Download FT: Hope remains for a little more resilience

FT: Hope remains for a little more resilience
By Daniel Thomas
Published: November 19 2008 02:00 | Last updated: November 19 2008 02:00
As growth faded in the western economies last year, there was much talk of Asia escaping the
global cycle of boom and bust.
The concept of a decoupled regional economy appears to be debunked now, with many countries
facing harsher economic conditions in the wake of the financial meltdown.
Yet, many investors hope the region's property markets, along with other sections of their
economies, will prove more resilient than ib other parts of the world.
There has been a wave of fund-raising among global investors hoping to target rates of return
that are still attractive compared with western countries.
Last month, Merrill Lynch completed a $2.6bn fundraising for its Asian opportunity fund, its first
dedicated to real estate in Asia. It follows similarly large raisings by LaSalle Investment
Management and MGPA, taking the amount of equity raised this year in Asia above $10bn.
Invista Real Estate has raised a £50m fund to invest in Asia-Pacific, mainly Japan, while
Grosvenor, the property company owned by the Duke of Westminster, has launched a $600m
fund to invest in shopping centres in China. It joins investors such as China Real Estate
Opportunities.
Nicholas Loup, chief executive of Grosvenor Asia, says the fund plans to benefit from China's
domestic consumption, expected to grow with the local economy. He points to a limited supply of
shopping malls.
This is the main target for property investors and developers: tapping into the underlying growth
not just in population but also in the affluence of consumers who should ultimately support the
property market.
More jobs mean more office space; more money means more spending and more shops; more
development means greater infrastructure and the need for hotels, restaurants and other modern
conveniences.
Stuart Webster, head of international property at New Star, the fund manager, says the region is
not decoupled from the global recession, but identifies positives, such as the emerging middle
class and less reliance on the west for exports.
There is also potentially stronger demand and less supply than in the west, he says, but the
picture varies, with more mature markets seeing pressure on pricing owing to their greater
liquidity and transparency.
Mr Webster favours Japanese offices, because of tight supply, steady demand and underlying
land value growth. He also likes offices in Singapore, Kuala Lumpur in Malaysia and Thailand.
However, he says Korea is too tight to get sensible prices, despite good fundamental reasons to
invest.
William Hill, head of real estate at fund manager Schroders, sees opportunities in buying from
distressed sellers, particularly in Australia and Japan, while there are potentially good
investments in unlisted funds looking for prime assets in the region, according to Adrian Baker, of
CBRE Investors.
"Such opportunities should produce strong annualised returns while taking on minimal risk," he
says. "Markets with more risk exposure, such as India, will see less investor appetite in the short
term, as a result."
However, for all the intent among investors, property markets across the region have
deteriorated, with falls being recorded in prices, transaction levels and rents.
There has been a particularly sharp fall-off in sales volume, according to Real Capital Analytics,
down by 68 per cent in the third quarter, compared with the same period the year before.
Australia experienced the greatest drop, a 74 per cent fall in volume, with similar declines in
south-east Asia, China and Japan.
Real Capital Analytics says some of the fall in transactions in China resulted from new regulations
intended to slow speculation and land hoarding.
"Early on, investors flocked to Asia," it says, "thinking it might be immune to the credit crunch.
They drove property yields lower, however cap rates on recent transactions are now up 25 basis
points."
Andrew Ness, executive director for CB Richard Ellis Asia, says Asian banks are generally better
placed to withstand a downturn, but they have become conservative in providing loans and, as a
result, property sales are falling.
For the office market, the problem is that, even as prices slide, there is no longer any certainty
over income levels from tenants as the period of stellar rental growth appears to be over.
Meanwhile, supply is increasing in cities such as Hong Kong, Brisbane and Perth, and, in the
medium term, Singapore, Seoul and Kuala Lumpur.
According to CBRE, office vacancy increases have been recorded in 14 of the 16 big regional
office markets in the third quarter.
Confidence has been shaken, even though corporate bankruptcies and job cuts in Asia have
been less severe to date, Mr Ness says. Many companies have postponed plans for expansion.
The region's leading financial centres are to be more severely impacted, with further
consolidation in the financial sector resulting in additional downward pressure on rents.
The retail market also shows signs of caution amid concerns at a dip in tourist arrivals, increased
operating costs and a drop in consumer spending.
Mr Ness says Asia has "changed with surprising rapidity from being a buyer's to a seller's
market", as capital-strained banks and institutions come under pressure to dispose of real estate
assets.
As elsewhere in the world, highly-leveraged investors have largely stepped out of the region's
markets, while core investors, including pension and sovereign wealth funds, have adopted a
more cautious stance.
Mr Ness concludes that opportunities remain for investors over the longer and medium term, as
those starved of financing are forced to offer attractive deals, but the short term may prove more
of a struggle.