Asian real estate resilient despite economic concerns

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Real estate markets throughout Asia are expected to remain resilient in spite of weakening economic fundamentals throughout 2015, as capital continues to flow into the industry from a variety of investment sources, both domestic and international, according to Emerging Trends in Real Estate Asia Pacific 2015, a real estate forecast jointly published by the global nonprofit organization Urban Land Institute (ULI) and financial advisory services company PwC.

Japan remains a favored country for real estate activity, with Tokyo and Osaka ranked first and third respectively in terms of investment and development prospects for the next 12 months.

John Fitzgerald, Chief Executive, ULI Asia Pacific. (Photo/ULI Asia Pacific)John Fitzgerald, Chief Executive, ULI Asia Pacific. (Photo/ULI Asia Pacific)

“Currently, Asia’s real estate markets are beset by an abundance of riches.  Whether derived from new sources of institutional capital, or from almost six years of global central bank easing, a seemingly endless stream of money is now pointed at real estate assets across virtually all jurisdictions and asset classes.  This is pushing up prices and further compressing yields,” John Fitzgerald, Chief Executive, ULI Asia Pacific, said.  “As a result, we are seeing fewer transactions, a growing shortage of investment-grade properties, a search for alternatives to core products, and a general pullback from assets in secondary locations.  We can expect this to continue over the next several months.”

Emerging Trends provides an outlook on Asia Pacific real estate investment and development trends, real estate finance and capital markets, and trends by property sector and metropolitan area.  It is based on the opinions of 385 internationally renowned real estate professionals, including investors, developers, property company representatives, lenders, brokers and consultants.

“Our report finds that most investors prefer to remain in gateway cities, where they have more confidence in the resilience of pricing and liquidity.  This is especially so in Australia.  In China, likewise, many buyers are avoiding secondary locations because of a spate of over-building.  Japan is the exception.  Competition from local REITs is forcing investors to branch out to cities other than Tokyo,” says KK So, Asia Pacific Real Estate Tax Leader, PwC.  “The report also finds that institutional capital from sovereign wealth funds, pension funds and insurance companies is playing an increasingly important role in real estate, with a big increase in the money directed into both regional and global real estate markets.”

The top five investment markets for 2015

Tokyo (ranked first for investment and development) – Tokyo’s popularity is attributed to the government’s massive economic stimulus plan that has catalyzed property purchases in anticipation of rapidly rising prices.  While ongoing credit easing is allowing “plenty of room for markets to run,” the report points out that Tokyo’s attraction “lies not only in its prospects for asset price inflation but also in its status as a gateway city, featuring low levels of perceived risk.”

Jakarta (ranked second for investment and development) — The city’s appeal is predicated on Indonesia’s booming economy as well as strong asset price growth over several years.  In general, real estate prices remain low compared to other large Asian cities.  One issue of concern: The market remains opaque, with interviewees expressing concern about the land title process and the court system.

Osaka (ranked third for investment, fourth for development) – Osaka in benefiting from the fierce competition for assets in Tokyo, with many investors being pushed into Japan’s secondary markets.  Much of its product oversupply – particularly in the office sector – was absorbed over the past year, and vacancies are continuing to decline.

Sydney (fourth for investment, third for development) – High yields and a mature economy are drawing international investors to Sydney, which, combined with substantial participation from Australia’s pension and wholesale funds, is creating tough competition for properties.  The city is experiencing strong interest in development, specifically in conversions of older office stock into residential units.

Melbourne (fifth in investment, fifth for development) – Melbourne is perceived as offering a similar environment to Sydney.  There is a significant emphasis on development, an abundance on capital seeking investments, and attractive yields (despite some compression).

Across the Asia-Pacific region, the industrial/logistics sector is by far the most popular property type for investment prospects for the coming year.  According to the report, the appeal of this sector reflects “chronic shortages of logistics capacity in most markets and the relatively higher yields still offered by logistics plays.”  The hotel sector also received high ratings, due to a boom in tourism in many markets.  The office sector continues to be regarded as a safe investment; but enthusiasm for the housing and retail sectors has waned.