In China, rural homes and paddy fields are rapidly giving way to roads, shopping centres and transmitting masts, while in other parts of the region, property supply has not kept up with foreign investment and job creation. Real estate prices are rising and there are profits to be made. Jody Clarke reports
Clinging precariously to the side of a 20-metre high mound of dirt, Wu Ping’s two-storey house in the Chinese city of Chongqing was never going to pose much trouble for the wrecking team who’d come to level it. Sure enough, after a stand-off that lasted ten days and nights, by 10pm on 3 April it had made way for a new shopping centre and homes planned for the area. When the wrecking ball finally struck, Wu had already taken down the banner reading: “The legal property of citizens cannot be violated”. China has embarked on a rapid period of urbanisation and nothing and no one will get in its way when it comes to moving 20 million people a year from the countryside to the cities.
The same thing is happening across East Asia – the methods may be different, but the dynamics are certainly not, as this half of the continent embarks on the greatest period of urbanisation the world has seen since the industrial revolution. Indeed, whether straining your neck at Hong Kong’s skyline or driving past the slums that cling to Manila’s fringes, it’s hard to believe that the countries of East Asia are not already heavily urbanised. The region is home to 47 of the world’s 100 tallest buildings and nowhere on earth is there a greater concentration of people. Urban densities in Jakarta and Seoul range from 10,000 to 15,000 people per square kilometre. That’s double the density of Latin America; triple what we have in Europe; and ten times that of US cities, says the World Bank.
Asia’s rural exodus
Yet East Asia remains remarkably under-urbanised, with most people still stuck in rural jobs that pay little and make only a small contribution in terms of economic output. By contrast, urban areas where labour and raw materials are pooled make a far greater contribution to a country’s GDP than rural ones. Take Vietnam. Just 25% of the population is urban-based, but towns and cities contribute 70% of national output, says the World Bank. Meanwhile, China’s 120 cities are responsible for 75% of its GDP. So it’s no surprise that East Asia’s governments want their citizens to ditch their pitchforks and hit the factory floors.
But it’s not as if they need much pushing – a Chinese farmer can make three times his rural salary in the city and it’s a similar story across Asia. This exodus from the countryside means that between 2000 and 2025, while the United Nations Population unit forecasts that the population of
East Asia will increase by 17%, the urban population is set to grow by 65%, or 500 million people. By 2030, for example, 86% of South Koreans and 76% of Filipinos will be living in cities, the latter figure almost double today’s urban population.
That’s going to put a huge strain on everything from plumbing to transport networks, which is why vast sums are being spent to meet the infrastructural needs of the region’s new boomtowns. The Chinese government, for example, is spending $160bn improving Beijing’s infrastructure ahead of next year’s Olympics, building a new airport terminal, new roads and a metro system.
But as more jobs are created in these urban landscapes, another problem is rearing its head. Where are they going to house all those people? If Asian cities are to remain as densely populated as they are today, the effect on property and land prices will be extraordinary. Nowhere will this be felt more keenly than in China, where 20 million people a year are moving to town from country.
But as the tale of Mr Ping’s house shows, China’s authorities will have to work hard to convince foreign investors that they will respect the property rights that we all take for granted here in the West. The incident was by no means unique; in the same week, a man who’d held out for a year and a half against developers in East Beijing saw his home demolished to make way for the new Chinese Central Television Tower. And as the country’s government has now said that foreigners wishing to buy property must be resident for more than a year as either a student or a worker, we are hardly suggesting relocating to Beijing to buy condos there.
Asian property: The best investment opportunities
But this shouldn’t concern investors looking to cash in on the Asian urbanisation story: elsewhere in Asia, governments are eager to attract foreign buyers and investment. But supply hasn’t been able to keep up with demand, which has forced up both rents and capital values. What’s more, although there are some foreign buyers, either purchasing property directly or through Real Estate Investment Trusts (Reits), they are largely riding the coattails of wealthy Asians, flush with money and looking to spend it on new homes. As Mark Faber told the Asia Public Real Estate Association Forum in Ho Chi Minh City, Vietnam, last month: “As an asset class, real
estate in Asia presents tremendous opportunities as urbanisation gets under way.” So where can investors find the best opportunities?
