The statistics are still impressive and prospects are good. But the effects of the credit crunch are being felt in Asia with the added sting of inflation, as delegates to REIW Asia, among them Richard Lowe, found out
Asia will account for 45% of the world's GDP by 2020. This forecast by the Asian Development Bank was cited proudly by Singapore's senior minister of state for national development and education, Grace Fu, in her upbeat guest-of-honour address for this year's Real Estate Investment World Asia conference.
Held once again in Singapore, Real Estate Investment World (REIW) Asia 2008 aimed to bring together the leading lights of the Asian property industry and to exchange ideas and perceptions about - among other things - where the rapidly growing markets of the Asia-Pacific region are ultimately headed.
Fu was certainly bullish about the outlook for Asian real estate - not least Singapore itself - despite the recent turmoil in global financial markets and rising inflation, pointing to factors such as healthier macro-economic fundamentals and improved banking systems.
However, while Asia is still attracting the lion's share of global real estate capital and, unlike Europe and the US, can envisage double-digit returns across many of its markets, the feeling that the region is not immune to global financial shocks was palpable throughout. If proof was needed that the growing pessimism in the West had spread to this corner of the globe, it could be found in the title question of the opening panel debate: "Are we in the post-golden age era?"
Putting this question to the panel was moderator David Jacobs, chairman for Asia Pacific at law firm Baker & McKenzie in Australia. Not surprisingly, no one agreed with this scenario, but the optimism was measured. Justin Chiu, executive director at Cheung Kong Holdings, admitted that Asia had been affected by the credit crunch, but he did not believe this would necessarily cause a drastic change to the region's positive outlook. In fact, Chiu said it could be a good learning experience for some of the rapidly expanding markets that might otherwise overheat. However, when asked whether he expected to see price corrections, he said yes - especially where there is oversupply.
Later that day, Michael Smith, head of Asia real estate at Goldman Sachs, gave a presentation suggesting that, despite Asia's robust economic fundamentals, the "contagion effect" of the liquidity crisis in the US and Europe would "depress" its property markets. Markets in Asia are already feeling a credit squeeze as Western lenders have retreated, while local banks are not always able to supply the demand for debt, he said. Local institutions in Singapore, for example, have regulatory caps on how much they can lend and Smith expects many might have reached their limits.
Asieh Mansour, chief economist and strategist at RREEF, gave a separate talk on the prospects for the global economy and real estate fundamentals. Her prognosis for the Asian markets was that, although they had not escaped the effects of the credit crunch, they were "fundamentally sound". Turmoil in the global financial markets had led to a widening of credit risk premiums and banks were lending less aggressively, creating refinancing issues for borrowers, she said. But "Asia should outperform the developed nations".
It was not only the credit crunch that reared its ugly head, but also the issue of rising inflation, which has the potential to be more damaging to the Asia success story. In the aforementioned panel debate, Jacobs asked Stephen Riady, president of the Lippo Group, which was more of a concern: the credit crunch or inflation? Riady opted for the latter. And while Chiu admitted he liked inflation because of the upward pressure it can put on rents, Yu Lai Boon, chief investment officer at sovereign wealth fund Dubai World, warned that rising inflation could increase political risk in some countries and this would have to be priced into investments.
Mansour also spoke about the subject, suggesting that inflation is today globalised - to the point that the US is importing Chinese inflation - and that rising food prices will have more of a detrimental impact on Asia than the credit crunch.
Many of these issues were discussed in relation to Asia's biggest (geographically speaking) market: China. One of the chief topics was how the Chinese government continued to carry out measures to moderate foreign investment in real estate and tighten the local lending regulations - so as to prevent a market bubble destabilising its economy. The latest move has seen China's central bank raise the amount that lenders must hold in reserve.
In a panel debate dedicated to China, Lim Ming Yan, CEO of CapitaLand China Holdings, explained that the government was attempting to decelerate foreign capital inflows, because they were pushing up prices and making residential buildings unaffordable for the masses. He said he was seeing the effects of regulation across cities in China and that the tightening of the availability of debt was affecting land values. Nancy Marsh, tax partner at Deloitte in China, observed that it was actually becoming more difficult to get money into China than it is to get it out. She warned of further credit tightening in the future from the government, arguing that this would lead to smaller developers being squeezed out of the market.
This point was picked up by a separate panel discussing the future strategies of opportunity funds in the region. As suggested by Ming Mei, president of ProLogis in China, the government's moves to slow the economy and stem foreign investment had brought about an opportunity for bridging loans. The panel agreed that this offered investors the potential to own developments through buying the debt or "loan to own".
Finally, REIW Asia 2008 was followed by a post-conference summit on Vietnam. With a current account deficit of over 20%, a similar level of inflation and tremendous stress in the banking system (caused by excessive growth in credit) the country is not without its problems. But the overriding message was that while Vietnam has some necessary short-term pain to ride out, its long-term growth prospects are excellent (it is Asia's most vigorous growth economy after China, said Dragon Capital founder Dominic Scriven) and 2009 is expected to be a very profitable year for real estate investment in the country.