Asia real estate navigating storm
Wednesday, 4 June 2008
The confluence of economic uncertainty brought on by the deepening subprime crisis has posed a real risk of a systemic financial event and a prolonged global economic slowdown. This, coupled with another round of de-leveraging in the structured credit market has led to further pressure and deterioration in real estate prices, predominantly in the US and Europe. Given that the pendulum swung as far as it could in the direction of reckless mortgage lending, it will now swing back towards the quaint notion of buyers being lent only the amount they can reasonably be expected to pay back. Whilst the rout has largely been confined to markets outside Asia, we see considerable softening in real estate markets with high foreign participation and in certain high-end segments. Opportunistic investors are pulling back from Asian property given more scope for acquiring distressed assets in their home markets, and loans remain elusive in Japan and Singapore, one of their favourite markets.
Hedge funds have stopped dabbling in property in the region, and although private equity players will continue to develop property in India and China, they are more likely to buy buildings cheaply in Western countries than in Asia. We expect values for US commercial real estate to fall by 23 percent in the next five years from their 2007 peak, causing losses of about $1,600 billion, including those on commercial mortgage-backed securities. London office values have dropped 12 percent from a peak in the middle of last year, and will be under further pressure from forecasts of a 15% decline in rental values through 2009.
In 2007, total direct investment in Asia jumped 27 percent to $121 billion - a sixth of the global total - with approximately half invested in Japan and Singapore. Real estate stock in Asia currently stands at $9.5tln, growing on average by 6 percent-7 percent pa except in China which grew by 15 percent pa.). China and India make up 50 percent and 12 percent of the total stock respectively while Japan constitutes 20 percent of the total. The demand for real estate is dependent on the health of the economy, which in turn is affected by financial markets. In 2008, we expect prospects for Asia's real estate to remain lukewarm, especially in traditional FDI led markets like Singapore. The global economy still faces major uncertainties in regards to how a further unraveling of the credit crisis will affect the availability of credit and asset pricing. The resilience of Asian economies and the real estate market will be truly tested in 2008. Buoyant domestic consumption is expected to help the region weather a substantial economic slowdown as weaker global demand impacts Asian exports.
Overall, despite the risks inherent in the region, we believe opportunities remain in Asia's real estate market, driven by sound GDP growth (projected at 8.0 percent y-o-y) underpinned by sustained private consumption, higher public and private investments; a re-rating of property as an asset class, sustained domestic demand and on-going infrastructure development. We remain bullish on India and Vietnam, with a cautious view on China, Malaysia and Singapore.
China's real estate market is still subject to the consequential effects from a possible slowdown in the US economy spurred by the subprime mortgage crisis, given the dominant role that the US consumer plays in driving the demand side of the world economy. We also anticipate strong competition and stricter restrictions on foreign investment in the Tier-I cities to result in foreign investors shifting their preference to Tier-II or Tier-III cities such as Chengdu, Chongqing and Hangzhou. However, the China's real estate market is expected to continue to benefit from the country's strong fundamentals which will remain the driving force of the sector's growth in 2008. The real estate market will also enjoy the boosting effect from the 2008 Summer Olympic Games in Beijing and Shanghai. We caution that valuations post-Olympics in real estate market in Beijing and Shanghai will see considerable adjustment as rentals and demand adjust themselves.
Sustained growth momentum over the years has in turn boosted the demand for real estate. Property prices increased in most cities, especially in Mumbai and Chennai, with capital values of commercial properties increasing by 40 percent and of retail properties by between 20 percent and 35 percent over the past two years. India's real estate sector is expected to reach $90bln by 2015 from $14.8bln in 2007. High demand for commercial real estate driven by IT-ITES sector is likely to continue. Increasing real estate costs and a shortage of manpower in Tier I and II locations are encouraging IT companies to set up offices in Tier III cities such as Chandigarh, Jaipur, Kochi, Mysore, Indore, Bhuwaneswar, Ahmedabad and Nagpur.
After a period of up-cycle in 2003-2006, the Malaysian residential property is expected to reach a plateau in 2008, underpinned by the aggressive launches of mid-to-high developments since 2006. The high-end residential market is expected to witness a period of rationalisation and consolidation this year, and lose significant steam into 2009 on the back of increased supply, i.e. completion of new condominiums during the period. Meanwhile, the outlook of the office sector is also highly dependent on the economy achieving its projected growth of 5.7 percent y-o-y this year, which would subsequently improve the performance of the services sector. Prospect for real estate properties this year will largely depend on the location and development profile of the area. In relation to this, we expect the Grade A office space as well as luxury residential market in prime locations to remain in positive territory in 2008.
After coming off one of its best years in nearly a decade, the growth in the Singapore residential property sector has begun deteriorating in 2008, in light of recent caution in the market brought about by a host of factors ranging from global credit crunch concerns to measures undertaken by the government. The main structural risk to Singapore's property market is the consequential effects from a possible slowdown in the US economy spurred by the subprime mortgage crisis impacting demand in high-end residentials. We caution on high-end residential, but remain buoyant on the Singapore mass market segment. Investors are expected to adopt a wait-and-see attitude before making purchases, given the slowdown in the US economy which is still unfolding premised on Singapore's close trade and investment links. In the long-run, however, Singapore still offers one of the most attractive real estate plays in the region given its sounds macro fundamentals and its status as an Asian hub.
