With fundamentals across the Asia Pacific region relatively intact, the commercial real estate market looks well positioned for growth
Similarly to the UK, the Asia Pacific commercial real estate market corrected considerably over the course of the global financial crisis. Although less severe than the UK, the withdrawal of credit from the real estate sector has caused real estate capital values across the region to fall by around 40% over the two years since Q1 2008. Given the strength of Asia’s economic rebound, regional real estate investment markets are showing signs of a strong initial recovery.
With fundamentals across the region relatively intact, the commercial real estate market looks well positioned for growth. Some of the reasons for this view are short-term, cyclical reasons, related to current market conditions; others are long-established and structural in nature.
Cyclicals
A number of cyclical reasons support the case for investing in Asia Pacific commercial real estate. Over the two-year period to the start of 2010, real estate capital values in the region declined by around 40%. Since then, capital values across most of the markets appear to be stabilising. In the industrial market, values are still declining but are doing so at a much slower pace. However, in the retail and office sectors, prime assets values are stabilising and, in some instances, even beginning to strengthen.
Following the recent difficulties resulting from the credit crisis, investor confidence appears to be returning and investor demand for Asia Pacific real estate is recovering. According to DTZ, commercial real estate investment into the region stood at $38.6bn in the first quarter of 2010, an increase of 37% quarter-on-quarter.
The economy is also one of the main drivers of the real estate market. Consensus economic forecasts have reported expected growth in the region of 6.3% in 2010, topping Western Europe’s growth of 1.1% and North America’s 3.3% by a substantial margin. Encouraging macro performance should lead to stronger occupier demand.
Hiring expectations
However, prime rents for office and industrial assets remain far from the peak levels they reached in 2007. However, recruiter Hudson Asia recently reported hiring expectations have risen strongly in key Asian cities and Asian retail sales numbers are also outperforming expectations. In turn, the outlook for rental growth should improve over coming years.
Structural reasons also support the case for investing in Asia Pacific commercial real estate. Looking at the demographics, Asia has a population that is rapidly being urbanised. According to an estimate by the United Nations, three million people move into cities every month, creating six cities the size of London annually.
Impact on growth
Considering Asia’s urban population ratio remains low and the economic shift remains at a relatively early stage, the potential impact on real estate growth remains sizeable. The long-term outlook for retail and residential property looks particularly strong as increasing wealth and urbanisation should lead to stronger consumption. In addition, a number of markets are developing as global financial centres, which should benefit the long-term outlook for the office sector.
To date, the Asian population has shown a greater tendency to save than their Western counterparts. This is driven largely by deficient social security systems and limited availability of consumer finance. But this is quickly changing. As the Asian population has become more wealthy and aspirational attitudes have begun to change, there has been a rise in the number of Asian consumers. The rapid liberalisation of consumer credit should also play an important role in facilitating this shift. By way of comparison, while there were only three million credit cards issued in China in 2003, there were 230 million by the end of 2009. As Asian consumers put their savings to work, there should be very tangible benefits to real estate investments.
In addition, the investible universe in Asian real estate, as a percentage of output, is still low relative to other regions. This presents an opportunity to participate in the development and/or funding of institutional grade real estate and access to a growing universe of investment properties. J.P. Morgan estimate that between 2009 and 2028, the size of Asia’s real estate investible universe will grow at almost twice the pace of Europe and North America. This ultimately means Asia could increase five-fold in less than two decades from now.
East versus West
The global financial crisis has also highlighted important differences between Asian and Western economies. Asian economies have been less reliant on debt over the past decade, notably post the Asian financial crisis. As a result, government, corporate and personal balance sheets remain in much better condition than those of the West. Without these legacy issues, Asian economies look to be much better placed for recovery.
In summary, since the start of the cyclical correction in early 2008, Asia Pacific commercial real estate capital values have fallen by circa 40% across key cities. That said, the quicker-than-expected recovery in the broader economy means that real estate values should follow suit with meaningful improvements. The prospects for Asia Pacific commercial real estate market look strong over the four-year period from the end of 2010, with returns most likely to be driven by a combination of rental growth and yield compression.
Ian Hally, chief executive, Asia Pacific Real Estate, Aviva Investors
