The inflow of outside capital arriving in Asia Pacific real estate markets in 2005 and 2006 was remarkable as it marked the start of a wave of foreign interest in regional property assets, but the follow-up in 2007 has been no less extraordinary, a survey on 'Emerging Trends in Real Estate Asia Pacific 2008 conducted by Urban Land Institute (ULI) and PriceWaterHouseCoopers (PWC) reveals.
In 2008, even greater volumes of cash have descended into these markets as institutional funds follow the trail blazed by their more opportunistic cousins, besieging limited supplies of investable stock, forcing up prices, and sparking a migration of capital to the far corners of the region as investors fight to place funds from Tokyo to Hanoi.
But as growing competition compresses yields ever further, investors have reached a point where they have little more room to plan. With capitalization rates at the lowest, the only way for many fund managers to deploy their cash is to move less mainstream areas, by moving from established markets and opting for chancy destinations. As global interest rates continue to climb, the combination of lower overall returns and generally high levels of leverage brings an added degree to risk to an already uncertain horizon.
Demanded Markets
The hot markets noticed out in terms of property investment flows this year are Japan and China. The fact being Japan as Asia's biggest real estate market by far, accounting for 55 per cent of total deals by value, real estate investment growth in 206 was the strongest in Asia by a mile, with commercial property transactions volumes soaring 128 per cent to $52 billion, according to Jones Lang LaSalle. Further, it answers that the surge in this sector is due to Japan's economy is emerging from a multiyear period of stagnation and is seen by investors as a good bet for a cyclical recovery. Secondly, while deals are hard to execute technically, nowhere else in Asia has a market with the same depth. Thirdly, it offers a level of maturity that can only be rivaled elsewhere in the region by markets in Australia, Hong Kong and Singapore which makes it attractive to lot of new money arriving in Asia.
As per Jones Lang LaSalle, the last year direct commercial real estate deals amounted to some $9.2 billion up 70 per cent for the year. Of this, cross-border capital amounted to $6 billion, an 18 per cent rise over 2005. That now ranks China market as Asia's third biggest behind Japan and Australia, with about 10 per cent of the Asian total and just over 1 per cent of the global total. As Chinese cities have very little investable stock there is tension investing there. With a multitude of new regulations restricting market access and plenty of other pitfalls lurking in the shadows, it remains a very tough place in which to invest. China has become a speculative market, the more you are far it seems to be interesting but when near you can make out how difficult it is to get something performed. It takes at least six months in China to close a deal, whereas in Singapore, Hong Kong or Tokyo it takes only a month. Due to lack of transparency, the customer never knows what he has bought and suddenly the deal falls out of bed.
Retail & residential projects
The PWC & ULI study explains that one byproduct of gradual migration into Chinese and Japanese secondary markets have been increasing investment volumes in retail and residential projects. In addition, no one knows where the CBDs in undeveloped locations might eventually be established, making office development a risky prospect. Residential projects, however, are seen as a safer bet.
The drift to mass residential development is especially strong in China, where Beijing has tired of an obsessive interest in building high-end accommodation in pursuit of apparently higher margins – a development strategy that has distorted the market by failing to meet the needs of most consumers, caused land and property prices nationwide to bid up in a speculative frenzy, and left a vast pool of completed housing stock standing empty because so few can afford to buy it.
As a result, government policy is now focused on developing large tracts of low- and medium-priced housing. According to official figures, new land supply during the first five months of 2007 for all mainland residential developments grew 35.5 per cent year over year, while supply for apartment buildings grew 76.3 per cent and that for low-cost homes a remarkable 166 per cent.
Emerging markets
The trend towards building in secondary locations is also provoking a wave of investment into emerging Asian economies, the standouts being Vietnam and India. Vietnam is now drawing interest from Asian developers like Hong Kong, Singapore, Taiwan and Korea.
The ULI & PWC survey finds out while Vietnam may be a new kid on the block, another favoured kid has actually been around for a while. India has been on investors' radar since several years, but has proven inaccessible due to government restrictions. This scenario got relaxation in 2005, when some foreign investment restraints were eased. The Southeast Asian developers were the first to appear on the scene, but today India is attracting huge amounts of global capital from US, Europe and the Middle East. Foreign investments rose from 4 per cent of all Indian real estate deals in 2004 to an expected 26 per cent this year.
As per Associated Chambers of Commerce and Industry of India (Assocham), the total size of the domestic real estate market would rise from current $16 billion to $60 billion by 2010.
Furthermore, the land registration system is weak and transparency remains poor. It is said that about 70 per cent of all the cases in court in India are land related and 25 per cent of all land transactions involves corruption. In addition, there are lots of unregistered transactions because people are dealing on the black market to avoid paying stamp duty, which is up to 10 to 12 per cent at certain places. However, transparency is improving rapidly as private equity players bring in stricter management practices, longer-tem perspectives and more focus on improving building quality.
