Investors in Asian property have had plenty of adventures in recent years as prices have pitched and rolled like boats buffeted by a typhoon.
But adventure can be overrated. Returns in many Asian frontier and emerging property markets, such as that of mainland China, have often disappointed. On the other hand, developed property markets in Asia-Pacific’s high-income countries, such as Australia and Singapore, can offer good prospects that are not clouded by the economic slowdown in the Chinese landmass.
Moreover, these prospects come with increasingly lower risk, for two reasons. Pension funds and other institutions from inside and outside the region are supporting prices by investing in these real estate markets. Prices are also bolstered by strong demand among prospective tenants, as the Asia-Pacific region’s economy grows, and the needs of Asian societies develop. In short, investment in Asia-Pacific property does not have to be dangerous to be exciting.
But investors should always remember that icons rarely make for good investments. Prime property in the centers of leading Asia-Pacific cities is often best avoided because it is overpriced. Investors should instead consider property outside the most prestigious developments, including real estate that fits into particular niches.
For example, how about student accommodation in Australia and Singapore, as Asian families seek high-quality overseas education to ensure that their families continue to climb the socioeconomic ladder?
Property in Asia-Pacific’s higher-income countries has certainly proved a good investment in recent years. For euro-based investors, for example, annual returns averaged 8% in seven high-income Asia-Pacific countries and territories between 2007 and 2014, compared with only 4% in the Eurozone. Some Eurozone investors may initially be reluctant to explore overseas, but increasing numbers see that it is worth their while to do so.
Property in Asia-Pacific’s higher-income countries has certainly proved a good investment in recent years.
If we strip Japan out – leaving Australia, New Zealand, Singapore, Korea, Hong Kong and Taiwan – the annual return rises to 12%. Japan’s economic growth is slower, but a small investment in the country may appeal as a way of de-risking certain portfolios because Japan is Asia-Pacific’s safest property market.
The case of Japan shows the need for investing by theme within high-income Asia-Pacific, rather than adopting a blanket approach.
One of the most promising themes both in Japan and in other Asia-Pacific countries is the ageing of populations. One promising investment opportunity is assisted living care homes aimed at wealthy people over the age of 75. Another is retail space made up of relatively small convenience stores in large urban areas that have ample healthcare facilities.
These are the sort of outlets where older people can get to know individual store assistants through a little shopping and chatting every day. Although Japan as a whole is not an exciting market, it still has promising niches such as these. The specialist market of student accommodation – part of another, broader theme based on Asia’s expanding middle class – also offers opportunities in Japan.
The third and final theme is the growth of urban populations in high-income countries. One way of tapping into this is by investing in residential property. In most mature markets, housing demand is likely to outstrip potential supply over the medium term, because supply is constrained by planning laws designed to raise quality of life in line with rising income. This helps to explain why, since the 1980s, the capital value of residential property has risen faster than for any other type of property in four of the five most developed property markets in Asia-Pacific: Australia, New Zealand, Singapore and Japan. The exception is Hong Kong, where it is beaten only by retail.
The sector that has grown least in value since that time in all five countries is office space. For many years, institutional investors in real estate regarded office space as just about the only game in town, but we think that there are other, better games to play. There will be opportunities in office property, but these will mainly be in short-term investing where values have dropped sharply because of a cyclical downturn.
Looking at the long term, office blocks have disappointed because existing property owners have been savvy. They have redeveloped existing sites and squeezed more people into them by increasing the efficiency with which they use space. This has kept supply high.
Pessimists sometimes find it hard to think of anything positive to say about Asian markets of any sort at the moment because of fears about a Chinese slowdown.
But some slowdowns are good: a car approaching a hairpin bend, a long-distance runner who starts the race a little too energetically, or an economy built on manufacturing exports that is trying to switch towards service industries to cater to its increasing domestic wealth – like China’s.
China’s generally successful slowdown will support prices in Asia-Pacific’s developed real estate markets for years to come by keeping demand for property high in many different ways. The tens of thousands of Chinese students who hop on a plane to Australia every semester can read that in the business pages of their free inflight newspapers. That is, if they can drag themselves away from the shopping channel advertising ways to spend their parents’ money in the airport shopping malls on the way to their well-heeled accommodation.
Real estate investments are relatively illiquid and the ability to vary investments in response to changes in economic and other conditions is limited. Property values can be affected by a number of factors, including, inter alia, economic climate, property market conditions, interest rates, and regulation.
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.