
However, the multi-family market has split says Casal, with historically low yields of around 5% in New York and other big coastal cities contrasting with 6.5% to 7.5% in the better second-tier cities.
One negative factor investors should consider is the potential withdrawal of cheap money over the medium term. "Historically, investors in multi-family have been able to use subsidised financing from Fannie Mae and Freddie Mac, and this has supported values," says Casal. "But there is a lot of backing in Congress to wind down these institutions, and if that happens, it will put some downward pressure on prices. Nevertheless, values in Washington DC and San Francisco have moved back up to replacement levels for the first time in years, and we are seeing construction again in those cities."
Aviva Investors has also invested in workforce ("key worker") housing in New York City - as a defensive play. "Occupancy is very high, because of the chronic housing shortage in New York," says Casal. "We're exploring ways of increasing exposure substantially, but it is difficult to increase the allocation at present."
Aviva Investors is also exploiting student housing, a resurgent sector with the arrival of the "echo" boom - baby boomers' children who are now going through college.
"University budgets are constrained so they are not building quality accommodation, at a time when the baby boomers want the best for their children" says Casal. "But you have to have specialist knowledge. For instance, if you haven't rented out the apartments during the summer, you've missed a year's occupancy. It is also important to ensure buildings are within walking distance of the campus, and to maximise safety for women."
Assisted housing for seniors is another avenue that Aviva Investors is exploring. "The affluent baby boomer class is ageing, so will require more in terms of social housing," says Casal. "But when the housing market collapsed, people couldn't sell their homes to buy units. However, the market is now moving slowly back again, although lease take-up rates are still not as expected."
But as ever, the big question facing investors is: where do single-family house prices go from here? "Over the years, house prices had appreciated well in excess of homeowners' disposable income, but that was an unsustainable situation," says Casal. "While we have seen prices firming up in pockets of New York and Washington DC, on a nationwide basis house prices are still 10% too high by historical standards."
"We think the argument for multi-family in the US is still pretty strong," says Bellman. "We expect total returns to remain in the low double digits for the next two years, supported by an improvement in employment figures. But the owner-occupier market will continue to be weak for some time."
In Europe, Bellman says he expects occupancy rates in Paris and Amsterdam, two of the biggest rental markets, to improve over the next year. "Rents will continue to rise in Paris, mainly because of the relative lack of supply," he says. "In Amsterdam, the owner-occupier market underpinning house prices will generally not be affected by interest rate rises, since most owners are on fixed-rate mortgages. We expect rents to be stable, and prices to increase by about 3-5%." Patterson says: "Paris, AXA Real Estate's primary residential market, is currently giving yields of about 4.5%, and overall has better rental value growth than other European markets, for example, Germany."
AXA also invests in German residential through an open-ended fund on behalf of its clients. "It's not a sexy portfolio, but it's a good secure diversifier because the rent continues to be paid, so returns are steady," says Patterson.
Munich is the most attractive German city because of its affluence and growing population, but Berlin is catching up: it had an oversupply of apartment blocks some years ago, but Patterson believes the tide has now turned, on the back on the capital's growing commercial sector.
He is still wary about Frankfurt, however, and is largely avoiding eastern Germany, since there is substantial migration from east to west.
"However, we are looking at new-build blocks and are in discussions with developers to buy off-plan, taking the risk away from the seller and therefore getting a good price," he says. But he adds: "The austerity programmes throughout Europe this year will reduce disposable income, so affordability will be the issue. Another key theme will be polarisation between capital cities and the rest of the country. This will be strongest in the UK, with the London residential market supported by foreign buyers."
According to Knight Frank, 41% of new-build properties completed in London in the 12 months to March 2010 were bought by investors, nearly half of whom were Asian. "While the weaker pound has created a compelling buying opportunity for Asian investors, rents in London have also been rising since last June," says Lee.