By Cuong Nguyen, senior research analyst, PRUPIM Singapore
Investors head into 2013 knowing that few of the fundamental economic problems in the developed world have been solved – and many of them could remain unresolved throughout the year. However, as 2012 has shown, a situation which goes from worse to bad is one in which astute investors can make considerable amounts of money. Larger UK pension funds have been entrenched in Asian real estate for many years. Smaller schemes and local authorities are starting to follow suit. Insurance companies, which are now permitted to invest up to 10% of their assets in the asset class, are expected to significantly increase real estate allocations in the coming years. Many factors are driving demand. And UK investors are increasingly looking east for opportunities.
But Asia comprises many markets, each with their own unique characteristics. The China growth story continues to hit the headlines and attract attention from UK institutional investors. But how should investors view Chinese real estate as an investment opportunity? Economic development has reshaped China’s economic structure and its underlying fundamentals over the last 30 years. According to the World Bank, even if China’s growth rate slows to 6% p.a., it would still be expected to replace the United States as the world’s largest economy by 2030. Mirroring China’s remarkable economic development, its real estate markets have undergone significant evolution. A growing and increasingly affluent middle class and structural shift towards a skill-intensive and services-orientated economy are driving occupier demand for modern real estate of all types. This is especially evident in the major cities of Beijing, Shanghai, Shenzhen and Guangzhou. The transformation in the real estate market landscape is attracting significant interest from investors and developers, fuelling brisk development activity across major cities. Looking ahead, Chinese real estate market fundamentals remain broadly favourable. Tenant demand remains high. Office rental growth has been robust in China and other Asian markets thanks to the continued shift towards office-based employment in the economy. The retail sector has moved away from traditional “street retail” to large-scale integrated shopping malls. Demand for modern retail space will likely remain robust over the medium term. Investors in Chinese real estate also take comfort from increased levels of transparency and improved availability of market data. This has been made possible by the growing presence of multi-national enterprises and retailers, and the expansion of international property agencies in China, which has helped to popularise international standard practices. However, UK investors should be mindful of the potential risks in Chinese real estate. Besides the structural slowdown as the economy matures, there are some inherent risks within real estate investment. For example, capital control policies for overseas investors are creating significant challenges and uncertainties, particularly for those who are seeking to acquire direct assets. Similar to other emerging markets, reviews and changes to regulations governing the real estate market are ongoing in China. While general changes in regulations are expected to support the improvement of the legal framework and enhance market transparency, policy adjustments can cause uncertainty and sometimes disruptions to investment, especially when these changes are made with little forewarning. Despite significant development, Chinese real estate still exhibits the characteristics of an immature market. While the structural drivers of demand will continue to be relatively robust over the medium term, the market is also prone to oversupply given the low barriers to entry. The eagerness of developers to tap into the strong demand growth often results in poor planning decisions and a lack of consideration for local market fundamentals, which could potentially generate significant demand and supply mismatches and cause big swings in rental market cycles. China’s real estate market may not yet offer the core-style investment returns and risk tolerance of many UK institutional investors. However, given the rapid pace at which the market has matured and developed, investors should actively monitor for further structural changes over the coming years. The Chinese market may soon become too big, and too important, for institutional investors to ignore in their real estate allocations.
Comments