Friday, January 10, 2014, 08:15
Asia Weekly: Property outlook remains resilient
By JENNIFER LO in Hong Kong

Despite some risks, economic fundamentals like rising consumption and urbanization point to a growing market

Asia Weekly: Property outlook remains resilient
The Ginza shopping district in Tokyo. The Japanese capital is tipped by many analysts to be Asia’s top investment destination for property in 2014. (AFP)

As the threat of a Chinese hard landing has subsided and there is continuing economic recovery in the West, there is discussion on where property markets in Asia are headed as 2014 dawns.

Estimating how the property market will perform from month to month is tricky, never mind making a forecast for a year, but the general expectation is that the outlook will remain strong.

This is in large part due to Asian capital. Core markets are expected to become more crowded than ever, prompting investors to turn to riskier and niche assets. With the tapering of the US Federal Reserve’s quantitative easing program, major markets in the West are for the first time in recent years absorbing large flows of Asian capital.

Colin Galloway, a consultant with US-based research and education organization Urban Land Institute (ULI), agrees capital outflow from Asia to the West is inevitable, which will theoretically translate into higher interest rates and lower property prices for Asia.

But Simon Lo, director of research and advisory at property broker Colliers International, is more optimistic. He does not expect a capital exodus but a net inflow to Asia, given the region’s long-term economic prospects.

“Capital is likely to continue flowing into the region, where the majority of global growth is generated,” he says. The property market will remain resilient this year, because of a young population, rising urbanization rates and growing private consumption.

Unlike other assets, real estate in Asia “barely flinched” last year, Galloway observes. Part of the reason is due to regional capital from China, Singapore and South Korea pouring into Asian property assets. This is expected to continue.

For instance, according to real estate services firm Jones Lang LaSalle, 88 percent of all commercial real estate transactions in the first three quarters of last year originated from within the region.

“Asia has more capital, particularly from China and pension funds in Korea, than there are assets to absorb it,” says KK So, Asia Pacific real estate tax leader at PricewaterhouseCoopers (PwC) in Hong Kong. “A greater demand for business travel in a global village also creates new incentives for Chinese investors to buy new homes overseas.”

Tokyo is tipped to be Asia’s top investment destination for property for the first time since 2009, according to the latest report jointly published by PwC and ULI that surveyed more than 250 industry leaders.

Japan has reemerged as an investment magnet for offshore purchases, due to a weakening yen and the miracle of ‘Abenomics’.

The government’s massive economic stimulus has boosted transaction volume in Tokyo’s property in anticipation of rising prices, while secondary markets such as Osaka, Fukushima and Sapporo are gaining appeal.

Nicholas Holt, Asia Pacific research director with property consultancy Knight Frank, is less enthusiastic, saying it “depends on your view of Abenomics”.

“Those bullish on Japanese growth prospects see value in a market that, given the currency play, is relatively cheaper than core markets of Hong Kong and Singapore,” Holt says.

Japan’s aging population and huge levels of sovereign debt are fundamental weaknesses, he says.

Lo from Colliers shares some of Holt’s doubts.

“It is uncertain whether the government can successfully bring the economy out of the deflationary doldrums and hit the inflation target,” he says.

Others have a similar view: Japan’s economy is not risk-free.

“Investors will need to be highly cautious,” warns Alexis Garatti, an economist with Haitong International Research in Hong Kong. A value-added tax rise is likely to hamper Japan’s expansion and hurt consumer spending.

While a sharp depreciation of the yen will destabilize the economy, the local property market’s domination by local players such as J-REITs (Japan real estate investment trusts) and domestic institutions could scare off investors.

Shanghai, dubbed an evergreen market for Asian investors, will continue to be the most-favored Chinese city, particularly for those who are unwilling to venture into lesser-known cities.

Its newly announced pilot free trade zone will increase its “actual fitness” for foreign investments, Garatti theorizes. This signals a boost to Shanghai’s commercial real estate as leading foreign banks such as HSBC and Standard Chartered have shown interest in entering the zone.

“China is in a different position. It has an image of stability, which is an advantage,” Garatti says. “The US tapering will mainly have an impact on emerging markets already with some vulnerability, such as Brazil, Indonesia, India and Turkey.”

Housing policies in China are largely adapting to recent situations with the government’s continuing efforts to regulate lending. Despite a tightening regulatory environment, investors can still expect a 20 percent year-on-year increase in housing prices, Garatti says.

“To investors, this is ideal. You enjoy the double benefit of a safety net and decent returns.”

Not surprisingly, Asia’s frontier markets such as the Philippines, Vietnam, Cambodia and Myanmar are attracting investors although the warning is that risks can be high and exit is tough.

“It’s already a crowded place and thin on the ground in terms of opportunities,” says ULI’s Galloway.

In Jakarta, land is cheap but the domination of local players means it can be hard for outsiders to get a foot in the door, the joint report by PwC and ULI highlights.

The report also points out that the property market in Manila benefits from a young population and remittances from workers overseas, although it suffers from typical problems facing emerging economies: Corruption and a shortage of investable stock.

The Philippine capital is seeing a 5 to 8 percent growth in prime office rental, thanks to its growing popularity as a destination for multinationals seeking outsourced services, such as call centers and back offices.

Ho Chi Minh City, on the other hand, could be at a bottom in 2014. One reason is that it has been hard hit by a mismanaged economy that pushed inflation to 23 percent in 2012. Vietnam’s state banks face massive bad debts after lending to the property sector without adequate safeguards.

The silver lining lies in Vietnam’s industrial assets, including industrial parks, which are set to benefit from the “China plus one” strategy adopted by multinationals seeking to diversify production bases away from China to lower-cost locations in Southeast Asia.

Also on investors’ radars are niche assets. It would mean buying B-grade buildings or assets in logistics, senior care, self-storage and green buildings.

“Investors have reacted not by pulling away from real estate in Asia, but by finding new ways to make the numbers work, including a focus on specialized property types,” says Raymond Chow, North Asia chairman of ULI.

With an aging population, Asia lacks sufficient senior facilities, although differing cultural expectations on senior care remain an obstacle for creating a single Asian model.

Self-storage is also gaining popularity, particularly in Tokyo, Hong Kong and major Chinese cities, where small living spaces mean consumers need to “rent a closet”, ULI’s Galloway adds.

Others are seeing prime commercial property as good hedge.

“If the economy improves, you’ll get rental growth; if it goes the other way, prime product is a safe income-producing haven,” says Holt of Knight Frank.

In a nutshell, competition for commercial properties remains as there is plenty of capital chasing limited stock.

This is echoed by Colliers International, which forecast better growth of office rentals in key financial centers across Asia in 2014. Singapore will be on a cyclical upswing this year owing to a rise in demand across the board.

With retail sales projected to grow by 15 percent, China will retain its position as a retail hotspot fueled by private consumption and infrastructure development.

Looking ahead, will Asia still be an attractive destination for investors? Opinions vary but 2014’s forecast isn’t dire. Asian capital, Abenomics and niche assets are the rising stars, but investors should still watch out for the many economic headwinds — Asian capital outflows and rising interest rates squeezing yield spreads.



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