Asia Pacific Real Estate – Emerging Trends 2008

Saturday, 23 February 2008

Review by Terry Boyle

Price Waterhouse Coopers and Urban Land Institute have recently published a comprehensive report on trends in the Asia Pacific region. They surveyed participants representing a wide range of industry experts—investors, developers, property companies, lenders, brokers, and consultants. This 53 page report ‘Emerging Trends in Real Estate Asia Pacific 2008' provides an outlook on Asia Pacific real estate investment and development trends, real estate finance and capital markets, property sectors, metropolitan areas, and other real estate issues.

The report tables a consensus outlook for the future and reflects the views of more than 200 individuals who completed surveys and/or were interviewed as a part of the research process for the report.

A summary of emerging trends include:

* Top ten Asia Pacific investment cities: Singapore, Tokyo, Osaka, Hong Kong, Beijing, Seoul, Ho Chi Minh City (former Saigon), Guongzhau, Mumbai and Kuala lumpur. Jakarta ranked last.

* The Asia Pacific real estate market is growing and still offers opportunities for investors and developers in 2008. However, stiffening competition continues to compress yields to their lowest points. Therefore, a new flow of investments is heading into less mainstream markets for the possibility of producing higher returns.

* On overall economic and market fundamentals, regardless of interest rate increases, Asia Pacific real estate executives' responses remain strong. However, an added degree of risk is being introduced as real estate is offering lower returns at higher leverage. In 2008, participants will still have higher—albeit slightly diminished—real estate firm profitability when compared with 2007.

* An oversupply of foreign exchange reserves, rising occupancy and staffing costs, market transparency, and interventionism of regional governments are topics that investors will be following. Each of these areas is of concern and may possibly affect investment and development opportunities as the year progresses.

* Opportunity funds, institutional investors, and publicly listed companies will lead the growth in real estate investing in 2008. High levels of equity capital continue to pour into the Asia Pacific property pool. Most executives believe that these markets are attracting even more capital than in 2007. The majority of real estate capital in Asia is private equity, which has kept the markets moderately oversupplied. Investment capital flows across all continents, but with strongest growth in flows coming from the Middle East, China, and other Asia Pacific countries.

* Due to relatively low-cost debt, an increase in leverage continues to be popular among Asian property investors. However, little interest remains for securitized financing deals such as CMBS or CDO deals. Therefore, most Asian markets don't risk having too much exposure to credit meltdowns similar to those witnessed in the United States in 2007.

* The boom of REIT growth in 2007 looks to slow slightly as 2008 approaches. Australia continues to be the dominant player within the Asia Pacific region, followed by Japan with over 40 publicly listed property companies. Yield compression seems to have taken its toll on the REIT industry, as private equity isn't attracted to only capital growth investments. Regardless, executives continue to be confident that the industry will emerge as a major force in Asia.

* Based on investment prospect ratings, the top five markets are Shanghai, Singapore, Tokyo, Osaka, and Hong Kong. Compared with last year, four of the five cities remain in the top five, with the only addition being Hong Kong. Other notable increases in rank are Seoul, Ho Chi Minh City, and Mumbai moving into the top ten.

* For 2008, the hotel sector tops the list of real estate performance prospects, followed by the office sector, which led all others in 2007. Hotel growth looks strong as there continues to be demand for rooms in most of the major cities. On the development front, residential (for-sale) properties comes out on top. Not all cities would agree, but an increase in urbanization, second-home markets, and household income supports this sector's strong growth.

Steven Blank from Urban Land Institute in his observations stated "it is expected that even greater amounts of capital will be flooding Asia Pacific real estate markets in 2008. The real challenge for investors will lie in finding the right assets against the backdrop of yield compression and scrutiny by regional governments and tax authorities," he added.

The full report can be downloaded from PWC web site.

Source: PWC publication “Emerging Trends in Real Estate Asia Pacific 2008” – Urban Land Institute, September 2007, USA.