How much has Asian real estate benefited global investors in the past 10 years? Kevin Swaddle looks at the numbers
Global investors have been eyeing Asia real estate for more than a decade, motivated by the attractions of real estate as an asset class and Asia’s long-term prospects for economic growth. Some have taken the plunge, while others have sat on the sidelines waiting for bargains that have been in short supply. The IPD Asia Return Indicator now provides the chance to examine the sort of returns that investors could have achieved over recent years.
It is no surprise that average returns in Asia have been higher than for other global regions since the time of the global financial crisis. The IPD Pan-Asia total return was 6.2% pa over the period 2006 to 2012, compared with 3.8% pa for Europe and 3.2% pa for the US. Excluding Japan, Asia’s margin of outperformance has been even greater, with a return of 10.9% pa for the past six years.
Investors are also likely to be concerned with the returns they can generate in their own currencies, although this depends on the extent to which they are hedging currency risk.
For the last six years, both euro and US dollar investors have gained from currency movements against this region, boosting pan-Asian returns to 9.8% pa, which compared favourably not only to local currency performance but also to the Japanese Yen return of just 4.1%.
Based purely on return levels, investors have therefore benefited from holding a basket of properties in the region, but did this investment also justify the risk?
The IPD Pan-Asia Return Indicator covers nine separate national real estate markets at varying degrees of maturity from an investment perspective. Japan, Singapore, Hong Kong and Korea (the largest markets, contributing 77% of the total value of the database) are well-established international marketplaces, with a significant foreign presence, and thus a reasonable level of liquidity.
China, Thailand, Malaysia, Taiwan and Indonesia, the other countries in the Indicator, are only just beginning to open up to foreign capital, with a relatively small stock of investment grade assets. Allied to their thinner market liquidity, these are also places where there is less price transparency, but the establishment of information sources such as the IPD Pan-Asia Indicator is part of ongoing improvement in this area.
Another key question for investors in these markets relates to the potential for diversification gains. Perhaps surprisingly, the pattern of market peaks and troughs – albeit based on a short six-year review – does not look so different to that for Europe or the US, although the American market has demonstrated a much greater level of volatility.
In the globalised economy of the 21st century, all regions are influenced by fluctuations in world output and capital flows. However, as already noted, both Asian and European regions are made up from widely divergent groups of national markets. Performance levels among these have been widely spread, meaning that greater diversification benefits could have been achieved by investing in some Asian markets rather than others over the past six years.
At the tail end of boom market in 2007, Asian market returns were headed by Korea on 27.9% with Singapore and Hong Kong close behind. Taiwan and Thailand, however, returned only 8% in the same year. In 2008, performance levels declined sharply in all Asian markets, but by 2009 the Hong Kong market was already bouncing back to reach a respectable 15.3%, even though all other markets declined further, and the spread of national returns rose to more than 220bps.
A still wider range emerged in 2010, with Hong Kong returns matching those recorded during the boom years while, in contrast, the Japanese market remained depressed. The past two years have seen returns coming more into line as the dynamic conditions in Hong Kong and China have eased down, while smaller markets such as Thailand and Malaysia have continued a trend towards gradual revival.
Asian markets have also diverged significantly on income return, another key issue for risk. Over the past six years, Hong Kong and Taiwan have generated the lowest average income returns, at less than 5% pa, meaning they have placed greater reliance on capital growth for their overall performance. Hong Kong’s income return had fallen to 4% by the end of 2012, a considerable contrast to levels in some of the less mature markets, with, for example, Thailand at 10% and Indonesia at 9.2%. Of course, higher income returns may reflect a greater level of perceived risk in the market; on the other hand, very low income yields may suggest that the potential for further increases in capital values will place a heavy reliance on the continuation of strong economic growth.
Six years is too short a period to produce a statistically robust analysis of investment risk, but a number of pointers emerge from the data. In terms of diversifying market performance risk, Asia as a whole does not appear to have offered massive gains, as the pattern of upswings and downswings has closely mirrored that in Europe and the US over this period.
On the other hand, there has been substantial variation between Asian markets, with Hong Kong, in particular, but also mainland China, showing significant differences in timing from the region as a whole, thus potentially offering greater diversification gains.
Predicting these trends and patterns at the outset was clearly challenging, not least because of the lack of available performance data at the start of the period. Implementing a direct-ownership strategy across a variety of these countries also required substantial knowledge of local market practices and good local partners, aspects that even the largest international investors are likely to have found demanding.
Nevertheless, those far-sighted enough to enter these markets almost certainly benefited from a higher level of performance than available elsewhere during this very difficult period for global investing. As for the risk – that would have depended on where and when they invested within the Asian region.
Kevin Swaddle is executive director & head of Asia, IPD