Real estate as an asset class is hotter than ever right now; prices of prime property around the world are at record highs – and the market in Asia is no exception.

This trend has been driven by steadily rising demand from both institutional investors and private wealth, eager for both capital appreciation and steady income, over the past few years.

And it shows little sign of tailing off, if one is to believe survey findings suggesting that asset owners expect to increase their property allocations, including to Asia.

Indeed, the region is now seen as an essential part of any global real estate portfolio, whereas even just five years ago it sat firmly in the ‘opportunistic’ bucket. Big and sophisticated property investors, such as Canadian pension funds and European insurance firms are eyeing greater Asian exposure.

Admittedly, worries over whether property prices are peaking have nagged investors in Asia for years, said a late November report by consultancy PwC, “but this time, the alarm bells are ringing louder than ever”. Hong Kong real estate, for instance, has looked very expensive for some time to some experts, such as BlackRock's John Saunders.

However, the sheer weight of demand for the asset class suggests any drop in valuations may not be major, said the PwC report.

But if and when one does, where is it most likely to happen? AsianInvestor asked three experienced real estate investors which property markets in Asia Pacific they saw as most vulnerable to a fall in the coming year either geographically or sectorally.

Louise Kavanagh, managing director (Hong Kong)
TH Real Estate

Louise Kavanagh

Insofar as Asia Pacific core property markets are concerned, the most significant headwind to performance next year rests on the trajectory of global interest rates, particularly US monetary policy outlook. In this regard, the less hawkish guidance by the Federal Reserve recently will no doubt help assuage some of the concerns of a more severe dislocation in financial conditions between US dollar and non-US dollar-denominated investment markets in the near term.

In our view, the Hong Kong housing market remains still most at risk of a correction [in the region]. In real terms, prices have risen more than 133% above the previous peak in 2008, significantly exceeding the 8% rise in real wages over the same period. With a price-to-income multiple of 19.4 years, Hong Kong is the least affordable housing market in the world, ahead of Sydney and Vancouver, which have multiples of 12.9 and 12.6, respectively.

A more sanguine Fed cycle will help support domestic liquidity conditions somewhat, but nonetheless domestic liquidity conditions will likely continue to tighten, as three more interest rate increases are still to be expected. An already slowing economy amid rising global risks, headwinds from restrictive capital controls and ongoing slowdown in China will continue to overshadow the housing market.

After rising by more than four times since 2008, a steadily shrinking monetary base from capital outflows will also accelerate price declines. A drop of 20% would only bring housing prices down to early 2017 levels.

Vincent Chew, executive director and portfolio manager (Singapore)
PGIM Real Estate

From the capital markets perspective, there is still strong liquidity from investors, so we do not sense that there will be a sharp correction in capital values in the near term as institutional investors and managers continue to be active, even in the late cycle markets.

Vincent Chew

That said, specific sectors and markets where we would be more cautious include shopping centres in Australia, particularly in the sub-regional mall segment.  From a macro perspective, consumer spending growth has been slowing over the last few years and income growth is weak.  Home prices will slump further, which will continue to erode household wealth. 

Going forward, online retailing will continue to grow in Australia, which is part of the structural headwinds for bricks-and-mortar retail. Discount department stores, which are typically anchor tenants in sub-regional shopping centres, are under threat from e-commerce, and these retailers have generally been underperforming. As such, we have seen a sharper drop in rents for sub-regional shopping centres over the last year, and this trend should continue over the near term.

Rushabh Desai, Asia Pacific chief executive (Hong Kong)
Allianz Real Estate

Rushabh Desai

Allianz is a long-term investor and our investments in Asia-Pacific are aligned to the secular mega trends: changing demographics, accelerating urbanisation, a rising middle class, the transformation of shopping, and the rise of data and technology. Our long-term outlook for Asia Pacific continues to be favourable, however in the near term it is becoming increasingly challenging to “buy value”.

We see a number of things that could indicate a likely slowdown in investor appetite especially for office [property] over the coming 12 to 18 months, not least of which is prices globally being driven up by liquidity. Added to that, Australia prime office yields have reached an all-time low of 4.5%, office rental growth is slowing in Japan, and growth in China is slowing.

Much of our focus in 2019 will be on offices, resilient micro-locations and specific value-enhancement strategies, as well as logistics.