Strong Real Estate
Fundamentals Seen for Asia in 2014, Says Emerging Trends in Real Estate® Asia
Pacific 2014; Japan Regains Status As A Magnet For Investment And Development
Robert
Krueger
SHANGHAI (December 5, 2013) – Real
estate fundamentals are expected to remain strong in markets throughout Asia in
2014, with stiff competition for conventional assets in prime markets boosting
the popularity of niche property sectors and secondary markets for investments,
according to Emerging
Trends in Real Estate® Asia Pacific 2014,
a real estate forecast jointly published by the Urban Land Institute (ULI) and
PwC.
The report notes that, unlike other
asset classes, real estate in Asia “barely flinched” this year in response to
the tapering of the U.S. economic stimulus and expectations of higher interest
rates. This is due, in part, because of the increase in sovereign wealth and
institutional capital being directed to Asian markets, as well as the
substantial volume of Asian capital being exported from China, Singapore and
South Korea into real estate assets across the region.
“While Asia’s robust market has been
accompanied by higher prices and lower yields for core products, investors have
reacted not by pulling away from real estate in Asia, but by finding new ways
to make the numbers work, including a focus on specialized property types such
as senior care or logistics, and on opportunities in emerging markets,” said
ULI North Asia Chairman Raymond Chow. “We do expect some headwinds as
rising interest rates compress yields further, but overall, we are very
encouraged by the optimistic view reflected in the report.”
“If we look at new ways to enhance
returns, we can see investors are trying to enter at the development level and
an increasing number of co-invested development deals are now being struck,”
said K.K. So, the Asia Pacific Real Estate Tax Leader at PwC Hong Kong.
“Several large institutional players that have opened offices in Asia in order
to gain access to direct deals have opted to co-invest in development sites as
a means of securing core assets that would otherwise be unavailable or be too
expensive. This is something of a departure from normal practice at
institutional funds, but is being driven mainly by necessity. Besides, we also
see a trend towards lower opportunistic returns and investors are opting for
longer investment windows.”
Emerging Trends,
which is being released today in Shanghai and at a series of events across Asia
over the next week, provides an outlook on Asia Pacific real estate investment
and development trends, real estate finance and capital markets, and trends by
property sector and metropolitan area. It is based on the opinions of more than
250 internationally renowned real estate professionals, including investors,
developers, property company representatives, lenders, brokers and consultants.
The generally positive outlook for
many markets throughout the Asia Pacific region is highlighted by the
re-emergence of Japan (after a five-year absence from the top rankings) as a
favored market for investment and development. The country is one of the
largest beneficiaries of capital flows from other regions within Asia, notes
the report. Its increasing popularity is attributed to the government’s massive
economic stimulus plan, which has resulted in a flurry of property purchases in
anticipation of rapidly rising prices. In addition to Tokyo, secondary cities
in Japan, including Osaka, Fukuoka and Sapporo are gaining appeal among
investors, notes the report. Outside of Japan, the survey found continuing
interest in assets located in Asia’s emerging markets, including Jakarta and
Manila. The reason, says Emerging Trends, is that as “cap rate
compression continues to squeeze returns, and with higher interest rates
seemingly just around the corner, investors are drifting to markets that can
provide the kind of returns they are unable to tap elsewhere.”
Top Investment Markets for 2014
- Tokyo – Claiming the top spot is
Tokyo, which has emerged as an investment magnet soon after the
introduction of dramatic economic reforms aimed at boosting the economy.
Transaction volume picked up significantly in 2013 and, with the success
of the stimulus program yet to be determined, buying is expected to
continue next year. Tokyo is ranked second for development prospects for
2014.
- Shanghai – Shanghai, described as an
“evergreen” market for investors, is ranked second for investment
prospects. Despite cap rate compression and stagnant rental growth, real
estate in the city continues to draw international investors because
Shanghai is widely perceived as a well-known, low-risk market for those
who are unwilling to venture into lesser-known cities. Shanghai offers a
“level of comfort” to funds with a mandate to place money in China, says
the report. The city is ranked fourth for development prospects.
- Jakarta – Jakarta is ranked third for
investment potential, despite a lack of market transparency, and
difficulties obtaining entitlement, and competition from local businesses
and individuals. Newly released office stock in Jakarta is of better
quality than in previous years, and there continues to be strong demand
from companies seeking space, including the currently under-supplied
central business district. Jakarta is ranked first for development
prospects.
- Manila – Manila moves up to fourth place
for 2014, the result of a fast-growing economy, the increasing popularity
of the city as a destination for multinationals seeking outsourced
services, and a growing awareness that the problems long associated with
lack of transparency and governance issues are improving. The city is also
benefiting from a young demographic, strong capital inflows from local
citizens working overseas, and a workforce with a cultural affinity with
the West. Manila is ranked eighth for development potential.
- Sydney – Sydney rounds out the top five
markets, holding its appeal for both local and foreign institutional
investors despite relatively weak fundamentals in its office and retail
sector, and some concerns over the financial and mining sectors. Still,
with a limited supply of office space in the pipeline, investors are
bullish about the city’s central business district; and its residential
sector has experienced a solid rebound. Sydney is ranked eleventh for
development prospects.
Investment Prospects by Property Type
- Industrial/distribution – The industrial/distribution
sector is the top-rated property sector for investment potential. Emerging
Trends notes that the sector is undersupplied, due to extra demand for
storage facilities being fueled by increased online consumer spending in
Asia. Best bets for investments in industrial properties: China’s
secondary cities, as well as Shanghai and Guangzhou.
- Residential – Residential ranks second,
although the report cautions about high prices affecting housing
affordability, the likelihood of higher home mortgage interest rates, and
the ongoing impact of government intervention in China to control further
price increases. Best bets for residential investments: Manila, Tokyo and
Jakarta.
- Office – Office space is listed third
for investment potential, with the mediocre ranking attributed to “fevered
competition from too much investment capital fighting over the same deals,
especially in core assets. Best bets for office investments: Tokyo, Manila
and Jakarta.
- Retail – The retail sector ranked
fourth for investment potential, with some concerns being expressed about
overbuilding in some secondary markets. However, opportunities in prime
downtown locations still hold much promise. Best bets for retail
investments: Manila, Jakarta, Tokyo and Shanghai.
- Hotel – While hotels ranked fifth for
investment potential, the sector is still seen as general solid, due to a
rapidly growing tourism industry and relatively high yields. Tokyo leads
as the best bet for hotel investment, as the city begins preparations to
host the 2020 Summer Olympics.
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