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Real Estate Trends
The real estate industry has seen rapid growth across Asia post-crisis, with varying stages of development within each country. Nevertheless, we have identified several similar trends/patterns, unique throughout the region, as follows:
> The real estate sector in Asia is driven mainly by rapid and dynamic growth in the offices and high-end residential segments.
> Prices for residential and non-residential properties in many major cities and smaller cities continued to rise, despite higher interest rates across the region.
> Asia’s REITs markets continued to grow with many companies converting their assets into REITs. The total number of Asian REITs at the end of 2007 stood at 86 with a total market capitalisation of US$74.8bil.
> The overheating property markets in many countries across the region led governments to enforce stricter rules to cool down the situation.
The Chinese government further tightened measures by increasing taxes, requiring developers to build more low-cost houses and tightening rules on property purchase by foreigners. South Korea and India also tightened rules in relation to borrowing.
> In most markets (Singapore, Hong Kong, Malaysia, China, India) demand for office space is highest followed by hotel/resorts, retail, industrial/distribution, homebuilding and apartments residential.
> The strong capital inflow into Asia real estate particularly China leads to the problem of demand exceeding supply. Although the Asia market has unparalleled potential for growth, in most cases, it lacks depth. The lack of a solid investment base to absorb current levels of incoming capital lead to the reflection of the current scenario, therefore increasing the risk of overheating.
Looming subprime issue
We expect the US subprime issue to continue to rear its ugly head well into the year as write downs continue.However, we expect the impact on Asian markets to be minimal (safe the export sector) given that the region’s financial institutions have relatively limited direct exposures to US subprime mortgages.In the region, China is the largest overseas holder of US mortgage-backed securities, at around US$260bil, which is held mostly through its international reserve holdings and through holdings of commercial banks.We take the view that Asia remains relatively insulated from the US subprime issue for the following reasons:
> Asia’s huge pool of international reserves at US$3tril (including Japan and China)
> Asian banks’ exposure to subprime debt instruments is minimal and manageable
> Asian corporate sector leverage is very low
> The banking system has been strengthened and is strongly capitalised
> The financial sector’s direct exposure to equity markets also appears relatively limited
> Asian central banks have taken steps to improve the regulation of high-leveraged activities
> Asian economies have become more resilient to shocks to their capital accounts as external vulnerabilities have been reduced
> Companies depend less on the more risky capital inflows
As such, we expect the contagion from the US subprime crisis to be limited to the capital markets. An indirect effect of the subprime crisis on the region is that it has increased the cost of raising capital for banks, corporate and investment bodies.New bond issues will have to be priced slightly higher to reflect rising credit market volatility and the anticipated temporary decline in investors’ demand for these products both globally and in the region.Liquidity on capital markets in Asia remains vast although a re-rating of risk will see some liquidity being sapped out of equities/real estate in the medium term.Credit market spreads that reached record low levels pre-subprime crisis are likely to widen and remain high into 1Q08, both in the region and for emerging markets as a whole. In the medium to longer-term, as deals get bigger in size and more complex, access to cheap international capital is becoming more important.The crisis will continue to affect the region indirectly in that it has heightened uncertainty and resulted in a reassessment of risk, as reflected in the periodic declines seen in stock market in 2007.We expect frequent and large reassessments of risk and high volatility in asset prices to figure largely in Asian economies for the most part of 2008.Inflation poses a key challenge for the region, which has enjoyed robust expansion in the last few years amidst muted price pressures. Oil prices, which are expected to remain firm in 2008, have raised the spectre of global inflation trending even higher this year.This poses a key threat to the region’s inflation outlook. We expect oil to trend higher this year to average at US$80 per barrel, vs US$72.4 per barrel in 2007.A different set of rules will apply moving forward as policy makers strive to balance the need for tighter monetary conditions to rein in rising costs even as growth weakens.
(The Star 5-4-2008)
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