For the fourth consecutive year, Shanghai leads China’s major cities and much of the region by ranking as the second most attractive market for real estate investment in Asia Pacific, according to a report released on Thursday by the Urban Land Institute and PricewaterhouseCoopers.
For property development prospects, Shenzhen was the highest ranked mainland city, placing third, with Shanghai ranked fourth.
Explaining the appeal of Shanghai real estate, Kenneth Rhee, Chief Representative for Mainland China at the Institute said, “Despite ongoing capitalization rate compression and stagnant rental growth, real estate in the city continues to draw international investors because Shanghai is widely perceived as a low-risk market for those who are unwilling to venture into lesser-known cities.”
For other first-tier cities in China, Guangzhou ranked fifth for development prospects and sixth for investment potential, while Beijing ranked sixth for development and eighth for investment potential.
The report, Emerging Trends in Real Estate Asia Pacific, was based on a survey of more than 250 internationally real estate professionals, including investors, developers, property company representatives, lenders, brokers and consultants.
Top Investment Markets for 2014
Tokyo – Claiming the top spot is Tokyo, which has emerged as an investment magnet soon after the introduction of dramatic economic reforms aimed at boosting the economy. Transaction volume picked up significantly in 2013 and, with the success of the stimulus program yet to be determined, buying is expected to continue next year. Tokyo is ranked second for development prospects for 2014.
Shanghai – Shanghai, described as an “evergreen” market for investors, is ranked second for investment prospects. Despite cap rate compression and stagnant rental growth, real estate in the city continues to draw international investors because Shanghai is widely perceived as a well-known, low-risk market for those who are unwilling to venture into lesser-known cities. Shanghai offers a “level of comfort” to funds with a mandate to place money in China, says the report. The city is ranked fourth for development prospects.
Jakarta – Jakarta is ranked third for investment potential, despite a lack of market transparency, and difficulties obtaining entitlement, and competition from local businesses and individuals. Newly released office stock in Jakarta is of better quality than in previous years, and there continues to be strong demand from companies seeking space, including the currently under-supplied central business district. Jakarta is ranked first for development prospects.
Manila – Manila moves up to fourth place for 2014, the result of a fast-growing economy, the increasing popularity of the city as a destination for multinationals seeking outsourced services, and a growing awareness that the problems long associated with lack of transparency and governance issues are improving. The city is also benefiting from a young demographic, strong capital inflows from local citizens working overseas, and a workforce with a cultural affinity with the West. Manila is ranked eighth for development potential.
Sydney – Sydney rounds out the top five markets, holding its appeal for both local and foreign institutional investors despite relatively weak fundamentals in its office and retail sector, and some concerns over the financial and mining sectors. Still, with a limited supply of office space in the pipeline, investors are bullish about the city’s central business district; and its residential sector has experienced a solid rebound. Sydney is ranked eleventh for development prospects.
Investment Prospects by Property Type
Industrial/distribution – The industrial/distribution sector is the top-rated property sector for investment potential. Emerging Trends notes that the sector is undersupplied, due to extra demand for storage facilities being fueled by increased online consumer spending in Asia. Best bets for investments in industrial properties: China’s secondary cities, as well as Shanghai and Guangzhou.
Residential – Residential ranks second, although the report cautions about high prices affecting housing affordability, the likelihood of higher home mortgage interest rates, and the ongoing impact of government intervention in China to control further price increases. Best bets for residential investments: Manila, Tokyo and Jakarta.
Office – Office space is listed third for investment potential, with the mediocre ranking attributed to “fevered competition from too much investment capital fighting over the same deals, especially in core assets. Best bets for office investments: Tokyo, Manila and Jakarta.
Retail – The retail sector ranked fourth for investment potential, with some concerns being expressed about overbuilding in some secondary markets. However, opportunities in prime downtown locations still hold much promise. Best bets for retail investments: Manila, Jakarta, Tokyo and Shanghai.
Hotel – While hotels ranked fifth for investment potential, the sector is still seen as general solid, due to a rapidly growing tourism industry and relatively high yields. Tokyo leads as the best bet for hotel investment, as the city begins preparations to host the 2020 Summer Olympics.
Sovereign Wealth and Institutional Investors Supporting Asian Real Estate
The report notes that, unlike other asset classes, real estate in Asia “barely flinched” this year in response to the tapering of the U.S. economic stimulus and expectations of higher interest rates. This is due, in part, because of the increase in sovereign wealth and institutional capital being directed to Asian markets, as well as the substantial volume of Asian capital being exported from China, Singapore and South Korea into real estate assets across the region.
“While Asia’s robust market has been accompanied by higher prices and lower yields for core products, investors have reacted not by pulling away from real estate in Asia, but by finding new ways to make the numbers work, including a focus on specialized property types such as senior care or logistics, and on opportunities in emerging markets,” said ULI North Asia Chairman Raymond Chow. “We do expect some headwinds as rising interest rates compress yields further, but overall, we are very encouraged by the optimistic view reflected in the report.”
The report expects real estate fundamentals to remain strong in markets throughout Asia in 2014, with stiff competition for conventional assets in prime markets boosting the popularity of niche property sectors and secondary markets for investments.
Leave a Reply