Jakarta, Indonesia’s capital city, is the top city for real estate investment in the Asia-Pacific Region, according to Emerging Trends in Real Estate® Asia Pacific 2013. Jakarta is up from a ranking of 11 last year. Singapore, which held the top spot for the past two years, falls to number 3. Shanghai remains the number 2 market overall, with Sydney and Kuala Lumpur following close behind.
According to Richard Price, chief executive of Asia Pacific for CBRE Global Investors, international investors are not seeing attractive investment opportunities in prime markets such as Australia and Tokyo. “Some are looking at frontier markets such as Indonesia, while others are revisiting often overlooked capitals such as Kuala Lumpur and Bangkok,” Price says.
In Japan, notes Emerging Trends, a number of investors are seeing potential in the logistics sector as the country reorganizes its distribution infrastructure. While Tokyo is ranked 13th for investment prospects and 18th for development prospects, many investors say they think the city’s outlook is improving. Tokyo is seen as a magnet for foreign investment, with core funds looking at the office sector, and more opportunistic investors heading for the residential sector.
With many markets still recovering from the financial crisis of 2008, more local investors, which one respondent dubbed both “more aggressive and more bullish than those who are more internationally exposed” have entered the market, driving up liquidity and prices. The announcement of a third round of monetary easing, dubbed “QEIII,” by the U.S. Federal Reserve Board in September also had some inflationary impact on the other side of the Pacific.
Top Investment Markets for 2013
Overall, respondents were more bullish on the prospects for individual cities, awarding higher scores than in the previous two years. The top five investment markets for 2013 are predicted to be:
Jakarta - Topping the rankings for both investment and development for the first time, Jakarta is described as a “surprising” choice given the city’s lack of investment-grade stock and its economy, which while growing, lacks the enterprise, scale and infrastructure of its more-developed neighbors. However, Jakarta is seen by many real estate professionals as the most favorable emerging market in the region, with business transactions generally easier and more transparent than in other frontier markets such as Vietnam. The country’s interest rates and inflation are stable; the gross domestic product is growing steadily; and foreign direct investment grew by 39 percent in the first half of 2012. Demand for property is strong, resulting in year-to-year office rents leaping by 29 percent. Despite some challenges, such as difficulties securing bank debt and locating reliable local partners, Jakarta holds significant promise.
Shanghai – Shanghai’s office market and retail market have proved mainstays for foreign funds looking to invest in Chinese real estate. Both sectors remain popular, given the city’s relatively user-friendly business environment, growing volume of institutional grade properties and historic market performance. However, in spite of Shanghai’s strong ranking, the city is not as appealing to foreign investors as it was a few years ago. Prices are considered to be relatively high; the market has become saturated; and Chinese regulators have become less open to foreign investment, as they have increasing confidence in the ability of local real estate practitioners to finance and develop properties. While Shanghai will remain firmly on the radar of foreign funds with a mandate to invest in China, activity in the city will remain muted for the short term.
Singapore – Singapore retains its popularity among real estate investors who see the market as a safe haven offering solid, but not spectacular, returns that are underpinned by the city’s position as a global financial hub. The city’s office market has recently run out of steam with significant amounts of new Grade A office space drawing tenants away from existing buildings, a problem which is compounded by a shrinking head-count in the local financial sector. Rising vacancies and falling rents are causing problems for some international funds looking to exit the market.
Sydney – Sydney has seen a limited amount of new supply of commercial space in recent years, although a significant amount of office and retail space is in the pipeline for 2015. A shortage of institutional grade property has continued to suppress sales volumes and kept prices buoyant, driving up total returns for office assets. Australia has absorbed more international real estate investment over the past year than any other country in the Asia Pacific region. Office assets remain a popular target for these funds, and some analysts estimate that foreign investors account for 30 percent of the transactions in the sector.
Kuala Lumpur – Kuala Lumpur is beginning to enter the real estate limelight, offering a stable market with good opportunities for opportunistic returns. While property sales slowed noticeably in most Asian markets during the third quarter of 2012, Kuala Lumpur was the exception. The long-term prospects for the commercial property market are deemed by many to be strong, due to the success of the government’s economic transformation programe in drawing foreign investment.
