Richard Price, chief executive officer, Asia Pacific, CBRE Global Investors
As investors worldwide try to assess the depth and duration of China’s economic slowdown, more than 200 real estate industry leaders focused on the prospects for ongoing investment in emerging markets at a forum sponsored by ULI and the National University of Singapore’s Institute of Real Estate Studies. It was held September 21 at the Four Seasons Hotel in Singapore.
The emerging market of greatest interest to many of those in attendance was China, where the government has recently implemented controls to cool the property market. Despite the fear of some in the real estate industry that the China bubble has popped, panelists said they believe that such a pessimistic outlook was unwarranted.
Joseph Gyourko, director of the Zell/Lurie Real Estate Center at the Wharton School at the University of Pennsylvania, outlined the recent swings that the Chinese property market has experienced. “There has been a spectacular run-up in land prices in China,” he said. “The index we have is for 35 cities. . . . Eleven of those cities, since 2003, have had compound annual average growth rates above 20 percent. . . . There are another 15 of those cities between 10 and 20 percent.” Since the Chinese government instituted cooling measures, however, “we have seen the beginnings of some real declines in the land market, not the housing market. In the land market we have seen some collapses, and that raises the question of what will that do to the broader economy.”
Zhu Haibin, chief economist and head of Greater China economic research at J.P. Morgan, said, “Real estate investment in China is about 25 percent of total fixed-asset investments [FAI], and FAI is about 60 percent of China’s GDP [gross domestic product]. So for this year in our forecast, we expect that China’s real estate investment will slow down from last year [which was] at 30 percent growth, and this year we’re talking about 13 to 14 percent growth. So roughly speaking, we expect this slowdown in real estate investment alone will [account for] about two-thirds of China’s slowdown this year. So, China’s economic slowdown is related to the housing market adjustment.”
Haibin also pointed out that although the government has plenty of room to lower interest rates further or increase spending, it has been reluctant to do so because previous measures have indirectly funneled capital back into real estate rather than stimulate the economy. “From the policy makers’ perspective, a rebound in house prices is probably the last thing they want to see for this year, not only for [such a policy] involving economic risk, but more important is the political risk and the social stability risk involved,” he said. For that reason, Haibin expects China’s fiscal and monetary policies to remain unchanged in the near term as policy makers work to maintain stable housing prices and a moderate recovery in transaction volume.
Richard Price, chief executive officer, Asia Pacific, CBRE Global Investors, said China’s property markets have stabilized. “The next 12 months or so will continue to be an interesting window of opportunity to enter the market and benefit from that correction . . . in land values,” he said. Casting aside fears that the decline in Chinese land prices mirrors the declines seen recently in the West, Price said, “The other thing, which I think gets overlooked in a lot of the discussion, is that this is an engineered slowdown, unlike the subprime crisis in the United States. This is a correction by design.” One data point that supports this distinction is CBRE’s recent experience selling high-rise condominiums. Price noted that 80 percent are owner-occupied. “And of that 80 percent,” he said, “over 70 percent of [owners] are not actually financing the purchase at all. The leverage in the system is not likely to be to a point [where] you see a big collapse.”
Noting the possibility that the Chinese property market may have already begun to recover, Price said, “It’s going to be one of the more interesting investment opportunities over the next ten to 20 years in global real estate and capital markets, but it’s definitely not the only game in town. There are plenty of other interesting developed and emerging markets investment strategies that you can pursue.”
South Asian Outlook
In a panel addressing the outlook across south Asia, Brandon Sedloff, managing director of ULI Asia Pacific, asked participants what aspects of their current investments kept them up at night.
Rob Garman, executive director, south Asia, of Hongkong Land, and Jeremy Choy, head of capital transactions, Asia, for MGPA, both noted the lack of high-quality information in emerging markets. Garman said he worries about “the opacity of the markets” in general, while Choy was more specific, citing how difficult it is to track supply in the Kuala Lumpur office market, where there are many sites available for development and the government is considering developing a new financial district and 100-story tower. Boaz Boon, senior vice president for research at CapitaLand, said the major risks faced by his firm were policy changes in their residential markets and the stability of global financial cash flows.
All of the participants expressed continued confidence in the Singapore office market. Regarding Hongkong Land’s development, Garman said, “We’re not too worried about the vacancy; and just a mild concern over rents. Medium to long term, it’s still a good market to be in.” Both Garman and Boon, however, said they think the Singapore government’s desire to keep rental rates artificially low should be reconsidered. “You tend not to see customers moving from Hong Kong to Singapore because of pricing,” Garman said. “Our customers are here because they need to be here.”
Boon added, “Just because the rental is high doesn’t mean that tenants won’t be coming. So, I think the Singapore government probably has to check that notion that we have to keep our office rental low; what’s important is being competitive in a business and attracting more multinational corporations and especially financial institutions into Singapore.”
Panelists noted a number of other regional investment opportunities aside from Singapore. Garman said Hongkong Land is “keeping a close eye on Vietnam at the moment. We are looking at potential opportunities where large-enough sites have been cleared in the city center . . . where all of the hard work has been done and we can try to pick those sites up for a lot less than they were two or three years ago.” Choy said MGPA is “looking at a lot of opportunities in essentially Sydney—perhaps Brisbane and Melbourne—that seem to be quite interesting for the funds that we manage.
“And I think Tokyo office is also a ‘flavor of the year,’ ” Choy said. “I understand that a lot of the funds are also looking in Tokyo. We’ve been recently successful in terms of closing on two acquisitions in Tokyo over the last six to seven months, and the properties are outperforming our underwriting. We remain positive that there could be a couple more opportunities there.”
Of course, execution risk is the primary challenge that investors face when entering new markets, particularly emerging markets. To mitigate this risk, each of the firms has adopted a different strategy for partnering with local operators. At MGPA, Choy says they “typically try to avoid JVs [joint ventures] because, at the end of the day, I don’t believe our LPs [limited partners] are exactly giving us their capital for us to kind of give it to someone else.” Also, he noted, “the value proposition that we try to bring to LPs is that we are able to be local in whatever markets we are targeting.”
In contrast, almost all of Hongkong Land’s investments are joint ventures in which “whomever we partner with must be able to put the same amount of dollars down as we do,” said Boon. CapitaLand also pursues JVs, but stresses their need for control in all partnerships. “It’s just like in a marriage,” Boon said. “Most important is not just falling in love at first sight . . . but really to be able to live together, tolerate one another.” In certain economies, however, they cannot maintain that kind of control. “Really, it’s very sad,” he said. “We’ve got to divorce.”