James Buckley and Mark Callender consider the Asian property investment market
We believe there is a compelling case for investing in Asia’s real estate markets. The region’s property investment market has grown rapidly in recent years, driven principally by large scale urbanisation and rising living standards. China’s urban population is on course to have increased by 150 million between 2000 and 2010 and the urban population of Australia, Hong Kong, Japan and Singapore is expected to have increased by 12 million. During the past decade the amount of Grade A office space in the five countries has grown by 50% and the stock of modern retail space has more than doubled (source: JLL). Assuming Asia continues to enjoy faster economic growth than America and Europe, then it is likely to account for a third of global investment property by 2020 and China will rival Japan as the region’s largest investment market1.
While Asia’s real estate markets were not, of course, immune to the global recession which followed Lehman’s collapse, the downturn was generally short lived and agents’ data show that in many markets prime property prices had already started to recover by the end of 2009. Looking forward, Schroders’ forecasts suggest that Australian offices and retail, Chinese retail and Hong Kong offices should all perform strongly over the next few years.
Yet, while property forecasts are helpful, it would be wrong to use them uncritically for several reasons. First, the quality of property data in Asia is generally lower than that in Europe and North America and mainly consists of agents’ estimates of prime rents and yields. Although prime data are useful for spotting market turning points, they only provide a rough guide to the actual returns received by investors because they do not take into account capital expenditure, depreciation, tenant incentives and vacancy. Second, property markets in Asia are developing rapidly and historical data is often too short to build a robust forecasting model.
Third and most importantly, forecasts give no consideration to the differing levels of risk inherent in different markets. For example, forecast total returns in China might be higher than those in Singapore, but so too are the risks in terms of lower liquidity, poorer market transparency and greater controls on foreign property investment.
To recognise this, Schroders has compiled a set of property risk premia which take into account variations in the liquidity of each property market, their transparency and the volatility of the local rental cycle2. In addition, the model uses the long term risk free rate for each country estimated by Schroders’ fixed income team, to reflect variations in the sovereign debt ratings of governments and expectations of future movements in exchange rates. By adding the property risk premia to the long