Malaysia certainly boasts a benign environment, with interest rates at 6.75%, lower than several other Asian countries, including Vietnam and Indonesia. “Property prices in Malaysia are still among the cheapest in the region,” said Deutsche Bank analyst Aun-Ling Chia in a recent note to clients. This may not last for long – at the end of 2006, the government abolished the requirement that foreign buyers seek approval from a foreign-investment panel, a move that should “have a positive effect on the property market and on the mid-to-high end property segment in particular”, said Chia.
Hong Kong also looks relatively cheap, with rental rates for office space coming in at “$1,105 in 2006, lower than the high of $1,237 in 1994”, said Faber, quoted on Bloomberg. That suggests that we are far from bubble territory, even though prices have been rising for two to three years. In November, UBS said the city’s residential prices could rise more than 50% by the end of 2007 because of a shortage of apartments and mortgage competition between the banks.
The Zurich and Monaco of Asia But one potential cloud on the horizon is the vulnerable US economy. This could pose a problem for many East Asian countries, with much of the economy remaining dependent on exporting goods to America. With this in mind, Singapore offers the most compelling property investment opportunities in the region over the next two to three years. Nicholas Mak, director of consultancy and research at Knight Frank Singapore, says that after looking at the Chinese manufacturing boom over the past decade, the Singapore government has simply held up its hands, saying: “We can’t compete with China”.
And so resources have been concentrated elsewhere, with the aim of developing the city state as a financial and wealth-management hub. The country now has the lowest tax rate in the world for start-up companies, while 80% of firms pay an effective tax rate of less than 10%. Add to this its growing popularity with jetsetting tourists (it will soon host a Formula 1 Grand Prix), and Singapore “is now in the process of becoming the Zurich and Monaco, not just of South East Asia, but of all Asia”, said a recent Merrill Lynch report.
This has seen Singapore ‘decoupling’ from the US, as well as an influx of foreigners. Unemployment has reached a floor of 2.5%, which means that immigration is being actively encouraged by the government to take up the slack. Last year 176,000 new jobs were created, about half of which were taken up by foreigners. The government estimates another 450,000 jobs will be created over the next five years.
As a result, positive sentiment has crept back into the property market, which was hit hard by the Asian financial crisis of 1997. And since restrictions were lifted on borrowing limits in 2005, Singaporeans are now buying again. Yet prices remain cheap. “If you compare Singapore to an equal city in the Western world, like London or New York, Singapore is not expensive, it’s reasonable,” Faber tells Bloomberg. “It is not in a bubble stage like it was in 1996 and 1997.” In fact, Faber reckons property offers “better value” than the region’s equity markets, which he believes are still vulnerable to a US downturn.
It’s certainly a good way to diversify your portfolio, as a recent report from US-based Kensington Investment Group noted. In the three years to November 2006, it found that Singapore property prices had only a 0.29 correlation coefficient with UK property prices, where one would mean that prices had risen in lockstep while zero would represent no correlation at all. And importantly for investors in what can otherwise be a volatile region, Singapore is a country where the rule of law is respected, good governance reigns, there are well-defined legal structures and there are no restrictions on foreign ownership.
Asian property: Who’s snapping up Singapore?
Having been low for so long, prices are only now “playing catch-up” in Singapore, says Mak. And the people who are buying are locals, he says, rather than fickle speculators. As a recent report from New Jersey-based Prudential Real Estate Investors shows, speculative transaction volumes are estimated at 8% of total sales, much lower than the 40% levels seen in the mid-1990s.
