As China and India continue to power ahead, introducing the REIT framework will help boost transparency and liquidity. Pirkko Juntunen reports
Asia as a region is complex, and the real estate markets illustrate this complexity well. The financial crisis further emphasised the point clearly that Asia is not one market. The degree of impact and duration have varied; the mature markets have been the most affected while the less-developed markets have suffered less and have since made strong recoveries.
Many foreign players retreated from the market as lending conditions grew tighter. This opened up the competition for local players that are now increasingly competing with international asset managers on several fronts, including lending. Peter Zabierek, senior port-folio manager at Urdang, the Philadelphia-based property specialists owned by Bank of New York Mellon, says that typically the Asian banks were the financiers of the deals but as lending criteria continue to be conservative, the market is opening up for new players.
The shift towards income-generating core assets and markets that became evident during the downturn continues today. Investment is mostly directed at the developed markets such as Hong Kong, Singapore, Korea and Japan. Some also include Australia in the Asia bucket, whereas smaller countries such as Vietnam, Thailand, the Philippines and Indonesia are often viewed as too volatile or have regulatory environments that are not conducive for investment. Meanwhile interest in China and India is growing as their economies are powering ahead.
Kang Puay Ju, head of property for Asia Pacific at Aberdeen Asset Management in Singapore, says: "The fundamental growth story is clearly led by China and India because of the tremendous economic growth potential, population growth, urbanisation trends and growth in consumption. These will support property prices - offices, retail, residential and industrial - over the long term."
Chris Reilly, director of property, Asia, at Henderson Global Investors in Singapore, also believes China will continue to be the driver. "China residential continues to appreciate although some areas of the market are now overheated and the government is actively applying cooling measures," he says.
Jack Foster, managing director and head of global real estate at Franklin Templeton in New York, likes the economics of China residential where buyers need a 30-50% down payment to buy a property. Franklin Templeton favours the developed markets but believes China's growth is having a positive effect on the entire region. Foster does have some caveats on China however. "A lot more people are coming into the market competing for deals," he notes.
Zabierek says there are better opportunities in China now that developers are diversifying into commercial real estate (office and retail) as well. On India he says: "It is an immature market. In addition, we do not like the current pricing, so for us the timing is wrong."
Puay Ju acknowledges the complexity of the region: "The issue is access and execution. Unlike other asset classes, one cannot just buy an index of, say, China residential. To access this sector where there is clearly a lot of growth potential, one has to be able to access land, at the right price with the right partner (for an international investor) and hope the product is delivered in a generally conducive macro environment, ie, absent from any major tightening measures imposed by the government."
There are also opportunities in the core, mature economies. Australia and Singapore are able to capitalise on the growth of intra-regional trade led by China, according to Puay Ju. Reilly notes: "Offices in Hong Kong and Singapore have recovered strongly from the global financial crisis. Asset prices are rapidly reflecting a better occupier market. The retail market remains buoyant in core Asia particularly in Singapore (prime and suburban malls) and in Hong Kong."
Puay Ju is not keen on small and more volatile markets such as Macau and Vietnam while Reilly is avoiding Thailand because of the political uncertainty. Foster agrees that there are risks involved in government interference and the lack of depth in some of the smaller markets.
Zabierek says that countries such as Vietnam are difficult to access because foreign investors have to buy buildings rather than land. He says that although it is clear that the greatest interest is in core markets and sectors there are opportunities at the other end. "There are what we call ‘hairy' deals, which take a lot of work but where we can see a value-added opportunity." He adds that generally Urdang operates in the middle ground and that while there is a shortage of prospects for global players he "can see activity picking up over the next 12-18 months".
Currently Urdang also favours retail names in Hong Kong; office there is also popular as international banks and financial services providers are again willing to spend. Zabierek says the residential market has positive pricing but as local banks are increasing their interest rates, financing is becoming unattractive. Urdang also takes a positive view on the Singaporean office sector where rents are picking up, as well as the stable retail sector. He sees residential as a ‘wild card' because government in Singapore has the power to keep residential prices under control. "The economies are good but the government poses a risk," he says. He also says industrial real estate, while not a popular investment choice, shows good pricing and the export-driven economy supports growth. "Hotels are another growing sector, with new visitors coming to Singapore," he adds.
Investors in the region are welcoming the introduction of REIT frameworks in countries such as India and China. Puay Ju says: "This is helpful in terms of increasing transparency and liquidity of these markets, which should contribute over time to a reduction in risk premia. Another welcome market development is that underwriting discipline appears to have made a comeback and we certainly hope it will last longer this time around."
Reilly notes that restrictive regulation governing residential markets and housing policy in the region directed at dampening rapidly appreciating residential prices is likely to continue.
The human cost of the devastating earthquake in the north-eastern region of Japan in March is incalculable and the economic costs will take some time to evaluate. Market participants hope the earthquake will not change the direction of the recovery. Foster believes that in the long term Japan will recover and because of the efficient manner in which it has handled the financial crisis it is in a good position to do so.
The outlook for Asia is undoubtedly positive among the market participants but all warn that over the next 10 years growth will not be a straight line.