Investors see Asian property markets only rising further

Editorial

Published June 27, 2007

Asia's real-estate comeback


TEN years after the Asian financial crisis, Asia's real estate markets are bubbling again, led by Singapore. Given the key role overheated property played in that crisis, it bears asking, to what extent the current exuberance is a cause for concern this time around.

According to the Global Property Guide, Singapore experienced Asia's highest residential property price increases last year, with housing prices rising 9.5 per cent in real terms (although this masks higher percentage increases in prime market segments). Quite likely, it will be a similar story this year as well. Real estate markets in China, India, Korea and the Philippines have also witnessed sharp run ups - and in those countries too, prime segments have seen double digit price increases in percentage terms. Indeed, more and more real estate funds and other institutional investors are pouring money into Asian property. Some element of speculative activity is also evident.

How much should we worry about all this? In a study on Asia's real estate markets in April, the IMF took a generally sanguine view - although with qualifications. It pointed out that while property prices have been rising more rapidly than inflation, most Asian countries 'are not experiencing unusually rapid housing price hikes'. It noted that in many cases, the increases follow on the heels of extended declines (about eight years, in the case of Singapore). Moreover, housing prices have not risen exceptionally, compared with other asset prices. On average, housing price increases have run ahead of income gains in about half the 12 countries covered, but these average prices might mask affordability problems for some segments of the population.

Apart from income gains, there are other reasons for property price run-ups: the proliferation of mortgage products and a rise in mortgage credit - especially in China and India; higher non-speculative foreign demand for housing and commercial space (which is true in Singapore as well) as well as an element of speculative capital inflows - though less than in the 1990s.

Given that the run-up in real estate prices represents a rebound after several years of decline or stagnation, it does not, as yet, create cause for concern. The fact that institutional investors are far more active players in Asia's (and particularly Singapore's) property markets this time than they were in the 1990s is also reassuring. They introduce an element of stability and resilience because they have greater financial holding power than individuals, and are less likely to engage in panic selling.

However, all that said, policymakers and banking regulators across the region need to be vigilant to ensure that lending standards do not become overly relaxed and that housing lenders are adequately provisioned against what the IMF calls 'a reasonable worst-case scenario of falling house prices'. The degree of household indebtedness - particularly in those segments of the population who are vulnerable to income shocks - is also an indicator that bears watching. But as of now, it is difficult to make the case that there are sufficient danger-signs to warrant government intervention in the market aimed at bringing property prices down.

Published June 28, 2007

Investors see Asian property markets only rising further

They effuse about India; Japan also appears to be still hugely popular


(SINGAPORE) It's a decade since an asset bubble fed the Asian economic crisis and fears swirl over the US housing market and interest rates, but investors still believe the only way for Asia's soaring property markets is up - at least for a couple of years.

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'If there are no bubbles, you don't drink beer. It's just plain water and there's no incentive to invest. Of course, if you see too many bubbles, you stop pouring.'
- Justin Chiu, executive director, Cheung Kong (Holdings)

Asian economies are booming, and property is once again the hot subject of dinner conversations from Tokyo to Mumbai, fuelled by cheap credit, cross-border investment and rising incomes.

Policy-makers fear a boom-and-bust cycle where rising real estate prices fuel inflation and force interest rates higher, leaving households and companies loaded with debt and dragging on economic activity.

But at the Reuters Real Estate Summit this week in Singapore, where some residents are seeing their rents jump 50 per cent overnight, property executives effused about India, despite a doubling in urban land prices since foreign property investment was ushered in two years ago.

Japan also appears to be still hugely popular, although average Tokyo office prices have leapt 25per cent in last two years.

And investors believe government cooling measures will bring order to China's market, while failing to stem a hunger for homes among the expanding and increasingly affluent middle class.

Justin Chiu, executive director of Hong Kong property giant Cheung Kong (Holdings), said the prospect of ever higher prices was driving Asia's notoriously sentiment-driven markets. 'If there are no bubbles, you don't drink beer. It's just plain water and there's no incentive to invest,' he said. 'Of course, if you see too many bubbles, you stop pouring.'

Cheung Kong expects mainland China to account for a third of its property earnings by 2010 from about 18 per cent now.1

The Asian continent saw some US$94 billion of property investment in 2006, up 43 per cent on the previous year, but barely one-seventh of the global total. And investors show no sign they will stop the flow.

New flavours

Morgan Stanley said last week it had earmarked for 60per cent of a new US$8 billion fund for Asia and Goldman Sachs has raised about the same amount in a couple of funds, according to a source familiar with the matter.

ING Real Estate is raising two US$1 billion funds for Asia, and private equity firm Blackstone is raising US$10 billion to spend globally.

But some market watchers wonder where all the money will be spent, and if rising values will curb investment returns.

Asian commercial property is tightly held by families and private companies, so Peter Barge, Asia chief executive of property consultants Jones Lang LaSalle, believes many investors will have to take on risky development projects. 'There's a lot of money on the books, but people are scratching their heads about what to do with it,' Mr Barge said.

Japan is a perennial favourite in Asia because its US$1.27 trillion of investment-grade property offers huge choice.

Kurt Roeloffs, Asia head for Deutsche Bank's property unit RREEF, put it at the top of his list followed by China and India. RREEF, one of the world's biggest property fund managers, plans to spend around 30 per cent of its future private equity funds in Asia, Mr Roeloffs said on Monday. China is drawing Hong Kong developers such as Cheung Kong as well as funds run by ING Real Estate, AETOS Capital and Invesco.

But the new flavours of the month are India and Vietnam, which both rank among the most opaque property markets in the world but promise internal rates of return of 25-30 per cent.

Forecasts that Indian property prices have surged too fast and could drop anywhere between 10 and 40 per cent are brushed aside on the grounds that an outsourcing boom is enriching a middle class couped up in crumbling homes built decades ago.

'India has huge potential,' said Seek Ngee Huat, head of the GIC Real Estate. An investment company of the Singapore government, and one of the world's biggest property investors, GIC is eyeing developing markets including Russia and Turkey, while cautious about London offices because of steep price rises.

Mr Barge believes Asia has at least two or three years more to run on the upward swing of its property cycle, saying: 'Mother gravity is always there.'

Mr Seek was wary that defaults on US subprime mortgages could infect the whole financial system.

'There are certainly financial risks being built up,' he said.

Meanwhile, Liew Mun Leong, chief executive of South-east Asia's biggest developer, CapitaLand Ltd, which is launching funds for China and India this year, acknowledged that property investors may not have the best crystal balls.

'It's funny but we in the property industry can always predict when the market will turn up, but we can never say when it will turn down,' he said. -- Reuters