The survey states, "The growing maturity of Asian real estate markets is therefore reflected by the growing number of core investors now looking to place funds around the region. This changing dynamic has had a number of repercussions. Firstly, there are large numbers of investors with more structured and conservative investment strategies, who allocate funds rather than just deploying it wherever they see good prospects. In addition, the competition has stoked what was already a red-hot investment market with substantial amounts of new capital, boosting stiff competition to buy assets."
REITs – a provision of relief
REITs are listed in seven countries across the continent with a combined value of $185.6 billion. The biggest REIT market in Asia is Japan, where 41 JREITs are listed amounting to $46.6 billion. According to PWC & ULI survey, the Hong Kong market has probably been the most disappointing. In developing markets, REITs have for the most part failed to get out of the starting gate. India is now talking about introducing REITs next year and is meanwhile beginning to list property assets in Singapore and Dubai. In China, where some 80 per cent of property development is still financed by bank lending, REITs might seem the ideal means for shifting the burden of property development funding away from an already delicate domestic financial sector and into the capital markets.
Over the long run, REITs can emerge as a major force in Asian real estate and will help it to mature.
Government Intervention
Another recently emerging trend that has ruffled feathers in Asian property markets is creeping interference by regional governments. In Singapore, the tax is levied on developers where land values are increased as a result of government rezoning. In addition, the government has boosted the amount of land released onto the market in an effort to reduce perceived shortages that have contributed to large capital and rental price hikes over the last 12 months.
In Korea, a government reaction against foreign investors has now made difficult to attract the deals which come by. About couple of years ago, 70 to 80 deals had been done entirely by foreigners. Further, the interventions continued in Malaysia, Japan and China.
Markets in India
Based on ULI & PWC survey, the following cities in India tops in real estate market:
Mumbai
Mumbai is the top ten in investment prospect rankings. The investors as in other cities in India face several hurdles due to transparency. Few significant changes in buy recommendations include higher buy percentages in 2008 for industrial (67 per cent), lower buy percentages for retail (63 per cent), apartment/residential (down to 59 per cent) and hotel/resort (down to 64 per cent).
Bangalore
It ranks in the 12th place for investment. Bangalore is viewed as a risky market, particularly for larger non-prime township developments, simply because the expected supply is massive. Even prime residential is now twice the all time earlier peak. The sustainability of these prices is questionable. The buy recommendations have increased in 2008 for office, retail and industrial/distribution.
New Delhi
It has moved to 13th in 2008. The buy recommendations decreased for hotels from 77 per cent in 2007 to 61 per cent this year, whereas for industrial it increased to 50 per cent.
India and Israel
A Joint Study Group Report released by Prime Minister of Israel, Ehud Olmert, the then Minister of Industry, Trade & Labour of Israel and Kamal Nath in November 2005, identifies the potential areas for future cooperation and mechanisms for realising the agreed goals. It focused on Indian economy and business opportunities for the Israeli business community.
In terms of Foreign Direct Investment (FDI), India was rated as the second most attractive destination for investment according to the World Investment Report 2005 of UNCTAD, and one of the most liberal FDI policies in the world.
The real estate sector is registering an annual growth rate of 30%, an investment of $16 billion expected over the next five to six years in real estate. The returns in India range in 12-15% compared to 3-4% in more advanced countries, 100 per cent FDI is allowed under automatic route in townships, housing, built-up infrastructure and construction-development project, subject to certain conditions. The FDI up to 51 per cent is allowed through Foreign Investment Promotion Board (FIPB) route in single brand retail shops. In 2004, Securities and Exchange Board of India (SEBI) allowed venture funds to invest in local real estate and over 30 foreign funds have applied to start operations in India.
The SEBI has recently approved the scheme of Real Estate Mutual Funds (REMF), which can invest directly or indirectly in real estate property.
Conclusion
Going through the overall real estate structure, it leaves a question of doubt of choosing the right path. While the surveys mentioned here were conducted in the first part of this year which focuses mainly on optimistic outlook, the later part of the year did not speak well and has blown out customer expectations more than their prediction.
In India, the blow started with a surge in real estate prices and sooner followed by home loan rates moving in upward direction. Further, the price halt was impossible to settle down. There the Indian real estate has nosedived from the topmost ladder of being an emerging market for real estate.
The reason being Hong Kong and Singaporean money has been channeled into so many cross-border deals is that prospects in their own backyards are very limited. Besides, commercial property prices and rentals in these cities are too costly now, which hampers the prospects of future capital appreciation. The situation is caused by a rush of deep-pocketed tenants from abroad who are competing for a shrinking resource.
Apart from Asian countries, countries like US, the balance sheet never tallied for Lehman Brothers and led to its fall, which has invested a huge pie of its share in housing sector and lost the match, compelling to file bankruptcy.
The whole scenario being witnessed does not rule out the chance that real estate market is safer to invest at this moment. It may not fulfill the expectations of the customers or investors for a certain period till a logical correction is put in place.
