Asia feasts on global credit crunch

INVESTING in Asia has done a 360, once a no-go zone because of 1997 financial crisis – today the region is recording strong inflows of capital as Europe and United States feel the bite from the global credit crunch, according to a report.

The “Real Estate Investment in Asia Pacific: Migrating capital” report by KPMG, FTSE Group and Asian Public Real Estate Association shows the credit crisis in the US and Europe has put pressure on the decade of sustained growth in global real estate.

But on the other hand, the report observes the inflow of capital to Asia’s real estate market is accelerating off the back of a prolonged period of steady growth which is powered by a combination of opportunistic and increasingly longer-term investments.

And the report also found the slowdown in the US and European markets is unlikely to cause an immediate negative impact on Asia in 2008 although banks will tighten credit policies thus limiting financing options for real estate investments.

In fact, the report findings give an optimistic outlook for Asia in 2008 where returns are projected to remain higher than the global average for the coming year and are backed by strong market fundamentals and even stronger economic growth.

KPMG China and Asia Pacific’s partner in charge of property and infrastructure Andrew Weir said despite the current tightening of credit from banks, the deals will continue to happen.

But Weir said deals may take longer and the price may cost more and lead to a temporary slowing of the supply cycle.

“However, the current sub-prime fall out elsewhere may well act as a catalyst for the inevitable further development of Asia Pacific as a centre of property and investment management,” he continued.

APREA’s chief executive Peter Mitchell said many REITs in Asia should continue to deliver good returns for the remainder of the year.

But, he added the potential for new REIT listings is being impacted by the dull market sentiment.

“There is no doubt that market sentiment in Asia has been affected by the US credit crisis, and there is uncertainty about when a rebound will occur.

“However, over the longer-term, outlook should remain positive in the region, with REITs generally being good defensive stocks and inflation hedges. Projections show Asia’s REIT market exceeding a market capitalisation of $US100 billion by 2010,” Mitchell added.

Meanwhile, APREA yesterday signed cooperation agreement with the FTSE Group to develop new indices for Asia Pacific’s real estate sector.

APREA joins the European Public Real Estate Association and National Association of Real Estate Investment Trusts which have already chosen to partner with FTSE as their preferred index provider.

FTSE deputy chief executive Donald Keith said with many Asian countries introducing or set to introduce REIT regimes, FTSE and APREA are uniquely positioned to anticipate and deliver new real estate indices for the Asia Pacific region while ensuring existing indices remain relevant to investor needs.

The partnership launch coincides with the report findings that real estate funds remain the dominant source of capital for real estate investments in Asia into 2008.

Whilst the proliferation of single-market high-return funds such as those based on China and Vietnam continue to service the needs of the short-term speculative investor, long-term funds are generally taking a “wait and see” approach following the dampened sentiment in US markets.

FTSE Asia Pacific director Fran Thompson said it will take more time for Asia to fully develop property derivatives.

“However, the data and information in markets around Asia is improving. As a result, quality indices are being developed for the region which will support the development of a property derivatives market,” she added.

The report found Japan remains a dominant force in the region, not only accounting for half of last year’s real estate transactions but also experiencing the strongest growth.

But China also grabbed a number of headlines last year as it continued to produce attractive returns for investors.

Looking forward though, Japan continues to be viewed as an attractive market to look into, particularly for the lower-risk investor, whilst commentators still view China as a popular place to look as large volumes of capital chase more limited investible stock.

The report said the outlook for Asia is good, because the region’s increasing economic independence and inter-regional trade will help it to overcome most negative impacts from any US and European slowdown this year.

“As impacts from the credit crunch are being felt in the financial sectors overseas, Asia’s growth is forecast to slow in 2008 but still remain at a healthy level.

“Capital spending is expected to remain high in the region, as one commentator noted, this is due in part to a lack of investible options in home markets in US and Europe,”

“While the Australian REIT market is starting to show diminished interest in offshore acquisitions, the country’s superannuation funds continue to demonstrate growing interest in Asian real estate,” the report concluded.

Australian Property Journal