Emerging Trends in Real Estate Asia Pacific 2011 - Executive Summary

Improving economic conditions across the region brought an end to declining rents and prices in most Asia Pacific countries in 2010, with some markets (such as Japan) still groping for a bottom and others (such as China) moving so fast they are sparking talk of a bubble. Read about the regional growth expectations for Asia Pacific and about important caveats to any Asia Pacific recovery.

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Improving economic conditions across the region brought an end to declining rents and prices in most Asia Pacific countries in 2010, with some markets (such as Japan) still groping for a bottom and others (such as China) moving so fast they are sparking talk of a bubble. With regional growth expected to remain strong over the near term, investors voiced varying degrees of optimism over market prospects, with one caveat: a sovereign debt crisis in Europe or an economic reversal in the United States could yet knock the wheels off the Asia Pacific recovery.

While price action in the real estate market has been generally positive, deal flow remains meager. A standoff has developed over valuations, and investment funds in particular have found the bid/ask spread hard to bridge. In part, this is because sellers are holding out, hoping prices will rise more; in part, it is because many funds currently see richer pickings in the West; and, in part, it reflects a level of investor expectation that has been outstripped by the growing maturity of Asian markets, which today warrant a lower risk premium than they did in the “golden age” of Asian real estate investment ten years or so ago.

Increasing activity by local players is another reason the funds have had problems placing money. Be they high-net-worth individuals or groups, or large institutional funds that are just beginning to make significant allocations to real estate assets, locals have the means and the inclination to buy at current asking prices and are crowding others out of the market.

Whatever the reasons, the dearth of prospects is driving a trend toward different types of deals. For some, this means a shift in focus away from core and opportunity investments and more toward the middle ground of the value add, where they can better use their expertise to source and reposition properties for resale. For others, it means assuming more development risk, usually in partnership with a local developer.

Finally, it is also driving capital to countries with strong economic growth. In a world increasingly starved of yield, investors are now looking to hitch their wagons to fast-moving economies such as China and to new (and high-risk) markets such as Vietnam and India. As hot money pours into Asia in pursuit of this growth, it in turn raises concerns about asset price inflation, especially in residential property markets, where values in some markets have soared since the beginning of 2009.

On the financing side, Asia’s banks continue to rule the roost. Indeed, as alternative financing avenues such as international
bank lending or Asia’s nascent securitization markets have dwindled, regional banks have gotten an even tighter grip on an area they have long dominated. Their strong balance sheets have served to help prop up real estate markets because they have neither the need nor the inclination to undermine pricing by foreclosing on defaulting borrowers and unleashing a wave of distressed assets onto the market. Nonetheless, while lending conditions are improving, conservative bank lending policies have restricted investment in Asian property markets.

According to investment prospect ratings, the top Asian markets in 2011 are Singapore, Shanghai, and Mumbai. Interest in Singapore has risen because of its strong economy, resurgent financial sector business, and office prices that have been seriously depressed by an impending wave of new supply. China is again a dominant theme as investors try to position themselves in one of the world’s few growth engines. Shanghai has long been a traditional entry point to the mainland market, although this year interviewees have also identified the growing appeal
of China’s second- and third-tier cities. Finally, Mumbai’s emergence on investors’ horizons reflects an interest in the newest emerging markets, which also include Vietnam; they present plenty of risk, but also a chance to get in on the ground floor.

Read the full report of the ULI Capital Markets’ Emerging Trends in Real Estate Asia Pacific 2011.

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