Asian property markets face uncertain outlook

Amid signs of a global relapse into recession, sentiment in Asia’s real estate market continues to be cautious, according to a study released by PricewaterhouseCoopers (PwC) and Urban Land Institute (ULI) this month.

The Emerging Trends in Real Estate 2012 report identifies Singapore, Shanghai and Sydney as the most attractive destinations for investment, while Hong Kong dropped out of the top five for the first time in five years. It is now ranked a lowly 14th. Indeed, price inducements for office and retail properties in Hong Kong have doubled since 2009, leaving less room for profits. “The main view is that Hong Kong is essentially a fully priced market,” said Patrick Phillips, chief executive officer at ULI.

The report reveals that only three out of 21 markets surveyed won a higher investment score in 2011, while nine of the top 10 cities received lower marks. Singapore and Shanghai are the only two cities reckoned to have modestly good development prospects, compared to 10 cities last year. “Things have now changed from a glass half full to a glass half empty. I think we are in a twilight zone where something has got to give,” said one interviewee of the survey.

It is easy to gauge investors’ attitudes towards the market from what they say they care about most. According to the report, the three most important economic issues for the respondents — mainly banks, investment brokers and real estate firms — are interest rates, job growth and global economic growth, while refinancing, land costs and vacancy rates are the major concerns in the property market. Given the high interest rates in most markets in the region, high US unemployment and the expected slowdown in the global economy, sentiment is likely to remain poor in 2012.

Phillips pointed out that one constraint on Asia’s property market is the regulatory tightening, which is increasing borrowing costs and curtailing transaction volumes. Unlike Western governments, Asian regulators have long been micro-managing property markets and were especially active in 2011 as a way to fight inflation.

Despite the risks, investors are not all sitting on the sidelines. “There’s an opportunity for the first time to buy into assets at below replacement costs. That is new or that is different, so my knee-jerk reaction today would be to go out and buy something,” said one interviewee.

Portfolio investments into Asia’s property market have tripled their share of total investments during the past decade, rising to 28% in 2010 from about 9% in 2001, despite resistance to some types of foreign capital by many Asian regulators. However, most of the capital is from within Asia-Pacific, rather than the US and Europe.

“Since 2009, we have seen an increase in cross-border investment, but it is predominantly being driven by Asia-Pacific investors going elsewhere in Asia,” the report says. “International money coming into the region has actually tended to show net disinvestment.”

“The outlook for 2012 is obviously very uncertain,” Phillips added, “There is a backdrop of crises and opportunities.”