Although risk-seeking is back on some real estate investors' radar screens, it is balanced against an uneven pace of economic recovery globally, and a heightened sense of what American economist Ben Shalom Bernanke described as an "usually uncertain" economic outlook. Most economies in Asia Pacific are now as big, if not bigger, than they were before the onset of the global recession. However, although fiscal stimulus is ending here, monetary policy remains stimulative, with the recent movement by central banks aimed at normalisation rather than tightening.
Aberdeen expects Asia Pacific real estate markets to outperform globally, given the confidence of corporate earnings growth over the medium to long term and the developing nature of many markets. The region also provides global investors with an opportunity to diversify their real estate exposure, by accessing different economic structures, demographic profiles, tenant compositions and managers, to name a few.
Aberdeen is of the view that there are three sets of opportunities that should provide attractive returns if investors are able to access them, capitalising on the depth and length of the cycle in some markets, and the long-term fundamentals driving regional growth in others. We will address each in turn, in no particular order of preference.
The first opportunity is a distress or re-pricing play in Japan and/or Australia. These two markets have had different reactions to the global recession we are currently recovering from. Australia has been fairly robust, avoiding a recession and benefiting from China's stimulus packages through the resource trade. The Japanese economy, on the other hand, slipped into recession although, thanks in part to China and the global inventory cycle over the past 12 months, it has shown signs of a rebound in recent months.
Both the real estate markets, however, experienced significant re-pricing, especially Japan, which entered one of the longest and deepest cycles in the region, being the first to turn in late 2007 and still showing some weaknesses. Japan's problems are also compounded by its traditionally high leverage levels. Aberdeen's approach to these two markets is slightly different due in part to the different market fundamentals.
We see the Australian markets already turning the corner in terms of cap rates, underpinned by stronger economic growth and prospects. As a fund of funds investor, this means we now prefer fully seeded products which will allow us to ‘lock in' the pricing. In Japan, the systemic distress caused by the high gearing levels has not materialised, in part due to lenders' unwillingness and/or inability (from balance sheet stability perspective) to trigger a potential pricing collapse in the market. It is difficult to predict how the market will react to the spate of CMBS and balance sheet loan maturities in the coming months and years, but Aberdeen believes there will be opportunities in both the equity and debt space, and is seeking to capitalise on them.
The second opportunity that Aberdeen sees in the market today is Singapore suburban retail development. Singapore has very favourable economic growth prospects - its GDP growth in Q2 2010 was a robust 19.2% year on year and we expect growth in the coming years to be above trend, which bodes well for consumption.
The suburban retail sector is a very defensive one, with stable income streams coming from staple retail sales to the local Singaporean market. The market is characterised by medium-sized shopping centres typically located around public transport nodes and supply has been tightly controlled. It is also a highly institutionalised sector, which means access is difficult, thus necessitating a development approach. Aberdeen is comfortable with the additional risks that this approach entails - we are no stranger to this strategy, having invested in Singapore suburban retail development since 2006 and have seen attractive returns being generated on our investments hitherto, despite the crisis.
The final investment theme is China retail. China is a good example of an emerging market exhibiting typical attractive features - high economic growth, rapid urbanisation, rising household incomes and wealth, along with aspirations for western-style consumption. The best proxies to this growth potential, in our opinion, are residential and retail. Between them, Aberdeen has so far preferred the retail sector - and not because it is the easiest. China's retail sector is still evolving, from the past prevalence of department stores to the current predominance of the shopping centre format and high-profile high-street flagship stores. And the pace of evolution differs between first-, second- and third-tier cities. These issues, coupled with the relatively long stabilisation period required of a retail asset, mean that local retail knowledge and mall management expertise are critical. Yet these are precisely what are still lacking in China today on a macro level. The key to success, therefore, will be to seek out those pockets of expertise and knowledge that are emerging and developing.
Despite these difficulties, Aberdeen believes that the structural changes taking place in the Chinese economy, from a move towards a more consumption-based growth model and opening up of domestic capital sources to property, all bode well for retail.
Asia Pacific is a region with abundant opportunities, with the dominant theme being growth. But it is also fraught with difficulties. For those investors with the ability to access these opportunities and knowledge to manage the risks, it will be an interesting and rewarding ride for many years to come.
Kang Puay-Ju is head of property, Asia Pacific, and Glyn Nelson is head of property research and investment strategy, Asia Pacific, at Aberdeen