Gains to be made in Taiwan
The performance of the Taiwanese real estate market has generally mirrored business cycles that have had an impact on the country’s economy. The hollowing out of Taiwan’s economy in the 1990s and the bursting of the tech bubble were major blows both to Taiwan as a
whole and the real estate market, along with the industrial exodus to China of both high- and low-tech industries.
However, following a strong year for the economy in 2004 and with the implementation of a number of governmental initiatives to buoy real estate investment in the country, the first quarter of 2005 showed a continuation of the recent revival in the Taiwanese property market, which in turn is
stirring up overseas institutional interest in the rising market.
The primary focus of investor interest in Taiwan’s real estate market has traditionally been residential property and that sector has historically exhibited the highest level of development activity. The construction of retail space has generally ranked second in the development stakes behind that of residential. In Taiwan, retail properties are often mixed-use, and therefore we see that investment trends for both retail and residential development have historically moved together.
Finally, office real estate has generally drawn least investment interest in Taiwan, and therefore has been the subject of least development activity when contrasted with other real estate segments.
As Taiwan’s economy began to dig itself out of the dotcom downturn that struck in 2000, the island’s real estate market showed initial signs of awakening from its somnolent state. The market’s recovery began with the expansion of residential development after 2002, which in turn sparked increased demand for development sites.
This upturn in construction activity was triggered as developers and private investors began to sense an improved shift in economic momentum and saw the opportunity to benefit from the gradual economic revival that was penetrating various markets.
Throughout this period of increasing private development interest, the Taiwanese government also worked to revive property investment by strengthening the real estate market through changes in the regulatory environment. The government has introduced a number of measures in an attempt to revitalise the market. These include: a reduction on land value incremental tax; the introduction of a Real Estate Securitisation Law; and the adoption of a firmer stance on the preponderance of real estate related non-performing loans (NPLs), as well as carrying out the disposition of publicly owned properties.
Public properties offered for sale as well as those acquired through the restructuring of NPLs by asset management companies (AMCs) include properties from all sectors of the market. Thus the market is seeing the return and entry to the market of a great number of highly sought after, well-located, high quality facilities.
Further to its programme of revitalisation, the government is stoking development activity in Taiwan’s capital, Taipei, through the auctioning of prime development sites in Taipei City and the Hsin Yi Planned Area. The latter area has been slated as Taipei’s new financial, retail and residential hub, as well as the city’s future development focus. Highly contested government auctions of public land have highlighted the current boosted level of developer sentiment in Taiwan and have acted to stimulate office development in both the Hsin Yi Planned Area and Taipei office market locales.
However, while Taipei’s residential market began to look up in 2001, with government support and strengthened public sentiment, the office market struggled in what essentially remained a climate of economic lethargy. Office demand at the start of 2005 continued on its upswing, following a three-year slide that began in 2001.
Following the highs of 2000, the Taipei office market began to register a more subdued performance as vacancy rose. This was the result of a combination of a number of different factors. The slowness of the economy at the end of 2000 played a critical role in perpetuating the declining trend as it resulted in reduced demand for office space. Demand for space, particularly of Grade A office quality, decreased significantly at the time, as many companies were under pressure to downsize and cut costs. This trend caused the average vacancy rate for the office market to climb steadily from 1.73% to 13.01%, by the end of 2003.
It is also important to note that the hardening of the Taipei office market before 2000 generated a great deal of development interest. This initiated a heavy focus on new office development in Taiwan’s capital after 2001. The stepping-up of construction culminated, in the fourth quarter of 2004, with a major quantum of new supply, including the towering Taipei 101, coming onto the market and causing the vacancy level to spike at 18.36%.
The economic recovery, which began in the second half of 2003, sparked a reinvigoration of demand in the Grade A office market, with an increase in take-up registered during the rest of 2003 and in 2004. In 2004 there was the largest rate of take-up of office space in four years. The full-year take-up for 2004 reached almost 111,500m2, a level of demand almost equal to that in 2000 when the Grade A office market was at its highest point. In the first quarter of 2005, the demand for office space continued its rebound, reaching just over 70,600m2.
