As many other global regions continue to deal with aspects of the economic crisis, many Asian economies have returned to pre-crisis levels. According to the fourth edition of Emerging Trends in Real Estate® Asia Pacific, jointly produced by the Urban Land Institute and PricewaterhouseCoopers, commercial real estate markets, even if gradually, are moving back to the direction of normalcy. The majority of Emerging Trends survey and interview participants believe that at this stage of market growth, tenant demand and a stabilizing economy will be enough to justify this robust movement. As one interviewee said, “The markets are acting as if the subprime crisis had never happened.”
Even so, others question if this progress is not solely driven by government infusion of capital and whether it can be sustained if a double-dip recession hits the United States or Europe. Local investors do not seem concerned, though, as they continue to take the lead in transactions throughout Asia. High-net-worth investors and families continue to drive out the foreign investors who remained after the financial crisis. In addition, local buyers are much more comfortable with local markets and the acceptance of regional risk. Foreign investors continue to linger over completing higher-risk transactions because many continue to have to face finalized deals that did not achieve their expected returns.
Even with real estate risk concerns, foreign and local capital continues to be available for Asian real estate investments. However, foreign investors are now much more limited in terms of their available capital and seem much more comfortable taking advantage of opportunities found in their own backyard. According to Real Capital Analytics, cross-border flows represented only 18 percent of all real estate transactions completed in Asia Pacific by the end of the September 2010, down from 30 percent recorded in 2007. Another driver for this decline may be the volatility in exchange rates. “Where our fund has a big issue right now is currency,” one investor said. “Because we’re a dollar-based investor, even if we get the full investment case right and make great real estate deals, our returns could be wiped out.”
These international funding hurdles open up even more financing deals for local banks as they continue to maintain a strong hand in deciding which investor will get the needed financial support for commercial investment, development, or homeownership. Bank financing is still difficult to obtain and limited, but lending conditions continue to improve for borrowers as many lenders show more signs of competing. “We’ve been out there looking at a large number of transactions,” one lender said, “and our debt team hasn’t been able to win these because the other bank has been willing to offer very favorable rates and lending terms with which we are not able to compete.”
With greater local investment interest and strengthening lending conditions in “the part of the world that is showing more growth,” professionals are combing the region for real estate opportunities. “Investors are looking to buy core real estate, with good leases and tenants,” one lender said. “Some will continue playing and look for opportunistic deals and returns.” According to the Emerging Trends survey results, this seems to be the case for top-ranked investment cities that offer both developed and emerging locations. In 2011, the top three investment markets in Asia are, in descending order, Singapore, Shanghai, and Mumbai.
Singapore jumped four spots to number one based mainly on the fact it is a market that has survived the economic decline and looks to flourish in a country that can sustain strong gross domestic product growth. Shanghai dropped to second overall; even though it is highly rated and offers several opportunities, investors are starting to show concern over questionable monetary policies, wildly increasing real estate prices, and an inflationary bubble. Respondents are fond of Mumbai this coming year, with the city rising five positions from its 2010 ranking. “Mumbai is clearly the best-performing and most active in real estate,” said one investor.
Two of the top three investment cities can be found at the top of the development ranking as well. Mumbai, New Delhi, and Shanghai top the 20 cities covered in the survey. India continues to provide the most development opportunities in commercial real estate as it has continued to post cities at the top of the list since 2007.
Interest by property type is highly focused on the residential sector, which ranks first for both investment and development prospects in 2011. Many markets continue to show signs of skyrocketing residential costs, but demand remains strong throughout the majority of Asian markets. The largest buyer interest for residential properties is found in Ho Chi Minh City, while investors have the least amount of apartment interest in Beijing.
In 2011, retail properties will continue to offer a lot of appeal to real estate investors. The quicker economic recovery in Asia should lead to increased consumer spending and a good investment option in the coming year. In addition, “most retail properties in Asia are well balanced in terms of supply coming on board and demand,” one person interviewed commented. According to Emerging Trends, the best acquisition prospects can be found in Shanghai; the worst are in Osaka.
In 2011, investors in Asia will have many more commercial real estate investment angles to consider —compared with many other global regions—as the majority of economies throughout the region begin to stabilize and even grow over the coming years. Even so, possible double-dip recessions abroad may still hinder the potential. Still, local investors—and limited foreign capital—will look to do deals throughout Asia in the coming year and take advantage of opportunities they offer.
