Bright spots in the gloom
Asia-Pacific property markets are languishing in the 'twilight zone' as financial woes in the United States and Europe weigh heavily on investor confidence - and the gloom is likely to continue this year.
This is according to an Emerging Trends in Real Estate report by PricewaterhouseCoopers (PwC) and the Urban Land Institute (ULI).
Simon Treacy, an institute trustee and ULI South Asia chairman, notes a shift in sentiment as 2011 drew to a close. 'Asia has no shortage of investment capital and, until the middle of 2011, there was more concern over inflationary pressures than lack of demand. Suddenly, however, the prospect of a global relapse into recession is creating mounting unease.'
He predicts 'significant uncertainty' in economies and real estate markets this year. 'Is this a crisis or opportunity? It's both,' he says. 'Asia has entered the twilight zone, as there is still much to play out globally, given the debt and political issues in the US and Europe. It's certainly time to reduce risk, focusing on cash flow.'
K.K. So, in charge of co-ordinating real estate taxation services at PwC, says uncertain global macroeconomic conditions will continue to put pressure on property pricing, transaction activity and financing.
'Capital flows remain volatile, affected by numerous cross-currents. Inflows and outflows occur more frequently and more rapidly,' he says.
However, So notes that real estate fundamentals in the region, while showing signs of softening, remain supportive of continued investment by local, regional and international capital sources.
So where will brave investors park their real estate dollars this year? According to the report, published a few months ago, Singapore, Australia and the Chinese mainland are the top tips.
Singapore claims the top spot for a second consecutive year, with the report noting its status as 'a truly global city with a burgeoning asset and wealth management sector'. The city-state also continues to experience strong immigration and tourism growth.
But many of the more than 360 experts consulted for the report feel the market may have peaked. They suggest a large pipeline of grade-A office buildings and lower rent levels may hold down investor returns.
When asked whether this year would be an optimal year to buy, hold or sell properties, more than half of the respondents recommended 'hold' in all sectors.
Meanwhile, Shanghai is ranked second for investment potential, also for the second straight year. The city continues to grow and attract institutional capital, according to the report. But office space remains the key focus because of high demand and short supply, with an equal number of experts choosing 'buy' and 'hold' in the office market.
Retail growth in Shanghai is robust because of high domestic consumption, fuelled in part by tourism - and more than half of the experts chose 'buy' for the retail sector.
Sydney stability, offering 'some of the lowest risk found in the Asia-Pacific region', supports its third-place ranking for investment potential. Last year, there was a surge in office development in the city, with demand showing signs of recovery.
With investors finding good access to capital from multiple sources, acquisitions across all property types have remained active and may continue into this year, the report forecasts.
Next up was Chongqing, making its debut in Emerging Trends, and ranked fourth for investment prospects. Home to some of China's largest car and steel corporations, second-tier Chongqing will benefit from rising labour costs in China's top cities, which would increase its attractiveness.
Similar to Shanghai, more than half the respondents gave a 'buy' recommendation for retail. Office stock is likely to increase dramatically over the next five years, far beyond the market's absorption capability.
Elsewhere on the mainland, Beijing enjoys bullish prospects even as experts in the report note an economic slowdown or 'soft landing'. A favourable aspect in the Chinese capital is the strong commercial leasing market, with a constant supply of new buildings being met with consistent demand and growing rents.
The area is cultivating new, large start-ups which, together with an abundant supply of capital, will support further construction. Even though analysts expect China's economic performance to slow this year, with moderate growth over the next five years, the fact it holds three of five top investment cities gives the country a clear advantage.
According So, the biggest question for foreign investors is whether they can pour capital into the mainland, given the central government's fear of asset bubbles appearing in the real estate sector.
Among other cities in the region, Ho Chi Minh ranked 9th, Jakarta 11th, Bangkok 13th and Kuala Lumpur 16th for investment potential. Hong Kong dropped a few places to the 14th spot because of its high prices.
As for what to buy, the report rates industrial property first, followed closely by residential real estate.
Office and retail sectors are in the middle, while the hotel sector is least favoured for investment.