Bangkok--2 Sep--CB Richard Ellis
The Asian property investment market enjoyed a stronger second quarter of 2009 following a subdued start to the year, with direct real estate investment volume edging up 41% from the first quarter, according to international property consultants CB Richard Ellis. The improved investment turnover was attributable to a certain extent to debt-funded owners compromising at current price levels and liquidating assets to service near-term debt obligations. Despite the improvement witnessed in the second quarter, however, transaction volume remained thin in the first half of 2009 compared to the corresponding period in 2008, falling by 58% year-on-year to approximately US$12.4 billion.
Investor sentiment in the region generally turned more positive as the first half of the year progressed. Hong Kong, Singapore and Taiwan experienced the largest quarterly rebound in transaction volume, up 302%, 297% and 151% respectively in the second quarter. The same quarter also witnessed a rise in land acquisitions in China as big local developers scrambled to snap up land for future development in anticipation of the imminent appreciation of land prices.
Direct real estate investment in the region was concentrated in a selected number of countries, with the market dominated by Japan which accounted for 44% of total turnover. China and Hong Kong represented 18% and 15% respectively. Despite the significant contraction of total investment turnover in the first half of 2009, India and Taiwan ended the six-month period with positive year-on-year growth, surging by 339% and 12% respectively. The change in investor sentiment in Taiwan primarily resulted from the opening of the domestic market to mainland Chinese investment. In India, the formation of a stable government coupled with the utilisation of Qualified Institutional Placement (QIP) by real estate companies to raise new funds provided a boost to the domestic property investment market.
The largest transaction concluded during the review period was AIG’s sale of its Tokyo headquarters, the AIG Otemachi Building, to Nippon Life for US$1.2 billion. Eight of the ten largest deals in Asia during the first half involved domestic buyers. Overall, the amount of inter-regional cross-border investment accounted for only 8% of total volume in the first half of 2009, dropping from a high of 30% a year earlier, as global institutional investors and real estate funds largely remained on the sidelines. The largest cross-border transaction was completed in Tokyo with the sale of KDX Toyosu Gran Square by Kenedix to Carlyle Group and South Korea’s National Pension Services for approximately US$363 million.
Prime office properties continued to attract the strongest interest from investors, accounting for 55% of total turnover for the six-month period, followed by the retail sector, which accounted for 16% of total volume. The sale of the Sogo Shinsaibashi Store in Osaka City for approximately US$384 million was the largest retail investment transaction during the period.
The strong rebound in prices in a number of Asian markets began to subside slightly during the second quarter. According to the CBRE Asian Office Yield Index (which reflects the changes in prime office yields in major Asian cities), overall prime office yields edged down during the second quarter by some 51 bps to 4.59%, after rising for three consecutive quarters. Hong Kong, Singapore, Bangkok and Taipei witnessed the largest yield compression. The spreads between the prime office yields and 10-year government bond yields narrowed significantly in these markets, which to a certain extent represents how the risk premiums and volatilities associated with such investment properties alleviated considerably during the same time span.
Lenders remain selective towards providing property finance
Since the beginning of the year central banks across the region have increased money supply and lowered policy rates in a bid to alleviate pressure caused by the credit shortage and restore inter-bank lending activity. While a number of developers and REITs successfully obtained fresh capital from stock markets during the review period, lenders remained cautious and demanded lower loan-to-value (LTV) ratios for property financing and refinancing, in light of what they saw as a lack of evidence of property values amid the widespread correction in property prices. Banks remained especially reluctant to provide finance for large transactions. These factors consequently led to a market standoff during the early months of the year. However, as deleveraging on institutional investors begins to gather pace, particularly for those investors with assets which have experienced a certain degree of price correction, we can expect to see more transactions taking place over the second half of the year.
Bangkok
There were no whole building sales in Bangkok in the second quarter. "This was due to few buildings being offered for sale rather than lack of demand for income producing buildings," according to Ms. Kulwadee Sawangsri, Executive Director — head of Investment & Land Services at CB Richard Ellis.
There has continued to be demand for development sites for condominiums both in the Central Business District and along mass transit routes. There has been no evidence of a decrease in prices for land in the Central areas.
"We expect that local investors will be the dominant force in both site and building acquisition in Bangkok over the next 12 months as foreign investors focus on the larger more liquid markets such as Australia and Japan," added Ms. Kulwadee.
