Russell pinpoints bright spots in Asia's real estate markets

Russell Investments highlights the merits of Hong Kong’s office segment and Singapore’s suburban retail market, as well as the long-term prospects of Taiwan’s property market.

Hong Kong’s office segment and Singapore’s suburban retail market have been singled out for their attractiveness to Asia real estate investors given robust demand and limited supply.

Taiwan’s property market also offers long-term positives on the back of improving ties with mainland China, says Martin Lamb, director of Asia-Pacific real estate investment at financial services firm Russell Investments.

However, he warns of a bumpy ride ahead given headwinds facing Asian economies this year, including inflationary pressures, currency appreciation, policy tightening and questions about the health of their export markets.

“Property markets in Asia are both highly sensitive to business confidence and sentiment and to changes in government policy and these factors seem to be at loggerheads right now, making near-term forecasts more difficult,” Lamb notes via teleconference.

He urges investors to keep an eye on government policy announcements, particularly in mainland China and Singapore, and to be prepared to stomach volatility as property markets digest the impact of current and proposed tightening measures.

Lamb notes substantial new supply in both retail and office in major Indian cities, along with a strong office supply in Singapore, the Pudong area of Shanghai and Beijing. This, he suggests, will moderate the ability of landlords to raise rents in the near term, even in the face of strong demand.

“Markets we find notably attractive include Hong Kong office, especially in Central because of robust demand and limited new supply, and for the same reasons we like suburban retail in Singapore, which has proven quite resilient in the aftermath of the global financial crisis,” he states.

Lamb urges caution over tier-1 luxury residential development in major Chinese cities as prices for these types of products have been fuelled by the sort of speculation that Beijing is determined to cool.

He also advises caution regarding Tokyo office outside of the central three wards, where effective rentals have come down and led to a flight to quality, leaving a challenging leasing future for less desirable locations.

But Lamb points to long-term positives for Taiwan’s property market following the signing of the Economic Cooperation Framework Agreement (ECFA) last June, combined with a coastal development plan to improve infrastructure in Fujian province directly across the Taiwan Strait.

“No doubt there will be occasional fits and starts in the cross-strait relationship, but it is not inconceivable that in 20 years that Taiwan and Fujian will enjoy as robust and symbiotic an economic bond as Hong Kong and Guangdong do today,” Lamb says.

In the longer term, he expects the ECFA to support additional office demand in Taipei as a result of expansion in the manufacturing, chemicals, finance and textile industries.

However, he points out that grade-A office leasing rates are already at pre-crisis highs, while the Legislative Yuan is also likely to introduce measures to cool the residential market in 2011. Further, he notes that the New Taiwan Dollar is at a 13-year high against the US dollar, which constitutes a degree of headwind for a trade-dependent economy.

As for Australia, Lamb notes that commercial property cap rates have compressed slightly from post-crisis highs but are now largely stable, therefore in the near-term asset price appreciation will mostly be driven by gains in rental income.

Office has rebounded strongly on the shoulders of robust white-collar employment growth, while retail has generally been resilient to date.

However, the spectre of future interest rate increases darkens prospects for strong future gains in retail sales and residential prices in the near term.

The recent strength of the Aussie dollar also led to a reduction in foreign investment in Australian property markets in the second half of last year.

“We submit that this is an excellent time for Australian institutional investors to revisit the case for global diversification and investment overseas,” finds Lamb.

“As a summarising statement, since Asian and global property markets are subject to a variety of often conflicting influences and it is difficult to predict future market movements, we believe long-term diversified real estate investment strategies remain the best method to manage downside risk.”

Headquartered in Seattle, Russell Investments had $155 billion in assets under management at the end of last year in mutual funds, retirement products and institutional funds.

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