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Impact Investing

IPE special report May 2018

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Real Estate - Gems emerging in some Asian markets

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Real estate transaction volumes in Asia Pacific in the first quarter of 2012 fell by 43%, compared with the fourth quarter, with all segments posting a decline, according to data from the Asia Pacific Real Estate Association and Real Capital Analytics. Transactions in land fell 51%, commercial property 25%, hotel 12% and apartments 9%.

 An increase in volumes of 32% in Hong Kong and 23% in Japan offset some of the decline in other regions - China (-54%), Singapore (-53%), Australia (-40%), South Korea (-28%) and other Asia Pacific areas (-43%).

 In China, the housing market is still a crucial portion of the nation’s GDP growth and the government has vowed to keep real-estate industry curbs into this year. Current volatility in inflation means that policy framework is unlikely to shift significantly, according to Simon Baxter, Head of Lenders & Investors in China at EC Harris.

 “Soft landing is the key agenda for China mainland’s property market in 2012. To ensure the smooth political transition, residential price stability will be extremely important for all levels of government, at least until the middle of this year.”

Foreign funds in the Chinese real estate market have been watched closely by different government bodies, Baxter adds. “There are also new policies to constrain the expansion of foreign funds, but this market is still big and moving fast enough to generate satisfying income for investors. The main challenges for foreign funds are how to avoid policy traps and how to secure the ideal project because China is so big geographically and demographically.”

 Limited pockets of value are emerging and may be found in other markets, including Indonesia and Australia, Baxter says. Countries such as India, Malaysia and Vietnam have potential as well. “The economy is growing fast in India, Vietnam has a large amount of young people and Malaysia is still under valued compared with most Asian countries.”

 For markets that have seen the strongest growth over the past few years, for example, Hong Kong and Singapore, a modest reversal in rents and capital values is anticipated, although the severity will vary by sector, according to Paul Guest, who heads research and strategy for Asia Pacific at LaSalle Investment Management.

 “The cyclicality of Hong Kong and Singapore markets presents opportunities but also potential losses for existing owners. As small open economies, both are more exposed to the global economy than the larger economies of China, Japan and India.”

MGPA, the private equity real estate investment advisory company that manages $10bn of assets in Asia and Europe, has invested very successfully in Hong Kong in the past and plans to do so again in the future, says John Saunders, the CEO for Asia. “We are big fans of the Hong Kong market in the long term.”

 “However, now is not a good time in the cycle, the market is heading for a fall in the medium term in both commercial and residential sectors.  Over the next one or two years, office prices might decline as much as 20% and home values, as much as 30%.”

Hong Kong’s currency peg is the problem, according to Saunders. “Hong Kong imports all the growth from China, then pays for it with a monetary policy that’s designed to drag the US out of deflation and economic chaos. So it’s massively inflationary.”

 Singapore, Saunders says, is different and will cruise along in a less dramatic fashion. “There is no peg, they can appreciate and depreciate the currency as they need to.”

 In both markets, the reversal in the market could mean that core-type assets become available at attractive prices in a relatively small window of opportunity, says Guest. LaSalle Investment, on behalf of LaSalle Asia Opportunity Fund III, in February agreed to sell its interest in Twenty Anson, a Green Mark Platinum Grade-A office building in Singapore. The property will be sold to CapitaCommercial Trust for an agreed property value of S$430m ($342m).

 Together with other Asia-Pacific countries, hotels also present an intriguing opportunity in Hong Kong and Singapore, Guest adds. In April, LaSalle Investment, on behalf of LaSalle Asia Opportunity Fund II, agreed to sell its 100% shareholding interest in Novotel Nathan Road Kowloon Hong Kong for an agreed property value of HK$2.368bn ($305m). The interest will be sold to funds managed by Gaw Capital Partners and CSI Properties.

 Very high tourist arrivals in recent years have resulted in strong average room rate growth and above-average occupancy rates, according to Peter Wittendorp, managing director for Asia at AEW Asia Pte. Ltd. “The key risk however remains that weak global economic growth and a retrenchment in business confidence with resulting cost containment focus could tamper this current optimism.”

 Some core areas of opportunity in Hong Kong and Singapore this year include high-yielding hi-tech logistics warehouses and niche medical suites in Singapore, and mid-tier hotels in Hong Kong, especially those near key commercial areas, Guest says.

 The implementation of government anti-speculation measures by Hong Kong and Singapore have targeted the residential sector, prompting more investors to move into warehouse and other commercial properties, Wittendorp adds. Ultimately, a certain tolerance for capital value volatility is required.

 “Return is correlated to risk, for example, no risk no gain, and Asia tends to have a higher return profile in the longer-run given the stronger underlying economic growth that translates into incomes and ultimately rents and capital value.”

 “There is also little evidence that anyone can consistently time when markets bottom or peak particularly in an industry that is not very liquid, so yes you do need a strong stomach to ride the volatility.  It also helps to be conservative in the use of leverage.”

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