Comment: Why invest in Asian real estate?

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Asian countries are fostering stronger integration as well as trade ties amongst one another at a time when Europe is dealing with uncertainties surrounding the EU and a breakaway of one of its key trading partner, the UK, according to Kiran Patel, global chief investment officer, Savills Investment Management.

In this feature below Patel, pictured below left, asks the questions ‘Why invest in Asian real estate?’

As Asia braces for further economic progress with China at the helm, Asian countries are set to benefit from these strengthened partnerships, making it an appropriate time to consider investing in the Asia-Pacific region.

It is difficult to think of another part of the world that provides the diversity of investment opportunities available in the Asia-Pacific region.

The continent consists of many different countries from developed nations like Australia, Hong Kong, Japan, South Korea and Singapore to emerging markets like China, the world’s second-largest economy (thrice the size of the German economy or four times that of UK).

Frontier markets
It can also offer exposure to frontier markets such as Indonesia and Philippines with a population of 261m and 103m respectively; a combination that is greater than the populations of either Western Europe or the US.

Asia is moving into an era of unprecedented urbanization. For instance, in just 30 years, nearly 500 million people will have moved from rural areas into China’s 622 main cities, and a predominantly rural country will have become nearly 60% urbanised. It is expected that around 58% of the world’s population or 4.6 billion people will live in urban areas by 2025, up from 3.9 billion currently.

Cities will hold the future of economic growth. For instance, even though Japan’s population has been declining since 2012, Tokyo continues to record strong population growth thanks to internal migration2. With more than 80% of global GDP generated in cities, urbanization can contribute to sustainable growth if managed well by increasing productivity, allowing innovation and new ideas to emerge.

Mega regions
In many places, cities will merge together to create urban settlements on a scale never seen before. These new configurations will take the form of mega-regions, urban corridors and city-regions. For example, it is estimated that Japan’s Tokyo Nagoya-Osaka- Kyoto-Kobe mega-region will have a population of 60 million by 2025.

The city region of Bangkok in Thailand will expand another 200 kilometres from its current centre by 2020. (1/3)

Compared to the more developed economies in Asia, developing economies such as Indonesia, Malaysia, the Philippines, and Vietnam boast robust young populations that drive the economy as they join the workforce each year. Economic growth and structural shifts toward higher productivity sectors are boosting household income across Asia.

Growing middle class
By 2030, an estimated 1.8 billion people are expected to move into the middle-class bracket while Asia alone would have at least 28 new megacities (defined as cities with population greater than 10 million) from, currently 34. Asian countries will benefit from a growing middle class with domestic spending power fuelling domestic consumption trends and driving consumption growth in the next decade.

Populations are not only increasing rapidly but are often better educated and increasingly mobile, which puts additional pressure on towns, cities and transport networks.

This increases the demand for infrastructure, which is associated with real estate. Major infrastructure projects ranging from China’s ambitious “Belt and Road” initiative on a global level to infrastructure development in the Association of Southeast Asian Nations (ASEAN) nations (such as Thailand, Malaysia, Indonesia and Singapore) are also expected to support further economic growth as the population grows, thereby supporting demand for real estate.

The megatrends also benefit the region through increased intra-regional business activity. The presence of Global Fortune 500 companies in Asia has been growing significantly, surpassing growth in North America and Europe3. Based on the updated Fortune Global 500 list, Asia is home to 197 listed companies, followed by North America (145 companies) and Europe (143 companies).

The shift towards integrating technology to boost productivity because of an ageing society in the developed markets and, a burgeoning growth in a more educated workforce also indicate a growing demand for high quality real estate.

Besides the potential of investing in a region that offers faster economic growth compared to the US and Europe, an allocation to Asia in a global portfolio helps in diversification. Even within the Asia Pacific region, the real estate markets are at different points of the pricing/ rental cycle as well as the economic cycle. Moreover, (like in Europe) there is a variety of different property sensitivities and tenancy regimes across Asia.

As the market matures, so does transparency alongside the growing institutionalization of the Asian real estate universe. (2/3) 

To put things into perspective, and as an example, the current investable stock in China alone is equivalent to that in the UK and France as at 2016. However, China’s investable universe is expected to be as large as the entire European investable universe by 2036 as the market matures.

While Asian asset markets should not be considered a “safe haven” during periods of global market volatility and are not entirely immune from the economic woes that are troubling the West, opportunities exist for long-term investors who are underweight to the Asian region. We believe the long-term upside remains attractive for those investors looking for favourable risk adjusted returns.

Attractive volatility
The attractive volatility mix that is commensurate for a certain level of return needs to take on board the various nuances that influence stock selection criteria. These can include (but not exhaustive) indicators such as the nature of the Country being targeted (developed and/or emerging), the obligations/rules of engagement between landlord and customer (lease, costs and tax structures), the size of the real estate market at city level, it’s liquidity, it’s transparency, and the point at which you are in the cycle based on fundamentals of supply, demand and pricing.

Our recommendation for a net return to investors in the range 8-10%pa would be to have a bias towards Income orientated stock with some income growth potential in major cities of Japan and Australia (circa 2/3rds of the portfolio).

The remainder targeting emerging countries but major cities that are benefiting from strong population/urbanisation dynamics where occupiers want to build long term businesses. Asset classes such as offices, residential and logistics would be our favoured targets.

Whatever the market conditions, stock selection and understanding market dynamics is key. Investors will benefit from partnering with managers that can draw from the benefits of a broad network of offices and local market understanding to source and add value to assets. (3/3)

By Kiran Patel, Global Chief Investment Officer, Savills Investment Management.