The entry into the WTO in Nov 6 has encouraged more foreign firms to invest and operate in Vietnam. The effect of the accession has resulted in robust demand for office, retail and industrial space. Financial institutions will continue to form the key source of demand for the office sector as the deregulation will allow domestic entities to expand their businesses and international players to establish their presence in Vietnam. Further, Vietnam is currently undergoing major infrastructure development in terms of economic and industrial zones spread around the country to spur both foreign and domestic investments. We remain optimistic on Vietnam's real estate, given firm macro fundamentals underpinned by the strong FDI flows and continued measures by the government to improve investment climate and efficiencies in the government machinery.
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Kuwait Finance House
Hedge funds have stopped dabbling in property in the region, and although private equity players will continue to develop property in India and China, they are more likely to buy buildings cheaply in Western countries than in Asia. We expect values for US commercial real estate to fall by 23 percent in the next five years from their 2007 peak, causing losses of about $1,600 billion, including those on commercial mortgage-backed securities. London office values have dropped 12 percent from a peak in the middle of last year, and will be under further pressure from forecasts of a 15% decline in rental values through 2009.
In 2007, total direct investment in Asia jumped 27 percent to $121 billion - a sixth of the global total - with approximately half invested in Japan and Singapore. Real estate stock in Asia currently stands at $9.5tln, growing on average by 6 percent-7 percent pa except in China which grew by 15 percent pa.). China and India make up 50 percent and 12 percent of the total stock respectively while Japan constitutes 20 percent of the total. The demand for real estate is dependent on the health of the economy, which in turn is affected by financial markets. In 2008, we expect prospects for Asia's real estate to remain lukewarm, especially in traditional FDI led markets like Singapore. The global economy still faces major uncertainties in regards to how a further unraveling of the credit crisis will affect the availability of credit and asset pricing. The resilience of Asian economies and the real estate market will be truly tested in 2008. Buoyant domestic consumption is expected to help the region weather a substantial economic slowdown as weaker global demand impacts Asian exports.
Overall, despite the risks inherent in the region, we believe opportunities remain in Asia's real estate market, driven by sound GDP growth (projected at 8.0 percent y-o-y) underpinned by sustained private consumption, higher public and private investments; a re-rating of property as an asset class, sustained domestic demand and on-going infrastructure development. We remain bullish on India and Vietnam, with a cautious view on China, Malaysia and Singapore.
China's real estate market is still subject to the consequential effects from a possible slowdown in the US economy spurred by the subprime mortgage crisis, given the dominant role that the US consumer plays in driving the demand side of the world economy. We also anticipate strong competition and stricter restrictions on foreign investment in the Tier-I cities to result in foreign investors shifting their preference to Tier-II or Tier-III cities such as Chengdu, Chongqing and Hangzhou. However, the China's real estate market is expected to continue to benefit from the country's strong fundamentals which will remain the driving force of the sector's growth in 2008. The real estate market will also enjoy the boosting effect from the 2008 Summer Olympic Games in Beijing and Shanghai. We caution that valuations post-Olympics in real estate market in Beijing and Shanghai will see considerable adjustment as rentals and demand adjust themselves.
Sustained growth momentum over the years has in turn boosted the demand for real estate. Property prices increased in most cities, especially in Mumbai and Chennai, with capital values of commercial properties increasing by 40 percent and of retail properties by between 20 percent and 35 percent over the past two years. India's real estate sector is expected to reach $90bln by 2015 from $14.8bln in 2007. High demand for commercial real estate driven by IT-ITES sector is likely to continue. Increasing real estate costs and a shortage of manpower in Tier I and II locations are encouraging IT companies to set up offices in Tier III cities such as Chandigarh, Jaipur, Kochi, Mysore, Indore, Bhuwaneswar, Ahmedabad and Nagpur.
After a period of up-cycle in 2003-2006, the Malaysian residential property is expected to reach a plateau in 2008, underpinned by the aggressive launches of mid-to-high developments since 2006. The high-end residential market is expected to witness a period of rationalisation and consolidation this year, and lose significant steam into 2009 on the back of increased supply, i.e. completion of new condominiums during the period. Meanwhile, the outlook of the office sector is also highly dependent on the economy achieving its projected growth of 5.7 percent y-o-y this year, which would subsequently improve the performance of the services sector. Prospect for real estate properties this year will largely depend on the location and development profile of the area. In relation to this, we expect the Grade A office space as well as luxury residential market in prime locations to remain in positive territory in 2008.
After coming off one of its best years in nearly a decade, the growth in the Singapore residential property sector has begun deteriorating in 2008, in light of recent caution in the market brought about by a host of factors ranging from global credit crunch concerns to measures undertaken by the government. The main structural risk to Singapore's property market is the consequential effects from a possible slowdown in the US economy spurred by the subprime mortgage crisis impacting demand in high-end residentials. We caution on high-end residential, but remain buoyant on the Singapore mass market segment. Investors are expected to adopt a wait-and-see attitude before making purchases, given the slowdown in the US economy which is still unfolding premised on Singapore's close trade and investment links. In the long-run, however, Singapore still offers one of the most attractive real estate plays in the region given its sounds macro fundamentals and its status as an Asian hub.
The entry into the WTO in Nov 6 has encouraged more foreign firms to invest and operate in Vietnam. The effect of the accession has resulted in robust demand for office, retail and industrial space. Financial institutions will continue to form the key source of demand for the office sector as the deregulation will allow domestic entities to expand their businesses and international players to establish their presence in Vietnam. Further, Vietnam is currently undergoing major infrastructure development in terms of economic and industrial zones spread around the country to spur both foreign and domestic investments. We remain optimistic on Vietnam's real estate, given firm macro fundamentals underpinned by the strong FDI flows and continued measures by the government to improve investment climate and efficiencies in the government machinery.
.....................................
Kuwait Finance House