Real estate investor sentiment in the Asia Pacific property sector remains relatively positive, despite continuing global economic uncertainty, according to Emerging Trends in Real Estate® Asia Pacific 2013, a real estate forecast jointly published by the Urban Land Institute (ULI) and PricewaterhouseCoopers (PwC).
However, while steady economic growth, rising incomes, and stable or increasing property values are contributing to an overall sense of optimism, the outlook is tempered by concerns among investors that prime assets in key real estate markets in the Asia Pacific region are becoming overpriced. As a result, the report finds that markets outside core cities are increasingly attractive for investment and development. This is reflected in Jakarta, Indonesia, being named the top choice for both investment and development prospects for 2013.
“With high rents, high capital values, low yields, and an abundance of local capital, many international investors are struggling to see attractive investment opportunities in Asia Pacific’s prime real estate markets,” commented ULI Trustee and ULI North Asia Vice Chairman Richard Price, Chief Executive, Asia Pacific for CBRE Global Investors. “As a result, investors are expanding their horizons as they seek compelling investment opportunities. Some are looking at frontier markets such as Indonesia, while others are revisiting often overlooked capitals such as Kuala Lumpur and Bangkok, which explains the strong showing for these locations in this year’s report. Secondary markets such as Kowloon in Hong Kong and second-tier Chinese cities are also experiencing increased interest from international buyers. At the same time, core investment markets in many mature, western cities are seeing a surge in demand from newly formed Asian Institutional Investors seeking to capitalize on the post-global financial crisis corrections there.”
“Investors’ interest in alternative asset classes is also shown in our report. The overall dearth of investible options across Asian markets has led some opportunity players to migrate towards more focused strategies in niche sectors, especially where these require an element of expertise that domestic players lack,” commented K.K. So, the Asia Pacific Real Estate Tax Leader at PwC Hong Kong. “These alternative asset classes provide not only a measure of protection against cheaper local money, but they also are relatively sheltered from economic volatility. The logistics sector was mentioned favorably by several interviewees, especially in Japan, where distribution infrastructure has been reorganized in the wake of last year’s earthquake, and also in China, where the requirements of domestic consumers, especially in the e-commerce arena, continue to outpace the capacity of local logistics networks that have traditionally been oriented towards meeting exporter demand.”
Top Investment Markets for 2013
Overall, respondents were more bullish on the prospects for individual cities, awarding higher scores than in the previous two years. The top five investment markets for 2013 are predicted to be:
1. Jakarta - Topping the rankings for both investment and development for the first time, Jakarta is described as a “surprising” choice given the city’s lack of investment grade stock and its economy, which while growing, lacks the enterprise, scale and infrastructure of its more developed neighbors. However, Jakarta is seen by many real estate professionals as the most favorable emerging market in the region, with business transactions generally easier and more transparent than in other frontier markets such as Vietnam. The country’s interest rates and inflation are stable; the gross domestic product is growing steadily; and foreign direct investment grew by 39 percent in the first half of 2012. Demand for property is strong, resulting in year-to-year office rents leaping by 29 percent. Despite some challenges, such as difficulties securing bank debt and locating reliable local partners, Jakarta holds significant promise.
2. Shanghai – Shanghai’s office market and retail market have proved mainstays for foreign funds looking to invest in Chinese real estate. Both sectors remain popular, given the city’s relatively user-friendly business environment, growing volume of institutional grade properties and historic market performance. However, in spite of Shanghai’s strong ranking, the city is not as appealing to foreign investors as it was a few years ago. Prices are considered to be relatively high, the market has become saturated, and Chinese regulators have become less open to foreign investment, as they have increasing confidence in the ability of local real estate practitioners to finance and develop properties. While Shanghai will remain firmly on the radar of foreign funds with a mandate to invest in China, activity in the city will remain muted for the short term.
3. Singapore – Singapore retains its popularity among real estate investors who see the market as a safe haven offering solid, but not spectacular, returns that are underpinned by the city’s position as a global financial hub. The city’s office market has recently run out of steam with significant amounts of new Grade A office space drawing tenants away from existing buildings, a problem which is compounded by a shrinking head count in the local financial sector. Rising vacancies and falling rents are causing problems for some international funds looking to exit the market.
4. Sydney – Sydney has seen a limited amount of new supply of commercial space in recent years, although a significant amount of office and retail space is in the pipeline for 2015. A shortage of institutional grade property has continued to suppress sales volumes and kept prices buoyant, driving up total returns for office assets. Australia has absorbed more international real estate investment over the past year than any other country in the Asia Pacific region. Office assets remain a popular target for these funds and some analysts believe that foreign investors account for 30 percent of the transactions in the sector.
5. Kuala Lumpur – Kuala Lumpur is beginning to enter the real estate limelight, offering a stable market with good opportunities for opportunistic returns. While property sales slowed noticeably in most Asian markets during the third quarter of 2012, Kuala Lumpur was the exception. The long-term prospects for the commercial property market are deemed by many to be strong, due to the success of the government’s Economic Transformation Programme in drawing foreign investment.
In addition to Shanghai, several other cities in China – including several second-tier cities as well as Beijing – were placed in the top ten listing for both investment and development prospects. Despite concerns related to rapid growth and surging prices, the report points out that it is not unusual for emerging markets to witness unexpected price movements, and that such shifts must be viewed within the context of local market conditions.
Japan, notes Emerging Trends, continues to recover from the earthquake and tsunami of March 2011; however, a number of investors are seeing potential in the logistics sector as the country rebuilds its distribution infrastructure. While Tokyo is ranked 13th for investment prospects and 18th for development prospects, many investors feel the city’s outlook is improving. It is seen as a magnet for foreign investment, with core funds looking at the office sector, and more opportunistic investors heading for the residential sector.
Emerging Trends in Real Estate® Asia Pacific 2013 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 400 internationally renowned real estate professionals, including investors, developers, property company representatives, lenders, brokers and consultants. It is being released at a series of events throughout Asia that are being hosted in November and December by PwC and ULI Asia Pacific, which serves ULI’s nearly 1,000 members in the Asia Pacific region.