Greater China
The residential sector in China recovered strongly in the first half and witnessed plenty of activity, particularly in the high end luxury sector. However, raising debt for large scale acquisitions remained challenging despite the improvement in market conditions, and a number of investors opted to focus their attention on smaller office buildings. Foreign institutional investors remained inactive, discouraged by the lack of further discounting, while local investors were more active on account of their readier access to domestic credit.
Investment sentiment in Taiwan largely improved during the second quarter following the announcement of the opening of a number of domestic industrial sectors, including infrastructure and real estate, to mainland Chinese investment. Total transaction sales in Taiwan amounted to NT$28 billio (US$853 million), up by 151% compared to the first quarter of 2009.
In Hong Kong the number of transactions above HK$100 million (US$13 million) dropped by 69% y-o-y in the first half of 2009. However, the residential sales market picked up in the second quarter thanks to the low lending rate and strong influx of capital into real estate assets.
North Asia
The second quarter saw Tokyo emerge as the location with the largest number of distressed or potentially distressed real estate assets in the region. Owners came under pressure to re-finance deals which have fallen to well below the original LTV ratios prescribed by their loan covenants. The period saw a number of major office transactions concluded at US$50 million and above, with Japanese investors and investment institutions accounting for virtually all acquisitions, proving that appetite still persists in Japan for acquiring quality assets.
Confidence in the Korean real estate investment market continued to improve. Domestic investors, mainly consisting of pension funds and institutional investors were eager to invest in real estate assets before inflation takes hold, with intense bidding driving up the price of quality office assets such as the ING Tower and the DACOM building in the GBD and the Kukdong Building in the CBD.
South East Asia
Three en-bloc office buildings were sold in Singapore during the second quarter, representing 24.5% of total investment sales and injecting life into what was previously a quiet commercial investment market. However, institutional investors mostly continued to adopt a wait and see strategy, judging that the fundamentals are weak and better opportunities will arise in six to 12 months time.
Investment activity in the Malaysian property market was thin during the first half of the year, with domestic investors accounting for the small number deals that did occur. There were no significant transactions in the office, retail and residential sectors, although a number of scattered transactions took place in the industrial and hospitality sectors. In the Philippines, one major hotel property transaction was made during the review period with a major industry player, Anchor Land Holdings, acquiring one of the older hotels in Manila, Admiral Hotel, from Admiral Realty Co. through a buyout of shares of the company which holds the property. The deal was completed for approximately US$7.48 million.
India
The Indian real estate investment market witnessed some improvement towards the end of the first half of 2009 after what was a relatively subdued start to the year. A number of enquiries witnessed in the second quarter should be converted into transactions in the third and fourth quarters. Private players found themselves in a stronger position following the marginal easing of interest rates and the willingness of banks to discount leased properties. Indian Hotels Company Ltd (IHCL) acquired an 85% stake in Elel Hotels and Investments, which owns the Mumbai-based Sea Rock Hotel, for INR 6.8 billion (US$141.7 million), while Unitech sold the Courtyard by the Marriott Gurgaon hotel to a local investor for INR 2.31 billion (US$48.1 million).
Investment Market Outlook
As we enter the second half of 2009, economies across the region are at various stages of stabilisation. Amongst the factors providing increased confidence to the market, China is still advancing and India is seeing the new election of its new government instill much needed confidence in its domestic economy while Hong Kong, Taiwan, Singapore and South Korea are also in a much better position after each has undergone severe economic contraction since last year. Japan is expected to recover very slowly amidst shrinking demand for high-tech and automotive exports.
Looking ahead, economic conditions should continue to strengthen and we anticipate that investors will gradually continue to re-enter the market as capital values stabilise, sentiment improves and the bid-ask spread narrows. A number of deals involving investment grade office or retail properties are on the verge of closing in China, Hong Kong, Japan and South Korea. However, interest in purchasing industrial assets is generally slack, with domestic demand remaining the primary driver.
Although investors have generally faced less pressing refinancing requirements during recent months, it is expected they will continue to find it difficult to obtain credit from lenders for property acquisitions. Deleveraging will continue to be the major trend for institutional investors and LTV ratios will remain in the safety zone of 50% at best. Cashrich domestic investors are likely to be the main drivers of the investment market over the short- to medium-term as many of them are keen to purchase quality assets for long-term investment.