Asian Real Estate Investment Market Suffering

The world wide financial slowdown has without a doubt made its way into Asia, and the Asia Pacific real estate investment market is feeling the impact. Colliers International …

The world wide financial slowdown has without a doubt made its way into Asia, and the Asia Pacific real estate investment market is feeling the impact. Colliers International looks closer at recent market developments — and examines the Hong Kong, China and Singapore in detail — in their article below from Property Wire.

Against the backdrop of the global financial turmoil and the sustained problem of the credit crunch, the real estate investment market in Asia Pacific continued to suffer.

This was reflected by the contraction of market volume. Comparing 1Q 2009 with 3Q 2008, the total value of investment sales transactions in Greater China fell by 67%, while that of South Asia plummeted the most by 84%. In terms of property sectors in the region, the value of sales transactions in industrial market has seen the most severe contraction, which dropped by 84% between 3Q 2008 and 1Q 2009.

With uncertain occupational demand, selective lending by banks and bid-offer spread remaining wide, the real estate market environment will continue to be challenging throughout 2009.

"The market will have further room for improvement when banks gradually strengthen their capital structure and become more proactive in offering loans to the real estate sector," expected Piers Brunner, Chief Operating Officer, Asia.  "Therefore, the region’s real estate investment yields in the coming quarters of 2009 are expected to edge upwards but at a slower pace than in 4Q 2008 and 1Q 2009.  Given the projection that an economy recovery to be in sight in 2010, it is now the time for investors to identify their targets, take advantage of current price weakness and act before the market takes off again."

Regional Market

In 1Q 2009, sizable investment deals with lump sum prices at US$50 million or above were scarce. The group of owner occupiers and cash-rich private investors who have been looking to acquire quality developments have their targets confined largely to mid-priced assets. Institutions and real estate investment funds have been sitting on the sidelines, while individual institutions were net sellers as they were still going through the process of deleveraging.

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Meanwhile, most real estate buyers have held back from entering the market as they found it difficult to obtain sufficient financing from banks in the private sector. "Despite a general reduction in interest rates in 1Q 2009, risk premiums expanded as investors perceived a rise in liquidity risk and anticipated a further consolidation of the global economy," mentioned Simon Lo, Director of Research & Advisory. "As such, real estate investment yields softened further by 25-75 basis points (bps) in 1Q 2009."

In terms of property sectors, the investments yields generally softened. Industrial property expanded significantly by 24 bps from 3Q 2008 to 7.69% in 1Q 2009. In contrast, the investment yield of residential property edged down. For example, the yield in Hong Kong was compressed due to capital growth expectations amid a strong recovery of the local stock market prices. The market was also supported by favorable mortgage payment packages offered by individual banks and genuine end-users demand.

Hong Kong

The overall investment sentiment in Hong Kong remained cautious in 1Q 2009, with the bid-offer spread remaining wide. "Since investors had factored in a thick risk premium in their bids, the yield spread between real estate investment yields and banks’ lending rates continued to expand," said Antonio Wu, Regional Director, Asia Investment Sales, and Head of Hong Kong Investment & Retail Services. "For example, the investment yields in the office and industrial property markets edged up 50 bps in 1Q 2009, despite the Hong Kong Interbank Offered Rates, which is commonly used as the benchmark for borrowing rates, fell by over 100 bps during the period."

Another key challenge for most investors was the availability of bank financing.  However, improvement on this aspect is expected soon since local PRC banks have become more active in offering financing packages recently.

"In the office sector, with prices came off 45% from the peak, the prime offices in the CBDs look attractive to long-term investors. Besides, the retail properties in prime locations are expected to draw investors’ attention, with the buoyant retail sales of Hong Kong underpinned by visitors, especially those coming from mainland China," said Antonio Wu. "Another sector potential for investment is development sites. Since land owners bear no income with bare sites, they see certain pressure to sell and are willing to offer room for price negotiation."

China

In 1Q 2009, individual risk-loving investors made preemptive moves well before the recent revision of the Chinese Insurance Law in mainland China. The new law makes local insurance companies eligible to invest directly in real estate, and allows reallocation of a huge volume of funds in the order of RMB 100 billion into the local real estate sector.

"Looking forward, the relaxation of investment regulations and the lowering of equity ratios for development projects act as positive stimulation to the real estate market in China," said Lina Wong, Managing Director, East and Southwest China. "Amongst different markets in the country, Shanghai’s residential, office in CBDs and retail property market are perceived as opportunistic for investment since they are supported by resilient end-users’ demand, sustained demand by MNCs and sustained growth of retail sales respectively."

Singapore

The effects of global financial market upheaval and the deflating world economy have worn the market confidence in Singapore, resulting in declining property prices and slower investment activity. In 1Q 2009, the total value of investment sales was S$242.25 million (US$166 million), which was only 1.9% of the $12.69 billion investment sales during the peak period of the market in 3Q 2007.

"Looking ahead, commercial and office buildings in Singapore are worthwhile for investors to pay their attention to, especially those in CBD with their prices falling to a realistic level," said Dennis Yeo, Managing Director of Colliers International Singapore. "Besides, business parks are favored by IT, manufacturing, backroom, and supporting offices which are not necessary to locate in the CBD. Thus, business parks present another opportunistic investment option at a relatively lower cost but offering high quality space in good environment."

This article has been reposted from Property Wire. View the article on Property Wire’s international real estate news website here.

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