Macroeconomic outlook
We see the global economic climate for the second half of 2012 as “not pretty” as Europe is headed for a recession, while the United States is facing anemic growth at best, and slowing growth rates in Asia. Nonetheless, Asia remains the bright spot for growth amid the bleak economic backdrop. We view Asia as an extremely heterogeneous market. Asia has approximately 50 countries which are different from each other in terms of stage of development, governance systems, transparency in real estate markets, tax regimes, and official languages used. Given the diversity in Asia, we view Asia as a collection of distinct local markets and broadly classify them into two categories: developed Asia and emerging Asia.
We see the global economic climate for the second half of 2012 as “not pretty” as Europe is headed for a recession, while the United States is facing anemic growth at best, and slowing growth rates in Asia. Nonetheless, Asia remains the bright spot for growth amid the bleak economic backdrop. We view Asia as an extremely heterogeneous market. Asia has approximately 50 countries which are different from each other in terms of stage of development, governance systems, transparency in real estate markets, tax regimes, and official languages used. Given the diversity in Asia, we view Asia as a collection of distinct local markets and broadly classify them into two categories: developed Asia and emerging Asia.
Developed Asia (Singapore, Hong Kong)
Investors within Developed Asia are more focused on Singapore, Hong Kong and Tokyo. As Tokyo attracts mainly local investors and specialized funds, investors tend to be more focused on Singapore and Hong Kong. Singapore and Hong Kong are among the world’s most open and dynamic economies and have both rebounded strongly with robust growth following the downturn in 2009.
Singapore and Hong Kong are island cities with limited land. Due to their space-constrained nature and high external dependency, these two property markets tend to be more cyclical than others in Asia. For example, Singapore and Hong Kong’s real estate market fell 40 to 50 per cent during the crisis in 2008/2009, but has since recovered strongly and has overtaken its 2007 peak and both governments are actively trying to counter further price increases by providing more land for sale.
We believe the most attractive sectors in Singapore and Hong Kong are in office and retail, particularly suited for core/ core-plus investors. In the short term, concerns of an asset bubble means investors must re-focus on core fundamentals when underwriting deals. In the long term, the Asia continues to power global growth amid the challenging global environment. The key is discipline (don’t get caught by the hype, do your due diligence) and having sufficient dry powder to ride out any unexpected events.
“Location, location, location” may be the proverbial saying but in times of uncertainty, it holds very true. Let me focus on some of the drivers for commercial real estate in Singapore.
Singapore office market
In Singapore, the supply of new office space is relatively high and 9.8 million sq ft of new office supply is expected to come online through end 2013. That said, Singapore experienced one of the largest increase in office rents across Asia in 2010/2011 driven by strong demand. While the Class B office sector remains vulnerable as there is a “flight to quality” from tenants, Class A office rents rebounded strongly and the outlook remains positive, as sentiment holds steady. If the demand for space continues to hold, we believe that the lack of new office supply beyond 2013 may lead to an increase in Class A rents back to 2007 levels.
Singapore retail market
Retail sales have been positively impacted by the number of visitors to Singapore, which exceeded 10 million last year. Tourist arrivals are expected to further increase to approximately 17 million by 2015. The retail market is experiencing stable occupancy rates and we believe retail demand will continue to hold steady.
Selective opportunities in Developed Asia: Focus on real estate fundamentals
While capital values in Hong Kong and Singapore have already recovered from the recent downturn, many of the commercial buildings in these markets are aged and under managed by the current landlords. We strongly believe that specific office and retail properties in these markets offer potential for value-added strategies such as repositioning or refurbishment. However, in volatile markets like Hong Kong and Singapore, it is crucial to focus on real estate fundamentals when underwriting deals rather than betting on potential rent increases or future cap rate compression.
Emerging Asia (Vietnam, China)
These two countries attract mainly opportunistic investors as emerging markets in Asia lack the depth to digest sudden capital inflows easily, the sudden movements in or out can be extremely destabilising, leading to concerns of an asset bubble.
Asian governments are able to control the capital flows by resisting the importation of some types of foreign capital. (for example: Asia cross border vs out of Asia, currency controls etc). Furthermore, structuring and tax issues remain a major hurdle to investing in some of these countries. Considering the higher investment risk of investing in emerging Asia, these markets should justifiably offer higher returns than the developed markets in Asia.