Other markets within the top 10 include:
Bangkok. Like Kuala Lumpur, Bangkok has emerged from the shadows this year, at least partly on the back of a newly vibrant REIT market and the opportunistic yields afforded by a growing economy. At the same time, Bangkok has never been an easy place for foreign investors to make money. Recently they have been whipsawed by an unstable political environment, a string of natural disasters, and a lack of transparency in the legal and regulatory framework.
Beijing. Beijing’s office sector has seen some amazing rent and price increases in the past three years, successfully absorbing an enormous pipeline of new supply that most analysts had expected would swamp the market. CBD prices have increased by at least 45 percent over the past two years while rents have risen 6.6 percent per quarter for the past 10 quarters, according to consultants Savills.
China–second-tier cities. Interest in China’s second- and third-tier cites has grown quickly in recent years as the low-hanging fruit in major metropolises has disappeared. It is a testament to the strength of interest in what is an essentially opportunistic play that the second tier is ranked so highly in the survey despite the general preference among investors for stable, core returns.
Taipei. Measures introduced by Beijing to cool China’s property sector have created a spillover effect for Taipei as mainland investors look offshore to place capital. Quantitative easing measures in the United States have added to this effect. With a low base rate creating good yield spreads and local life insurance companies also piling into the market, excessive liquidity has caused transaction volumes in Taipei to balloon.
Melbourne. Like its counterpart in Sydney, Melbourne’s office market continues to show strength, with foreign funds being major buyers. However, significant new stock is coming to market over the next two years that could change the investment dynamic.
As far as property types within the Asian-Pacific region, the industrial/distribution sector ranks highest for both investment and development prospects, while retail also scores highly.
Industrial/Distribution. This space has seen its popularity rise partly because investors are fleeing lower-yielding assets for higher returns, and partly because of a general rerating of the sector. In addition, said one survey respondent, “it’s because there’s a structural shortage of good-quality logistics. There’s been a lot of rejigging of logistics networks in Japan following the earthquake. China logistics is another market a lot of people are more interested in.” Industrial and logistics facilities were the only asset class in Asia to see an increase in sales activity in the third quarter of 2012, according to DTZ.
Residential. For-sale residential space dropped steeply in this year’s survey to last place from last year’s number-two spot due to ongoing issues across several Asian markets. In China, the government’s ongoing crackdown in the residential sector is targeted at reducing home prices, as well as the risk of a flood of nonperforming loans appearing in the banking sector. In several other jurisdictions— Hong Kong, Singapore, Taiwan, Indonesia, and Malaysia—governments have also introduced regulations aimed at preventing further home price increases caused by an influx of capital into the sector in response to inflationary pressures.
Office. Interest in office assets remains muted again this year, the sector registering third in the survey after a fourth-place finish in the 2012 report. This lukewarm response does not indicate lack of interest in the sector—which actually remains very strong—as much as a lack of suitable buying opportunities. The views of one Shanghai-based investor are typical: “If you’re trying to buy an office building in Shanghai, there are very few decent buildings for sale to start with, and then a relatively larger number of interested buyers, so that tends to drive up the price beyond what investors are willing to pay.”
Retail. Asia’s strong economic growth means that consumer spending is continuing to increase throughout the region. Nowhere is this more the case than in China, where the rise of the middle class coincides with a change in government economic policy to rebalance toward consumer growth, rather than infrastructure-led, growth. It is little surprise, then, that in a recent global poll conducted by CBRE, 70 percent of all shopping centers under construction throughout the world were found in Asia, with an astonishing 50 percent of those in China alone.
Hotel. Ongoing growth in tourism both from within Asia and elsewhere continues to create strong demand for hotels. The biggest pool of tourists is from China, and mainland tour groups are now ranging much farther afield than their traditional stomping grounds in Hong Kong, Macau, and Thailand.
Emerging Trends in Real Estate
® is an annual series of trends and forecast publications that reflect the views of leading real estate executives in three global regions—Americas, Europe, and Asia Pacific. Undertaken jointly with PWC and the Urban Land Institute, Emerging Trends in Real Estate® provides an outlook on real estate investment and development trends, real estate finance and capital markets, property sectors, metropolitan areas, and other real estate issues.