The following article first appeared in the March 2008 edition of magazine. Each month we offer online a feature from the magazine. To subscribe, please email us at [email protected]

Asia real estate continues to attract interest from global institutional investors. Fund managers with property expertise agree the regionÆs macroeconomic fundamentals remain strong despite the economic crisis in America and Europe derived from the collapse in US subprime mortgages.

If anything, ills in the western world have driven more institutions to allocate to Asian real estate, says Justin Pica, portfolio manager of the ING Asia-Pacific Real-Estate Securities Fund in Hong Kong.
ABP Investments of the Netherlands and the California Public Employees Retirement System recently opened offices in Asia to monitor alternative investments. The Canada Pension Plan Investment Board recently announced a $1 billion budget for Asian property investments.

Predictably, however, this interest û to say nothing of existing demand for real estate among Asia-based investors û has bid up prices. Deals from China to Malaysia are no longer cheap. Now investors say Taiwan will now take a star turn.

This market has been dormant, the anomalous slow-growth story amidst a booming region. If nothing else, though, the Taiwanese malaise has led to some of the cheapest borrowing conditions and lowest property prices in Asia, even as yields are rising.

Betting on Taiwan property has not been conventional wisdom. Until recently most analysts reckoned the US slowdown would hurt tech exports, thus undermining the islandÆs most vital sector. Taiwanese financial institutions have also suffered due to exposures to CDOs and other structured products. As recently as November 2007, CitiÆs equity strategist Peter Kurz was predicting write-offs.

But TaiwanÆs economy hasnÆt faltered, and the damage in its finance sector appears to be contained. In fact, financials were the one sector that did well in the Taipei stock market in January, thanks to investor hopes regarding improved cross-strait relations following the March 22 presidential election (see previous story).

The market sell-off was in line with regional fretting over AmericaÆs economy but may have been overdone. TaiwanÆs exports recorded 11.9% year-on-year growth in January, notes Merrill Lynch. Now CitiÆs Kurz says 2008 will be a positive year for TaiwanÆs stock market, where its price/earnings ratio is at an all-time low, and says the market has room to rise by nearly 50% this year.

With TaiwanÆs macroeconomic story looking the rosiest since the 1990s, real estate should perform well, says Kenny Lau, director of equity research at Credit Suisse. In fact, property prices are usually the first to react to an improving economy.

Investors are rolling out their maps of Taiwan for the first time in years. Stephen Yuen, formerly an executive of Hong Kong property developer New World Group and now CEO of HSBC NF Investment Advisors, a HSBC real-estate private equity arm, the opportunities there now match those on the mainland, thanks to a long period of under-investment that makes supply scarce. Normalizing trade with mainland China and easing restrictions on capital could catalyze TaiwanÆs property market, particularly in areas such as hotels.

Already, about 1,000 new resort and hotel rooms are on way to completion in 2009 in scenic Yilan county. Hotel management groups, such as Spring International, Regent, Sheraton and Shangri-La, expect direct links to bring mainland visitors to the county's spas.

But while some investors think Taiwan has the potential of unleashing a æbig bangÆ, property consultants warn progress will likely be gradual.

ôMost people have this expectation that [the election results] will be a big bang,ö says Jeffrey Hurren, head of research at Jones Lang Lasalle in Taipei. ôI donÆt think that will be the case.ö Rather cross-strait ties will improve gradually.

Even if deals take time to realize, however, investors may be attracted by cheap financing. The islandÆs overnight call-loan rate is below 2.1%, while rental yields are the highest in Asia ex-Japan.

Domestic insurance companies have noted the discrepancy between financing and rental yields, and have dived into local property investments. Shinkong Life Insurance, for example, is now one of the biggest landlords in TaipeiÆs trendy Xinyi area, the new business district crowned by the Taipei 101 Tower.

Shinkong has also announced the sale of its Shinkong Min Sheng Building project to a consortium group formed from Tatien, Mayer Steel, Taiwan Fire & Marine Insurance for NT$7.3 billion ($226 million). The project will provide Shinkong an initial yield of 3.8%, Hurren estimates. Interestingly, its subsidiary Shin Kong Bank has secured a 85% financing for the purchase at a rate of just 2.5%.

Smaller insurers are active as well. Taiwan Life Insurance announced an acquisition for the Kuo Hua Life Building at a NT$5.37 billion ($165.6 million).

Hurren estimates a NT$100 billion worth of property transactions will take place in 2008, with prices supported by lack of supply; more building projects will come on line in 2009.

If the new political regime does ease investment flows with mainland China, that will give TaiwanÆs relatively cheap property sector a boost. This expectation may underpin a spate of deals by foreign private-equity firms. Since the fourth quarter of 2007, Taipei has seen an unprecedented number of transactions exceeding NT$5 billion, with GE Real Estate, Citadel Group and Citi Property Investors among those snapping up real estate.

Citi Property broke local records for paying NT$9 billion ($277.6 million) for Asia Plaza, a twin tower located in the Neihu Technology Park, a new and expanding area on the fringe of Taipei.

The Asia Plaza deal has been followed with a NT$5.5 billion ($169.6 million) purchase of B&Q Test Rite Building, also in Neihu. Citadel purchased a similar project in the area, while adding a grade-A Aegon Building on Jianguo North Road for $5.2 billion. GE Real Estate had revealed plans to earmark NT$10 billion for acquiring commercial properties in Taipei, after its NT$684 million ($21.18 million) purchase for a new Taiwan head office.

TaiwanÆs corporations are looking to upgrade to grade-A offices but see limited choice available in the market, with prime office supply actually decreasing by 2.2% year-on-year in the fourth quarter of 2007, says CB Richard Ellis. Supply is at a five-year low.

Such is the consequence of TaiwanÆs business malaise. With a few exceptions such as the showcase 101 Tower, Taipei has always been the regionÆs ugly duckling, a condition prolonged during the post-tech souring of business sentiment.

As a result, Taipei and neighbouring areas donÆt have the necessary offices to support contemporary, digital businesses. Buildings designed in the 1970s canÆt adequately support the fibre optics, cabling and back-up systems that Taiwanese companies now badly need û to speak nothing of meeting modern fire and earthquake codes.

Taipei must transform much of its real estate from grade B to grade A. Scarcity means high returns; it is cheap compared to China or other parts of Asia; the macroeconomic background is improving; domestic institutional investors are keen on property; and the promise of liberalizing trade and investment flows with mainland China should serve as the final catalyst.