Asian cities, not countries, key to real estate growth and diversification

Rising middle classes, ageing populations, urbanisation, technology influencing Asia-Pacific’s social, political and economic landscape

PUBLISHED : Tuesday, 18 April, 2017, 4:03pm
UPDATED : Tuesday, 18 April, 2017, 7:27pm

The world’s economic weight continues to lean favourably towards Asia-Pacific. From just 28 per cent in the early 2000s, the region’s share of world output, in purchasing power parity terms, now stands at 39 per cent, and is projected to reach 44 per cent by 2025. Thus, many continue to consider Asia-Pacific to be replete with untapped investment potential.

Against this backdrop, Asia-Pacific’s social, political and economic landscape is being strongly influenced by megatrends – rising middle classes, ageing populations, urbanisation, technology and the above mentioned shift of economic power from the West – that are equally apparent in the physical development and the built environment of its key population centres.

Indeed, we see common threads running through some of the most prominent and resilient Asia-Pacific cities of today and tomorrow. Many are exceptionally safe and clean, have excellent infrastructure and are home to highly educated workforces that will serve as drivers of global growth in the coming decades.

Although Asia is ageing, the median ages of many Asia-Pacific economies are much lower than in the West, providing strong tailwinds to productivity, growth and consumption. Structural reforms to labour markets and immigration also have the potential to support the longer-term demographic attractiveness of many Asia-Pacific economies in the coming decades.

The interaction of people and places is what real estate is about, and winning cities will be those that can attract and retain people

While it could be argued that a rising tide will raise all boats, we believe that global investors looking for well-rounded and sustainable real estate investment opportunities in Asia-Pacific should focus their attention on catalysts for return at the city – rather than the country – level.

There is a great diversity of drivers influencing the investment outlook of many cities in the region. Therefore, rather than produce rankings of attractive cities, we prefer to look at the combination of factors that make a given urban area attractive, identifying cities based on their long-term demand fundamentals.

As a result, for core strategies, the key to constructing sustainable real-estate portfolios with exposure to Asia-Pacific is to identify cities that are defensive in light of the mega trends that are shaping them. This is not as simple as just targeting global gateway cities – the “strategy” of many international real estate investors – but is rather about identifying the specific factors that make a city likely to shine.

Sustainable strategies start with demographics. The interaction of people and places is what real estate is about, and winning cities will be those that can attract and retain people. Successful cities will be productive, generating better-than-average output or retail sales per capita. They will enjoy growing populations and improving wealth.

For example, there are cities in Africa and Asia that are expected to see their populations grow by more than five million over the coming decade. In these economies, people are lured by financial opportunity, and many believe they need to be in a city for economic survival.

A knock-on effect of this trend is that these rapidly growing cities are often prime targets for businesses looking to take advantage of rapidly-growing middle classes and cheap, highly-educated labour forces. Naturally, this dynamic gives rise to investment opportunities for real estate developers and investors. Indeed, the retail property sector represents a particularly promising opportunity to capitalise on urbanisation in Asia, which is expected to see its share of global output and retail sales increase markedly over the next couple of decades.

For example, Beijing is forecast to overtake San Francisco as early as 2020 in terms of total financial and business services output, while Shanghai is predicted to overtake Boston in 2026. So, while institutional investment markets in Asia are comparatively small, Asian cities should start to close the gap with their US or European counterparts as a result of their strong consumption and growing economies.

Some cities are attractive to investors because of their burgeoning middle classes and therefore represent an opportunity for investment in retail property to leverage this group’s collective spending power

The region’s stellar growth over the past decades has been concentrated on a few key core cities, many of which are already among the world’s biggest, most globally competitive and resilient. Many more are expected to rise to the fore in the coming decade, providing investors with even greater opportunities to tap into Asia-Pacific’s growing economic dominance.

Each of these cities is unique, and so the strategy for investing in each also needs to be unique. Ensuring a good mix of various cities with individual strengths can enhance sector and geographical diversification across a portfolio.

For example, some cities are attractive to investors because of their burgeoning middle classes and therefore represent an opportunity for investment in retail property to leverage this group’s collective spending power. Similarly, “cultural capitals” attract a different type of residential profile than do “technology trailblazers”, pointing to the need for a different investment approach.

One technology trailblazer is Hangzhou, in Zhejiang Province, China. The city of 9 million that is emerging as a high-tech hub and a bastion of entrepreneurship, Hangzhou is the home of e-commerce giant Alibaba and a symbol of China’s transition to technology powered growth. Its strong community of start-ups, which has created thousands of millionaires, has been spurred by the rise of China’s middle class. Alibaba owns the South China Morning Post.

More than ever, cities are determining the wealth of nations. The largest cities generally offer the greatest breadth of opportunities and have liquidity in their favour, but it is the demographic and genetic make-up of any given city that has the potential to make it a great investment opportunity.

In our view, real-estate investors who are fortunate enough to have the pick of the globe should make allocations to cities rather than countries, and strive to future-proof their portfolios by capitalising on global demographic trends.

Chris Reilly is managing director of Asia-Pacific at TH Real Estate