Hong Kong's ranking as a real estate market is lagging the rest of Asia, according to Emerging Trends in Real Estate Asia-Pacific 2015, a real estate forecast jointly published by the Urban Land Institute (ULI) and PwC. Investors remain cautious amid an impending interest rate hike and China's slowing economy. Last year's cooling measures by the government, lower loan-to-value mortgage lending and lower retail spending by mainlanders have also contributed to the low ranking.
"Notwithstanding their lower ranking, Hong Kong's markets have enjoyed a remarkable resurgence in the second half of 2014. Although the government's measures initially had an impact on transaction volumes, pricing in both the residential and commercial sectors proved largely immune to the downdraft," says KK So, Asia-Pacific real estate tax leader, PwC. "However, some investors are cautious about the outlook of the markets, as they see prices softening, driven largely by the impending rises in interest rates, and there is always the concern that the government may intervene further."
Hong Kong aside, real estate markets throughout Asia are expected to remain resilient despite weakening economic fundamentals during 2015, as capital continues to flow into the industry from a variety of investment sources, both domestic and international, according to the report. 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 next year.
"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," said John Fitzgerald, chief executive, ULI Asia-Pacific. "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."
"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 overbuilding. Japan is the exception. Competition from local REITs is forcing investors to branch out to cities other than Tokyo," adds So. "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.
Overall findings from the report include:
* Investors are opting not to buy. Transaction volumes across Asia fell 24 percent year-over-year in the third quarter of 2014, compared with significant gains in the US and Europe. Although much of the decline is due to fewer land sales in China, transactions have dropped in other Asian markets with the notable exception of Australia.
* Product scarcity is prevalent. The structural shortage of investment-grade assets across the region is compounded by growing volumes of capital held by local institutions and the lack of incentive to sell, given that relatively little commercial real estate is held by investment funds that tend to recycle their assets into the market after a few years.
* Investors seek other asset classes. With core product both expensive and hard to source, investors are looking for alternative strategies. This includes value-add deals and, in general, more complicated asset management situations, and finding specific types of assets that may have been left behind by the market.
* Investors are wary of secondary locations and assets. Given the lack of trust in the current market, most investors prefer to remain in gateway cities, where they have more confidence in the resilience of pricing and liquidity. This applies especially in Australia. In China, many buyers are avoiding secondary locations because of a spate of overbuilding. Japan is the exception, with competition from local real estate investment trusts (Reits) forcing investors to branch out to cities other than Tokyo.
* Emerging markets are losing some appeal. Fast-growing markets such as the Philippines and Indonesia remain on investors' radars, but the attraction has dimmed somewhat this year as investors become cautious over the potential for capital outflows in the wake of upcoming US interest rate hikes.
* Investors are increasingly willing to adopt development risk. Forward-funded and build-to-core strategies are popular, especially in Australia. In Japan, however, development is less attractive given increased construction costs.
* Currently, strong asset prices are in marked contrast with weak rentals. Occupational markets are weak in many markets, especially in Australia and Japan. Many investors project that the contrast between prices and rentals will shift, with returns based more on stronger rental fundamentals than soaring prices.