The "day of reckoning is just around the corner" for Asian property markets because of falling asset prices, rising capitalisation rates, deteriorating debt markets, increasing foreclosures and bankruptcies, and plummeting transaction volumes as the financial crisis travels the globe, according to the Emerging Trends in Real Estate Asia Pacific 2009 report issued by the Urban Land Institute (ULI) and PricewaterhouseCoopers.
"The eternal optimist in me wants to see this as an anomaly that will pass shortly, or at least one that won't affect the Asia-Pacific region the same way it will the US and western Europe, but my enthusiasm has waned," the report quotes one investor.
The report, released annually, provides an outlook on Asia-Pacific real estate investment and development trends, real estate finance and capital markets, and trends by property sector and metropolitan area. It is the third Asia-Pacific edition and is based on the opinions of internationally renowned real estate professionals, including investors, developers, property company representatives, lenders, brokers and consultants.
The investing landscape has undergone a substantive and possibly permanent change, according to the report. Asian banks have re-rated real estate for risk, and with the re-pricing of debt, investors will demand higher yields. The days of financing property via highly leveraged borrowing appear to be gone.
"Asia shares the same liquidity crises that the balance of the world is facing," says Stephen Blank, ULI senior resident fellow for finance. "Financial institutions—whether international or national, regional or local—are reluctant to extend credit as deleveraging reduces balance sheet lending capacity. While fundamentals in most markets and property sectors will be impacted by the prospects for a global recession, financing will be the single biggest issue facing the industry in 2009."
The report acknowledges that the "credit squeeze became a chokehold", culminating in the near-paralysis of regional debt markets.
The "moment of truth" has yet to arrive in the Asia-Pacific, the report says, with the exception of China and Japan where the credit squeeze began earlier.
"Refinancing may be the catalyst that brings the crisis home to regional real estate markets" in 2009 and into 2010 as short-term and construction loans mature, the reports says. However, as one fund manager notes, banks are being very accommodating because they know that if they start foreclosing on these rollovers, it's just going to force values to fall further.
"One potentially major problem is that the credit freeze will cause economies to seize up. That's the big risk for the entire industry," the report says.
Asian property sales plunged 68% in the third quarter of 2008 compared with 18% year-on-year through August, according to research firm Real Capital Analytics.
"Despite the dramatic change in the investing landscape, Asian economies have shown resilience. The trend will see more traditional players who will shop for quality assets in major locations. There will be more realistic pricing expectations," says KK So, PricewaterhouseCoopers real estate tax leader in Asia-Pacific. "Investors will also be rebalancing portfolios to take advantage of better economic prospects in Asia."
For 2009, the new mantra for real estate investing is "focus, focus, focus", and to be picky about markets and partners, according to the report, which recommends investors "not to stray from one's area of expertise and geography".
Tokyo, Singapore and Hong Kong rank one, two, and three in terms of real estate investment prospects. Shanghai falls from first to fifth place, ranking after Bangalore.
Bangalore, Mumbai, Taipei, New Delhi and Kuala Lumpur are all new entrants to the top 10 markets. Other markets surveyed include Melbourne, Beijing, Ho Chi Minh City (ranked second for development), Sydney, Osaka, Guangzhou, Auckland, Bangkok, Manila and Jakarta.
Tokyo's economy has slowed and exports are down. The city ranks first for investment and ninth for development prospects. However, Tokyo has the best risk rating throughout the Asia-Pacific region.
Singapore's central gateway earned it the number two spot for investment, but seventh overall for development. The city has to reconcile itself to slower growth and less demand, but has the second best risk rating after Tokyo.
Hong Kong moved up from fifth place for investment and sixth for development prospects. Demand is projected to slow from the rally of the past five years.
Bangalore catapults from 12th to fourth place for investment and number one for development prospects.
Shanghai drops to fifth place for investment and eighth for development prospects.
Rounding out the top 10 markets to watch:
Seoul ranks sixth for investment and 10th for development prospects. Industrial growth will play a large role in keeping the real estate market healthy.
Mumbai continues to experience unprecedented growth and spirals into seventh place for investment and third for development prospects. But, the city is also ranked the third riskiest for investment.
Taipei leaps from 16th into eighth position for investment and fifth-best for development opportunities. A strong office market with decreasing vacancies and increasing rents. All property sectors ranked as hold.
New Delhi rises to ninth place for investment and fourth for development. Current property investments earn a hold, but buy opportunities can be found in the hotel sector.
Kuala Lumpur slides into 10th position for investment prospects with tourism as its main economic driver.
Among property sectors most promising, offices take top ranking for both investment and development. Ho Chi Minh City is ranked the best market for buying office properties, followed by Tokyo, Mumbai, Shanghai and Bangalore.
The industrial/distribution sector ranks second for favoured property types. Shanghai gets the top buy rating, followed by Ho Chi Minh City, Bangalore, Mumbai and Guangzhou.
Retail ranks third in property sectors with Ho Chi Minh City garnering the top buy rating, followed by Mumbai, Shanghai, Bangalore and Beijing.
Residential rental apartments rank fourth in property sectors with Ho Chi Minh City, Mumbai, Bangalore, Tokyo and Taipei the top five buy markets.
Hotels witness a major drop from last year, when it was the favoured property type. Top five markets are: Mumbai, Bangalore, Ho Chi Minh City, New Delhi and Shanghai.
ULI is a global non-profit education and research institute supported by its members. Its mission is to provide leadership in the responsible use of land and in sustaining and creating thriving communities worldwide. Established in 1936, the Institute has more than 40,000 members representing all aspects of land use and development disciplines.