Cross-border real estate investment in Asia increases

Affordability of residential property, increasing transparency and the strong growth of REITs mean this trend is set to continue, says Fidelity International.

Global direct commercial real estate investment reached a new high of $682 billion in 2006 - an increase of nearly 40% year on year with cross border investment accounting for 42% of this total.

The Asia Pacific region accounted for $94 billion or 14% of the total investment. The region saw a 50% rise in the amount of cross border investment, with Japan and China taking the largest share of the flows.

Polly Kwan, manager of the Fidelity Asian Property Fund, believes that this trend will continue. Speaking at a conference in London last week, Ms Kwan commented: “The Asia Pacific property market is extremely diverse. Local markets remain distinct and there is a low correlation between the countries. The region benefits from having both mature and emerging property markets and there are a number of factors in play which should support growth for some time to come.”

Key drivers:

High population growth, combined with strong national and personal income growth, is resulting in increased demand for residential property.

Rapid urbanisaton and industrialisation has led to increased demand for industrial and logistic space. The key beneficiaries of this trend are China, Thailand, Malaysia and Singapore, which have low-cost manufacturing.

A growing labour force and an improving employment rate is supporting demand for office space. This is of particular benefit to cities with strength in commercial, finance, IT and back-office support such as Tokyo, Sydney, Hong Kong, Singapore and Mumbai.

The growing younger population and rising consumption are boosting demand for retail and hotel space

“Some commentators have questioned the continuing affordability of residential property in the Asian region,” continues Kwan. “However, I believe property prices have room to rise further. They are still lower than the bubble in the 1980s, especially in China, Japan and Hong Kong.”

Until very recently the region’s property market was a very local business but with increasing transparency and the strong growth of REITs, cross-border commercial property investment has began to increase on both and inter- and intra-regional basis.

Transparency of listed property securities has improved in more than half the countries in the region. Japan has seen the most improvement with the development of the J-REIT market and the expansion of internationally listed trusts with Japanese assets. China, India and Indonesia have also seen improvements in accounting and corporate governance as they strive to meet higher international standards.

“Governments throughout the region are also encouraging the development of REIT structures and this area is expected to see strong growth in the next five years or so. The Japanese REIT market is expected to grow by more than 160% in the next 6 years and further initiatives to enhance the S-REIT regulatory regime in Singapore should also attract listings from across the region.

“The office markets in these two countries are particularly attractive,” concludes Kwan. “Companies are starting to renovate buildings now that their balance sheet problems have been resolved and vacancy rates in Tokyo have declined sharply since 2003. Rental growth in turn is accelerating (11.8% year on year in April 2007) and there is strong demand for office space in prime locations with a limited supply over the next few years. Singapore has also seen rising prime office rental growth with rents rising 9.7% in the first quarter of this year. With robust economic growth and falling vacancy rate this should continue for some time.”