China
In China, we see correction ahead which provides selective opportunities in residential investments in Tier II cities. After sharp growths in 2009/2010, China’s residential market started to show signs of fatigue in 2011 and first half of 2012. This is due to the efforts of the Chinese government to decelerate the over-heated housing market using policy controls such as the introduction of property taxes & purchase and credit restrictions.
Despite the lower growth, we continue to expect significant pricing level corrections. We expect volumes and prices for residential properties to fall in the first half of 2012/2013 as the government is determined to make housing more affordable. We believe this will present another compelling entry opportunity in a market that has very strong fundamentals over the longer term.
We are cautious given the government cooling measures but we expect to selectively invest in growing Tier II cities. We view “build to sell” residential projects with a two to three year hold as attractive investments and expect to capitalise on Tier II city growth as these cities are better positioned with higher owner-occupier ratios than Tier I cities.
Tier II cities are also characterised by cheaper land and labor costs, less development competition and greater middle-income residential supply/demand imbalances due in part to less speculative build-up in previous years. Negotiating advantageous terms is less challenging in Tier II cities, as local developers are often in need of external capital to fund their projects. Upside risk is that fear of local-government defaults and a general property rout may induce the central authorities to ease restrictions earlier than expected.
Vietnam
In the past decade, Vietnam, the world’s 13th largest country by population with nearly 90 million people, has emerged as one of South East Asia’s strongest performers in terms of economic growth.
While strong growth came at the expense of double digit inflation and interest rates, we still see compelling opportunities, especially in the residential sector.
In Vietnam, we see demand for real estate underpinned by rapid urbanisation and compelling demographics. Compared to other Asian nations, Vietnam has the youngest demographic profile with approximately 80 per cent of the population under the age of 40. Given the fast growing middle class, there is significant latent residential demand in Vietnam. The concern is that after growing strongly in 2010-2011, current market movements are still unpredictable, so the no-rush attitude among buyers is prevalent at the moment.
However, we believe demand is still huge and we expect the mass market housing segment to recover first. Robust demand and urban migration are far outpacing supply, and have created a severe housing shortage in Vietnam’s urban areas, with a significant portion of the population living in sub-standard accommodations. As the cities grow, and urban migration and income rise, demand for housing will continue to increase. Investing in Vietnam is associated with potential risks, including the high inflation and challenges in fiscal and monetary policies. We believe Vietnam’s fundamentals are compelling over the long term.
Conclusion
Growth in Asia will remain one of the brighter spots in this challenging global environment. The diversity in Asia real estate generates selective opportunities for investments driven by various macro-economic and fundamental drivers. Strong relationships, best in class partners and deep regional experience are critical to successfully take advantage of opportunities over the medium to long term. It is especially important to partner with experienced operators and to align your interests. The appropriate investment structure needs to be used to improve the risk return profile of the investment.
By Roy Ling, Property Report
Investors within Developed Asia are more focused on Singapore, Hong Kong and Tokyo. As Tokyo attracts mainly local investors and specialized funds, investors tend to be more focused on Singapore and Hong Kong. Singapore and Hong Kong are among the world’s most open and dynamic economies and have both rebounded strongly with robust growth following the downturn in 2009.
Singapore and Hong Kong are island cities with limited land. Due to their space-constrained nature and high external dependency, these two property markets tend to be more cyclical than others in Asia. For example, Singapore and Hong Kong’s real estate market fell 40 to 50 per cent during the crisis in 2008/2009, but has since recovered strongly and has overtaken its 2007 peak and both governments are actively trying to counter further price increases by providing more land for sale.
We believe the most attractive sectors in Singapore and Hong Kong are in office and retail, particularly suited for core/ core-plus investors. In the short term, concerns of an asset bubble means investors must re-focus on core fundamentals when underwriting deals. In the long term, the Asia continues to power global growth amid the challenging global environment. The key is discipline (don’t get caught by the hype, do your due diligence) and having sufficient dry powder to ride out any unexpected events.
“Location, location, location” may be the proverbial saying but in times of uncertainty, it holds very true. Let me focus on some of the drivers for commercial real estate in Singapore.
Singapore office market
In Singapore, the supply of new office space is relatively high and 9.8 million sq ft of new office supply is expected to come online through end 2013. That said, Singapore experienced one of the largest increase in office rents across Asia in 2010/2011 driven by strong demand. While the Class B office sector remains vulnerable as there is a “flight to quality” from tenants, Class A office rents rebounded strongly and the outlook remains positive, as sentiment holds steady. If the demand for space continues to hold, we believe that the lack of new office supply beyond 2013 may lead to an increase in Class A rents back to 2007 levels.