Rental values also decreased drastically in the Taipei market’s period of decline from 2000 to 2004. Average rentals compressed by 23.2%, sliding from e19.24 per m2/month in the fourth quarter of 2000 to e14.76 per m2/month in the fourth quarter of 2003. However, this decreasing trend began to stabilise in 2004, when rental values for the Taipei office market only edged down by 0.5%. Indeed the downward cycle reversed in the first quarter of 2005 as leasing levels hardened with a return to e14.76 per m2/month. It appears that this turnaround marks the return to a positive cycle that will see further rental appreciation as well as the compression of vacancy rates.
The total stock of office space in Taipei has increased by nearly 72% over the last 10 years. However, it is likely that such growth will temper and in particular that 2004, with Taipei 101 and its 213,677m2 of office space, will stand out as somewhat of an enigma. Between 2005 and 2010, the office stock in Taipei is only anticipated to increase by 16%, to 2.83 mm2, of which the majority of new Grade A office supply will be located in the eastern part of the city, particularly the Hsin Yi Planned Area.
According to our estimates, space slated for release to the office rental market from future development could come to less than 167,226m2 in the next five years. Based on the historical rate of take-up, this amount of leasing space will be easily absorbed by the market, which will in turn put upward pressure on achievable rents. Considering these dynamics, we are very optimistic on the Taipei office market in the medium term.
During the period of recovery tracked by the Taipei office market, a new market for office space emerged, which further acted to drive investment interest. Foreign institutional investors seeking commercial, income-producing property started to show investment interest in the Taipei market.
Aside from very particular exceptions, such as regulations related to national security, there are no limitations on foreign ownership of residential or commercial property in Taiwan. While there is no real estate-related investment incentive scheme, many foreign institutional players, in expectation of a hardening market, have initiated real estate investment activities in Taiwan.
However, foreign investors operating on the island have typically been more conservative in their real estate investments because of the issue of political instability perpetuated by: cross-strait tensions with China; reduced transparency in real estate transactions; and lower investment returns as compared with foreign markets, which was the case in the past.
This situation has altered with a recent spate of high profile acquisitions. In 2004, the US insurance giant AIG purchased, as income-generating properties, two office buildings in Taipei. Prudential Life Insurance also acquired its first commercial real estate in Taipei, using part of the office building as corporate headquarters and the rest as commercial office leasing space.
Merrill Lynch, meanwhile, purchased two industrial offices in Neihu Science Park as its first real estate investments in Taiwan after a prolonged absence from the market. Aside from these investors, other companies and real estate funds, such as ING, GIC, Lone Star, and GMAC are now seriously evaluating the possibility of conducting real estate investment
Rising levels of investment return have recently drawn increased investor interest to the Taiwanese investment market. After 2003, many investors began close evaluation of potential investments in Taiwan’s real estate market, as rental and capital values looked to have bottomed out. Considering the depth of the slide that occurred in the lead-up to the 2004 turnaround, we see that there is considerable room for capital value and rental appreciation that would make such properties very attractive
Yields for residential property in Taipei range from 4-5%, and those for retail property range from 5.5-6%. The equivalent figures for the office segment are 5-6.5%. Currently, institutional investors playing an active role in the market are concentrating on office properties. However, as more overseas investors tap into Taiwan’s real estate market, we expect to see their investment portfolios enlarge to also include residential and retail property.
It is the continued undercurrent of political tension between Taipei and Beijing, however, that weighs most on the minds of overseas players when making investment decisions in the Taiwan market. Despite the fact that the discord between the Taipei and Beijing authorities was soothed with a series of conciliatory gestures by Chen Shui-bian’s Democratic Progressive Party following its 2004 election victory, foreign investors are still wary of the repercussions that overly-boisterous expressions of Taiwanese desire for independence might draw from Beijing.
Recently the inauguration of anti-secession legislation by Chinese authorities in March, which authorises the use of force to stop the self-ruled island from seceding, exacerbated political
turbulence between Taiwan and China as well as creating contention within Taiwan’s own political landscape. However, with President Chen’s recent announcement of the impossibility of Taiwan achieving independence during the tenure of his presidency, foreign investors are more confident that the current status quo between Taiwan and China will not alter any time soon.
The raised level of overseas interest in the Taiwanese market, which was seen across Asia in 2004, is spilling over into 2005. Furthermore, we see this demand as driving a momentum in the market, which will direct investment interest towards other property segments. In consideration of boosted local sentiment on the back of the improved economy, as well as the growth of overseas investment interest, we see the market as having begun an upswing which we believe will continue over the next few years.
Sheng Wu Lien is a research analyst at CBRE Taiwan