As the Asian property market slows, investors need to look further than First-tier cities and at new types of asset to make profits.
With its huge scale and diversity, Asia encompasses some of the worlds most sophisticated real estate markets, alongside emerging economies with very little investable real estate.
Some real estate sectors in Asia barely noticed the 2008 Financial crisis. Real Australian Residential property prices, for example, saw continuous growth – capital values in cities throughout the region have reached record levels in recent years. Therein lies a problem. Rents have grown to a level and yields have compressed to such lows that it is difficult to see how they can be sustained.
The name of the game is to pin the cap rate tail on the real estate donkey. Cities such as Singapore may still have some scope to squeeze more before capital values peak, and even First-tier Chinese cities look high-yielding compared to others in the wider region (though not by the standard of PRC interest rates). The sheer weight of money pointed at Shanghai and Beijing could yet send cap rates lower.
Other investors will be wondering where to place emerging markets such as Vietnam, Malaysia, the Philippines and Indonesia on the risk and yield curve. Is a city where the rental growth prospects are aligned to double-digit GDP growth in an emerging economy really a much worse risk than some of the very low-yielding core assets with limited rental upside in the mature, developed cities of the region? Does the 600 basis point difference between Hong Kong and Ho Chi Minh City office yields (net effective) reflect a real difference in likely future performance?
Some of the answers, not just for the Asian region but also for the world, may lie in one particular East Asian country. Japan has gone through more than two decades of extremely low interest rates, fully valued, low-yielding real estate, falling prices and depreciation.
The way the Japanese real estate market has matured is instructive. There is a case for investment, which comes not from fast-growing populations or burgeoning economies, but from stability. The capability of sound real estate markets to generate the secure income streams that an increasing number of global investors seek has made some sectors in key Japanese cities look attractive.
The long-term success of many new and emerging markets in the region will depend on them being able to offer the same tradability, openness and transparency for investors that the core gateway cities currently do.
Japan is perhaps the one real estate market in the world that is a genuine diversifier – having already previously experienced some of the monetary conditions with which the West now grapples.
CORE-PLUS – Yield compression in offices, station-front retail, high street retail
Core-plus is the most competitive segment of the market, as it has expanded to encompass multiple asset classes, including Residential, Retail, Office and Logistics. Inexpensive financing has considerably compressed yields in 2016. However, there may still be some scope for yield compression in Offices, Station-front Retail, High street retail and possibly even Logistics.
VALUE ADD – Hotels remain robust
The phenomenal growth of inbound tourism to Japan has resulted in a Hotel sector boom. Underlying growth in the industry is still robust and some hotels have room for operational improvement. Also, Hotels in outlying regions should be able to attract more tourists from megacities such as Tokyo, Kyoto and Osaka.
OPPORTUNISTIC – Supply issues in focus
Regional office property could offer attractive returns at lower prices. While many investors are concerned about a large upcoming supply in Tokyo, leasing agents in regions such as Osaka, Nagoya and Fukuoka are much more worried about no future supply and the fact there is little available existing space. On the other hand, regional cities may suffer first when the economic cycle starts to flip.
ALTERNATIVE – Self storage, data centres, student housing and health care
Popular topics are Self-storage facilities, Data centres, Student housing and Health care facilities. Despite the advantages of being a first-mover in these sectors, these relatively new asset classes have some issues, such as scalability and lack of underlying infrastructure.
CORE – HCMC office
HCMC is one of the hottest performing office markets in the region with Q4 occupancy at 97%. Strong demand remains as occupiers move up the quality chain and ensure the FIRE (Finance, Insurance, Real Estate) sectors grow their requirements in contemporary buildings.
VALUE ADD – Education
As the middle class grows there is greater demand for more refined educational needs, within Vietnam. There is an array of existing offers, however the industry is dynamic and will change with Vietnams orientation. Expect co location near the burgeoning start ups.
OPPORTUNISTIC – Logistics
The dynamic retail industry is being challenged by successful online retailers. Effective warehouse and logistics locations to provide efficient supply chain and last mile delivery will be critical. Location, location, location.
These are strange days for the Commercial real estate market in Singapore: rents have been falling for the past two years, while capital values of Grade A office buildings in the central business district are rising.
CORE – Grade A offices in Singapore CBD
This sector does not look a good prospect for 2017 as we expect rents to contract further during the year. However, we expect investor yields to compress further, too, so capital values may even rise slightly in some circumstances.
The number of CBD office buildings on sale are few and far between. Vendors are keeping their asking prices high and are hardly budging. So the fundamentals of investor supply and demand are sound, given the fact that there is still a considerable amount of global capital looking for a home.
Those in the current market paying record prices are mostly non-private equity buyers. This is because, at current prices, given the stage of the lease reversion cycle and the risks of further interest rates increases, institutions find it difficult to make a case for investing at all.
What are left are sovereign wealth funds and ultra-high worth individuals who purchase for the long term. When these two reasons come head to head the result is a ratcheting up in prices, upsetting the normal tripartite relationship between the rents, interest rate and capital values.
Australia has been relying on strong levels of immigration to defuse a demographic time bomb. This policy and demographic change provide opportunities for real estate now and in the future.
CORE – Melbourne and Sydney
Population growth in Melbourne and Sydney, coupled with infrastructure investment, means property investment opportunities abound in all sectors. As the cities grow, mini central business districts are expected to form around transport nodes, further increasing investor opportunities.
VALUE ADD – Hospitals are the new “Mega-mall”
Hospitals are a large piece of public infrastructure and generally do not close down. As demand for hospital services increases, the land around them becomes more valuable for ancillary services. Short-term accommodation, Entertainment, Retail, Offices, Consulting suites, Services and Parking are just some of the value-add opportunities.
OPPORTUNISTIC – Childcare
Increasingly, a double-income family is required to afford housing in big cities. As female workforce participation increases, demand for childcare services does too. This offers opportunities for investors and developers in both neighborhood and near-workplace Crèches, Nursery schools and Day care.
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