Vol. XXI, No. 230 [ BusinessWorld Online ]
Tuesday, June 24, 2008 | MANILA, PHILIPPINES
MANY ASIAN cities have experienced a surge in office rents and prices in the last year, but growth is expected to slow as the credit crunch hits the global economy and property markets approach a cyclical peak.
Still, Asian commercial and residential markets are still generally healthy because their rise has been less dependent on the availability of cheap debt, unlike their counterparts in the West, according to the Reuters Global Real Estate Summit.
Some highly leveraged Australian firms have suffered and the Tokyo office market is cooling after a strong five-year run-up, but Asia’s main cities are likely to see prices and rents hold firm rather than fall in the next couple of years.
Property investment in Asia went up by 27% last year to $121 billion, which was evenly allocated over the first and second halves of the year, unlike in Europe and North America, where investment slowed dramatically in the second half.
In Manila, investment yields on Grade A office buildings in central business districts stood at 10% in March, while capital values have risen by 11.2% at that time. Rent has risen by 18.2%, according to Jones Lang LaSalle.
In Australia, the global credit crunch has hit some property firms that depended on high levels of borrowing. Centro Properties Group, an operator of shopping malls in the United States and Australia, has struggled to refinance its debt and has had to try to sell assets to raise cash.
Media reports have said US private equity firm Blackstone Group and a unit of General Electric Co. are potential buyers. Babcock & Brown Ltd. saw its shares slide this month on similar concerns about its debt.
With local transactions drying up and pressuring commercial property prices, capitalization rates have softened slightly.
Consultant DTZ said the investment yield on prime office buildings in Sydney has climbed to 5.25%, from 5% a year ago, and the firm forecasts yields at 5.5% by the end of this year.
Office rents are holding firm, supported by strong economic growth, powered by soaring commodity prices. DTZ forecasts average annual rental growth of 5.4% for Sydney offices between 2008 and 2012, although the growth rate may slow down for both cities as supply picks up in 2010.
Central Sydney office vacancies fell to an 18-year low of 3.7% in January, compared with 5.6% a year ago. In Perth and Brisbane, which have benefited from booming natural resource industries, offices are full.
Middle East petrodollars are starting to flow into Australian property as oil reaches record highs. Dubai state-owned property developer Nakheel doubled its stake in Australia’s Mirvac Group this year to about 12.5%.
But the residential market has been slowing down. The Australian weighted average median house price declined 2.7% to A$458,488 in March from December 2007, according to the Real Estate Institute of Australia.
Japan market peaking
Meanwhile, in Japan, most analysts said Tokyo’s office market was probably peaking, having been popular with investors who have typically borrowed heavily at Japan’s rock-bottom interest rates to take advantage of a price recovery in the last five years. The global crunch has made Japanese banks more conservative in their lending for property deals, threatening to soften prices of small and second-grade buildings.
Yields on Grade B office buildings have risen by 50 to 100 basis points in the last year, according to Nomura Securities senior analyst Daisuke Fukushima. But because Grade A offices are almost full, they are likely to hold their value.
"You don’t see many quality office buildings coming onto the market for sale. But when they do, you would see long-term investors rushing to bid for it," said Takeshi Akagi, research head of Jones Lang LaSalle in Tokyo.
Investment yields on Grade A office buildings in central Tokyo stood at 3.2% in March, unchanged from a year earlier, while capital values have risen by 17%.
Capital values should hold steady for the next 12 months, property consultants said.
The vacancy rate for central Tokyo inched up to 3.03% in April, after hitting a record low of 2.49% in November, according to office broker Miki Shoji. Rents rose by 11.8% to 22,687 yen per tsubo (3.3 square meters) in the year to April, it said.
Some long-term investors, including German open-ended funds, are picking up assets this year.
Morgan Stanley bought Citigroup’s Tokyo headquarters, while the government of Singapore Investment Corp. bought the Westin Hotel Tokyo from Morgan Stanley and Starwood Capital for about 77 billion yen in February.
The residential market has been weak, with housing starts falling in April for the 10th consecutive month. A slowing economy and tighter construction rules introduced last year have weighed on the sector.
In the greater Tokyo area, sales of new condominiums fell by about 30% in April from a year earlier, but average prices are up by 15%.
Meanwhile, European institutional investors and US investment banks and private equity firms flocked to Seoul six or seven years ago to snap up buildings yielding as much as 10% — their values slashed by the Asian economic crisis.
But foreign interest has waned in the last few years because of soaring prices and a wave of excitement about China and India. Foreign investors hold about a fifth of Seoul’s prime office blocks.
Since 2001, strong buying by domestic investors has doubled prices for top-grade offices in Seoul, but because rents have only risen mildly, yields have fallen to 4% to 5%, below the 10-year domestic bond yield of 5.8%.
Because of tight new supply, the average vacancy rate in Seoul fell to a record low of 1.3% in the first quarter, with the rate for top-notch buildings down to 0.2%, one of the lowest levels in the world.
Despite the global credit crunch, South Korean banks are still giving loans to buy buildings showing healthy cash flows. But bridging loans — typically used for acquisitions of buildings that are empty or need major work — are drying up, so more equity is needed for such deals.
Shakeout in China
Meanwhile, China’s steps to cool a frenzied residential market are finally biting and look likely to usher in an industry shakeout that could see thousands of small developers forced out of business, leaving large listed operators sitting pretty. With average home prices doubling since 2002 and high-end apartment prices rising more, the state has tried to cool markets with curbs on supply and demand.
It has raised interest rates regularly, imposed taxes on capital gains and land appreciation, stopped nonresidents buying apartments, told banks to curb loans to developers and employed a "use it or lose it" policy to deter land speculation.
Signs have emerged that the government’s measures are slowing property price rises. Average urban prices rose by 9.2% in May from a year earlier, compared with 10.1% in April, according to official data. — Reuters
| CITY | VACANCY(%) | RENT (%) | $/SQ M/YR | ALUE(%) | $/SQ M | YIELD(%) |
| Tokyo | 3 | 13.4 | 1,796 | 17 | 39,528 | 3.2 |
| Seoul | 0 | 5.6 | 595 | 21.2 | 6,584 | 5.5 |
| Beijing | 16.5 | 21.2 | 430 | 13.8 | 3,348 | 7.5-9.5 |
| Shanghai | 2 | 13.6 | 456 | 19.1 | 5,865 | 7.3-8.9 |
| Hong Kong | 1.1 | 38.7 | 1,796 | 45.6 | 22,103 | 4.9-7.4 |
| Singapore | 2.7 | 51.9 | 1,370 | 44.3 | 22,636 | 5.5-6.1 |
| Kuala Lumpur | 9.3 | 2.4 | 160 | 5.3 | 2,073 | 9.7 |
| Manila | 3.5 | 18.2 | 207 | 11.2 | 1,862 | 10 |
| Bangkok | 14.3 | -2.6 | 199 | 0.1 | 2,524 | 6.6-8.2 |
| Jakarta | 19.7 | 6.9 | 113 | 4.1 | 1,385 | 8.0-8.2 |
| Delhi | 4.9 | 37.1 | 939 | 31.1 | 8,157 | 11.5 |
| Mumbai | 3.8 | 17.6 | 898 | 16 | 7,968 | 11.3 |
| Sydney | 3.4 | 25.4 | 667 | 18.6 | 10,583 | 5.25-6.0 |
| Aboe are percentage changes in both central business district grade-A rent and capital alues in the year to first quarter of 2008 (Source: Jones Lang LaSalle) | ||||||
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