Japan’s First-Tier Cities Remain Top Picks for Property Investment

24 Feb, 2015 –

Japan PropertyAs economic news about an exodus of Asian capital and the flagging Chinese housing market floods the airwaves, a great deal of chatter is about where the property markets in Asia are headed for in 2015. One key theme that has already emerged is that local market conditions will continue to drive cash-rich Asian investors abroad due to surging asset prices, low yields and lack of investable stocks at home.

This is evidenced by the low transaction volumes across Asia. Data show that in the first nine months of 2014, transactions were up 36 percent in the United States and 29 percent in Europe, but down 20 percent in Asia from a year earlier. Yet Asia’s real estate markets are not short of capital. As John Fitzgerald, Asia Pacific chief executive of US-based research group Urban Land Institute puts it: “Asia’s real estate markets are beset by an abundance of riches.”

It is probably not news that the flood of liquidity pointing at real estate assets in the region has pushed up prices and compressed yields. For Fitzgerald, this is more the consequence of six years of central bank easing around the globe and Asian institutional funds from China, South Korea and Singapore pouring into the region. “Too much capital… has the tendency to distort markets,” he says. This is especially the case in China. In August, Beijing gave the green light to the country’s insurance industry to invest up to one-third of its $1.55 trillion assets in property, with 15 percent of total investments going offshore. Theoretically, $220 billion could have been invested in overseas properties.

Between 2009 and 2014, the volume of Chinese overseas investment jumped over tenfold, from $600 million to $15 billion, according to property consultancy Knight Frank. So far, the thrust of this investment has largely focused on gateway cities in the United States, United Kingdom and Australia. The most recent high-profile deal was Sunshine Insurance Group’s purchase of Sydney’s Sheraton on the Park hotel for a record $375.6 million in November.

“The key factors for Chinese investors are the policy push from the Chinese government to diversify into other countries, a softening domestic market and the pull from higher returns achievable in overseas markets,” says Neil Brookes, head of capital markets for Asia Pacific at Knight Frank.

On the home front, the Chinese property market will continue to show signs of a slowdown. David Ji, director of research and consultancy for Greater China at Knight Frank, forecasts a moderate growth of 2 to 8 percent in property prices in first-tier cities and a fall of 1 to 5 percent in second- and third-tier cities. To spur recovery in the property sector, China’s central bank relaxed home-purchase restrictions and mortgage polices in September — the first such move to be taken in four years. This was followed by an interest rate cut in November, the first since 2012.

But Ji says the boost might not be significant due to a change in consumption patterns. “Although Chinese are still fond of buying properties, they are now eyeing and lured by increasing opportunities to buy overseas,” he says. A major pull factor is the potential yield return in overseas markets. According to Ji, over the next five years the average office rental growth in Sydney is projected at 22 percent, New York 28 percent and London 16 percent. These figures contrast sharply with just 4 percent in Shanghai. Sydney and Melbourne have emerged as safe havens for overseas investors. “Australian cities are the strongest at the moment. (Their) high yields and mature economy are a big draw,” says Ariel Shtarkman, founder of Orca Capital, a Hong Kong-based advisory firm focusing on cross-border property transactions. Development is a strong theme, particularly in Sydney, where the conversion of older office stock into residential units is drawing interest. However, tough competition could be the downside of a crowded market, Shtarkman adds. The Australian market has attracted keen attention from the country’s pension and wholesale funds, not to mention the influx of overseas investors. Last year alone, Australia saw 60 percent growth in overseas investment from China.

In East and Southeast Asia, first-tier cities in Japan remain top picks among investors. Tokyo ranks as the most favorable spot for property investment and development, according to a recently released joint report from PricewaterhouseCoopers (PwC) and Urban Land Institute, which surveyed more than 380 industry leaders.

A big part of Japan’s emergence can be attributed to Abenomics — the economic program of Japanese Prime Minister Shinzo Abe — as the government’s massive economic stimulus package has galvanized asset price inflation. The recent depreciation of the yen has also attracted overseas buyers of Japanese properties, which were sold at a discount. However, attention has begun to shift as fierce competition from Tokyo has forced investors to branch out to secondary markets in Japan including Osaka, which is ranked third in the PwC report. “Much of (Osaka’s) oversupply issue in the office sector is now absorbed and vacancy levels are declining,” said KK So, Asia Pacific real estate tax leader at PwC in Hong Kong.

Meanwhile, emerging markets in South and Southeast Asia are beginning to lose some appeal. Rising economic stars in the region such as Indonesia, the Philippines and Vietnam offer high returns on paper, but they are susceptible to capital flight when the US Federal Reserve raises interest rates, expected to happen by September this year. Jakarta is an exception, which placed second in the PwC report. The Indonesian capital is expected to ride on the country’s strong asset price growth and stable political landscape under the new administration of President Joko Widodo. However, the Indonesian market remains opaque in view of concerns over the judiciary and land title issues. “Sophisticated investors with strong local partners are more likely to succeed in this market,” observes Shtarkman from Orca Capital.

Hong Kong and Singapore are facing a separate set of issues from the rest of Asia. Government cooling measures in both places are casting a long shadow on transaction volumes and investor sentiment. Singapore, in particular, will be a net exporter rather than an importer of capital in Asia, notes the PwC report.

Also on investors’ radar are non-core assets left behind by the market. There is growing interest in alternative investment in self-use storage, student and senior housing, although the logistics sector is tipped to be a new favorite. The appeal of the sector largely lies in the “chronic shortages of logistics capacity” in most Asian markets and higher yields offered by logistics play, says Colin Galloway, principal author of the PwC report, adding that the sector is an area where investors are “unreservedly bullish”.

Industry watchers foresee a greater volume of traffic in the logistics sector, hence a surge in demand for modern logistics facilities and warehouse space. Asia’s e-commerce market is one big driver, underpinned by rapid urbanization and the increased purchasing power of the middle class. “To put it simply, the volume of deals in the logistics sector should boom in 2015,” says Simon Lo, executive director of Asia research and advisory at property broker Colliers International.

Now that 2015 has rolled in, will Asia be an attractive destination for global property investors again? Asia’s resilience to capital exodus will likely be put to the test again when U.S. interest rates rise later in the year, although a dose of realistic optimism can be justified.

Terence Tang, managing director of Asia capital markets and investment services at Colliers, offers a ray of sunshine in his summary of the prospects for this year. “It is likely that the outbound trend will continue,” he says. “The difference in 2015 is that more (long-term) capital will be heading to Asia at the same time… lured by good long-term growth prospects in the region.”

(Source – “China Daily Asia“, Pic – Osaka Cityscape Japan / “fwallpapers“)


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