At almost 3.5 billion, the population in the Asia-Pacific (APAC) region is twice that of Europe and the Americas combined. The tremendous speed of migration from rural to urban locations has led to the creation of many large, densely populated cities, such as Hong Kong and Singapore. While the favorable demographics create investment opportunities, not all large APAC cities are what we would define as “winning cities.” Population size and its growth are certainly part of what makes a winning city. But other factors can be equally important, such as quality of living, infrastructure, economic growth and any constraints on new property development. Overall improvements in infrastructure and economic growth within emerging markets imply that the number of high-ranking APAC cities is likely to rise over time.
Winning cities are strong engines of economic growth, attracting skilled labor from home and sometimes abroad, and these factors typically result in robust housing demand. The residential sector offers a particularly compelling means of tapping into the growth of the APAC region, in comparison to the structural change that we’re seeing in the office and retail markets. The office and retail sectors account for almost 80% of the property investment market in APAC, and although there are still opportunities, pricing at this point of the cycle is becoming stretched.
As the population increases, more homes are required to accommodate growth. Asia’s winning cities are mainly characterized by robust population growth – such as in Sydney, Melbourne, Singapore, Hong Kong and Tokyo. The drivers of growth reflect a variety of factors, such as internal migration, natural population growth and immigration from overseas. Even where population levels appear to have stagnated, such as in Seoul and Taipei, underlying housing demand is robust; this reflects falling household sizes along with rising income and wealth, which also drive up demand.
“Winning cities” within APAC are generally densely populated and offer relatively limited living space per person. We believe many of Asia’s “winning cities” in mature economies suffer from a shortage of living space, as new supply has failed to keep pace with population and income growth. India and China will require significant new development to accommodate the rising aspirations that accompany income growth.
While there is strong demand as well as investment opportunities in residential property within APAC, institutional investors face barriers in terms of income-producing opportunities within the region. The largest market is in Japan; elsewhere, income-producing residential property is limited to niche areas like student accommodation and nursing homes. At this point, we believe that the strongest residential opportunities lie in development strategies, such as preparing land for housing construction, conversion of commercial premises to residential use, and lending to developers.
A key concern in this market is that prices are higher because of low interest rates and not because of housing demand fundamentals. The traditional approach for measuring housing affordability is to compare house prices to incomes and then benchmark this against a historical norm. But because the norm varies sharply across countries and the economic environment is constantly changing, this makes it difficult to identify an appropriate benchmark. Another way of assessing valuations is to compare the cost of owning a home against the cost of renting.
On this measure, the cost of owner-occupation does appear unattractive on the surface. Markets in Singapore, Hong Kong, China and India appear to be around 30% or more overpriced. Cultural preference for ownership may be one explanation for high home prices, as renting is often stigmatized.
Low interest rates are also supporting house prices, and a move towards historical averages would make prices appear stretched in many markets. However, higher rates do not occur in isolation. Income growth should be correspondingly strong, and this is likely to push up rents as the demand for living space rises.
Overall, it is evident that the appetite for housing is increasing in Asia-Pacific cities, and with this comes the fear of an impending property bubble on the market. In an attempt to rein in housing demand, governments have reacted by imposing a number of restrictive measures, such as strict transaction taxes for speculative investors. Low interest rates have no doubt played a significant role in increasing housing demand, but we see lower borrowing costs as reinforcing structural housing imbalances in APAC’s “winning cities.”
Although there are no easy answers to solve the problem of the living space deficit, opportunities to finance redevelopments exist, particularly in terms of intensifying land use by creating high-density housing. Admittedly, executing planning approvals and construction can be challenging, but we believe the Asia-Pacific market is diverse enough to offer plenty of opportunities for investors with a range of risk appetites.
Investments in property may carry additional risk of loss due to the nature and volatility of the underlying investments. 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.
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