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.
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% 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 25% in the 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) Ltd, 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% now.
The Asian continent saw some $94 billion (Rs4.32 trillion then) of property investment in 2006, up 43% on the previous year, but barely one- seventh of the global total. And investors show no sign they will stop the flow.
Morgan Stanley said last week it had earmarked for 60% of a new $8 billion fund for Asia and The Goldman Sachs Group, Inc. has raised about the same amount in a couple of funds, according to a person familiar with the matter.
ING Real Estate is raising two $1 billion funds for Asia, and private equity (PE) firm Blackstone Group is raising $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,” Barge said.
Japan is a perennial favourite in Asia because its $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, India.
RREEF, one of the world’s biggest property fund managers, plans to spend around 30% of its future PE funds in Asia, said Roeloffs. “Office is still interesting in Japan, rental growth should continue to be strong because the supply rate is low,” he said. “We also like retail. We’ve done some and we’ll do more.”
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 that both rank among the most opaque property markets in the world, but promise internal rates of return of 25-30%.
Forecasts that Indian property prices have surged too fast and could drop anywhere between 10% to 40% are brushed aside on the grounds that an outsourcing boom is enrichening a middle class couped up in crumbling homes built decades ago. “India has huge potential,” said Seek Ngee Huat, head of GIC Real Estate. An investment company of the Singapore government and one of the world’s top property investors, the Government of Singapore Investment Corporation Pte Ltd. (GIC) is eyeing developing markets, including Russia and Turkey, while cautious about London offices because of steep price rises.
Barge at Jones Lang LaSalle 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.”
Derek Cheung, Asia executive director at fund manager Cohen and Steers believes Asia lagged the global property rebound from around 1996 by about five years, so is nowhere near a peak. “We’re now in a similar situation to 1994-1995, before the Asian crisis, with economic growth strong,” Cheung said. “In three or four years from now I don’t know, but now we’re not at a dangerous level.”
With the Chinese and Indian economies growing at around 9% annually, and Japan tentatively emerging from more than a decade of stagnation, the main risks now appear to stem from the US.
GIC Real Estate’s 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, CEO of Southeast 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.