Wednesday, 6 February 2013

Supply-demand mismatches in Asian real estate

As interest rates remain at historic lows in Singapore, Hong Kong and Japan for property-related borrowing, the combination of that cheap funding cost along with rising rentals is making it possible once again to derive a positive return from borrowing money and receiving a healthier rental yield.

Hong Kong and Singapore property is back close to the real price levels seen in early 1997, though affordability ratios are now better, simply because interest rates are so low. Paul Guest, the Singapore-based head of investment research and strategy at LaSalle Investment, says: “Our aim is to stay one step ahead of core capital as their risk aversion eases and such investors of core capital start to move higher up the risk curve, for example, into B+ grade property from A grade. One way to stay ahead might for us be achieved by refurbishing or repositioning a lower quality building for example.”

Guest also elaborated on the areas in property investment in Asia where he currently perceives the mismatch of real estate supply and demand is causing unanticipated anomalies, that are affecting pricing either positively or negatively, depending on whether the supply or demand side of the equation is in the ascendency.

China tier 2 cities
There is currently an increase in Grade A supply as a number of cities are building a modern central business district for the first time. When this happened in Beijing, as the capital city developed new office premises that was up to international standards, ultimately it was domestic companies took up the excess Grade A stock. For the mismatch in other cities to be taken up, domestic firms may have to perform a similar role.

Singapore offices
There has been a lot of office supply in recent years, and with that, the anticipation of falling rents. However, unexpectedly, there was a take-up of space by non-traditional CBD tenants, such as film and toy companies and social media firms. Given that absorption of space, the predicted fall in rents did not happen.

Seoul and Tokyo offices
Despite double digit vacancy rates in Tokyo and Seoul office space, there has been a strong supple of new Grade A office property, and that is expected to weigh on rents making them poor performers in Asian property. Author: Simon Osborne

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