Singapore retail market
Retail sales have been positively impacted by the number of visitors to Singapore, which exceeded 10 million last year. Tourist arrivals are expected to further increase to approximately 17 million by 2015. The retail market is experiencing stable occupancy rates and we believe retail demand will continue to hold steady.
Selective opportunities in Developed Asia: Focus on real estate fundamentals
While capital values in Hong Kong and Singapore have already recovered from the recent downturn, many of the commercial buildings in these markets are aged and under managed by the current landlords. We strongly believe that specific office and retail properties in these markets offer potential for value-added strategies such as repositioning or refurbishment. However, in volatile markets like Hong Kong and Singapore, it is crucial to focus on real estate fundamentals when underwriting deals rather than betting on potential rent increases or future cap rate compression.
Emerging Asia (Vietnam, China)
These two countries attract mainly opportunistic investors as emerging markets in Asia lack the depth to digest sudden capital inflows easily, the sudden movements in or out can be extremely destabilising, leading to concerns of an asset bubble.
Asian governments are able to control the capital flows by resisting the importation of some types of foreign capital. (for example: Asia cross border vs out of Asia, currency controls etc). Furthermore, structuring and tax issues remain a major hurdle to investing in some of these countries. Considering the higher investment risk of investing in emerging Asia, these markets should justifiably offer higher returns than the developed markets in Asia.
China
In China, we see correction ahead which provides selective opportunities in residential investments in Tier II cities. After sharp growths in 2009/2010, China’s residential market started to show signs of fatigue in 2011 and first half of 2012. This is due to the efforts of the Chinese government to decelerate the over-heated housing market using policy controls such as the introduction of property taxes & purchase and credit restrictions.
Despite the lower growth, we continue to expect significant pricing level corrections. We expect volumes and prices for residential properties to fall in the first half of 2012/2013 as the government is determined to make housing more affordable. We believe this will present another compelling entry opportunity in a market that has very strong fundamentals over the longer term.
We are cautious given the government cooling measures but we expect to selectively invest in growing Tier II cities. We view “build to sell” residential projects with a two to three year hold as attractive investments and expect to capitalise on Tier II city growth as these cities are better positioned with higher owner-occupier ratios than Tier I cities.
Tier II cities are also characterised by cheaper land and labor costs, less development competition and greater middle-income residential supply/demand imbalances due in part to less speculative build-up in previous years. Negotiating advantageous terms is less challenging in Tier II cities, as local developers are often in need of external capital to fund their projects. Upside risk is that fear of local-government defaults and a general property rout may induce the central authorities to ease restrictions earlier than expected.
Vietnam
In the past decade, Vietnam, the world’s 13th largest country by population with nearly 90 million people, has emerged as one of South East Asia’s strongest performers in terms of economic growth.
While strong growth came at the expense of double digit inflation and interest rates, we still see compelling opportunities, especially in the residential sector.
In Vietnam, we see demand for real estate underpinned by rapid urbanisation and compelling demographics. Compared to other Asian nations, Vietnam has the youngest demographic profile with approximately 80 per cent of the population under the age of 40. Given the fast growing middle class, there is significant latent residential demand in Vietnam. The concern is that after growing strongly in 2010-2011, current market movements are still unpredictable, so the no-rush attitude among buyers is prevalent at the moment.
However, we believe demand is still huge and we expect the mass market housing segment to recover first. Robust demand and urban migration are far outpacing supply, and have created a severe housing shortage in Vietnam’s urban areas, with a significant portion of the population living in sub-standard accommodations. As the cities grow, and urban migration and income rise, demand for housing will continue to increase. Investing in Vietnam is associated with potential risks, including the high inflation and challenges in fiscal and monetary policies. We believe Vietnam’s fundamentals are compelling over the long term.
Conclusion
Growth in Asia will remain one of the brighter spots in this challenging global environment. The diversity in Asia real estate generates selective opportunities for investments driven by various macro-economic and fundamental drivers. Strong relationships, best in class partners and deep regional experience are critical to successfully take advantage of opportunities over the medium to long term. It is especially important to partner with experienced operators and to align your interests. The appropriate investment structure needs to be used to improve the risk return profile of the investment.
By Roy Ling, Property Report
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