Private property prices rose 4.6% in the first quarter, after rising 3.8% quarter on quarter in 2006. “Barring any unforeseen circumstances, it is likely that residential prices will rise by a total of 10%-15% for the whole year, led by high-end projects,” Li Hiaw Ho, executive director of real estate firm CB Richard Ellis Research, said last month. This seems like a very reasonable estimate – the vacancy rate for condominiums is now at 6.6%, the lowest since the third quarter of 1996, when it was 5.8%. And “projecting the job creation numbers forward”, it’s clear that Singapore will soon have a housing deficit, says Merrill Lynch, as foreign workers hunting for homes swell the tiny country’s four-million strong population. “What happens then?” the bank asks. “Rents go through the roof.”
This is already happening in the commercial property market. The amount of space available for retail and industrial areas is already under pressure from new-build residential developments, while on the demand side, strong growth in new business set ups, keen to take advantage of the beneficial tax laws, and corporate expansion, has seen vacancy rates fall sharply.
The vacancy rate for grade-A office space is 3.5%, compared with 8.6% a year ago. Three years ago it was 20%. Unsurprisingly, capital values on grade-A office rose 66.7% year-on-year last year, while rents posted year-on-year growth of 73.9%. Meanwhile, the retail vacancy rate is a very narrow 0.6%, as a burgeoning tourist industry and new casino developments (construction has already started on one of two legalised casinos) add to the already booming economy. In the first ten months of 2006 alone, visitor arrivals, at 8.84 million, were up 10% on 2005 as a whole. “Large space users are facing limited options,” says a recent report from Jones Lang La Salle.
And with the country’s government aiming to increase the population by more than 50% over the next decade – a conservative estimate, according to most analysts – pressure on land values is only set to increase in the coming years. As Merrill Lynch says, “Singapore’s engine is running well and needs little oil to keep humming along.” So how can investors in the UK take advantage of this boom? MoneyWeek looks at some of the best options for buying into Singapore, and other promising parts of the region, below.
The best plays on Asian urbanisation
In January, Scott Crowe, a property analyst at UBS, advised investors to go “underweight” in US and continental European property stocks and “overweight” in Japan and Hong Kong. Ever since, fund managers have been following his lead into these and other parts of Asia. One of the first was James Rehlander, manager of the New York-based International Property fund, who has shifted 60% of his portfolio to Asia from 45% in 2006. “Potential returns in certain markets in Asia are more attractive,” he told Bloomberg in February.
One of his recommendations is Keppel Land (KPLD SP), the third-largest developer of land in Singapore by assets. It has interests in both residential and commercial property, and recently announced it would invest in an $80m housing project in Vietnam’s Ho Chi Minh City. However, it’s quite highly priced on a forward price/earnings ratio of 28 – reasonable perhaps when you consider the growth prospects, but by no means
a bargain.
As noted in the main story, office space in Singapore is in high demand and short supply, which should boost rental prices and the yields on Reits such as Suntec (SUN SP) and Ascendas (AREIT SP). Again, both trade on relatively high p/e ratios as investors have priced them for growth, with good reason. Suntec, for example, has already locked in higher rents for 2007 for its office buildings. “It’s really down to office rents in Suntec, which are going to be pretty good in the next year or two on re-leasing contracts,” Alastair Gillespie of UBS told Bloomberg in February. It trades on a forward p/e ratio of 28. Ascendas is on a more reasonable valuation of p/e 20, with a current yield of 5.18%.
These stocks should continue to do well – but the best bet for value investors could be firms involved in property development. As well as benefiting from the strong fundamentals in the market, these have gone almost unnoticed by investors, meaning they look very cheap.
Take Ho Bee Investment (HOBEE SP), one of the best pure plays on the Singapore residential market. It’s a property developer and hotel operator that “has never lost money in any of the 19 years it’s been in business”, says Martin Spring in his On Target newsletter. It should benefit from immigration, as it focuses on “bungalows and condos of the kind that foreigners are likely to buy”. Last year, the group posted net income of S$51.1m, up 659% on 2005’s figure of S$6.7m. Yet it remains on a forward p/e of just 9.6. Similarly, Hong Kong-listed Paul Y Engineering (577 HK) is an engineering services group, with construction activities spread across Asia. It’s currently on a p/e of just seven, with a gross yield of 6.91%.
For those who want a broader play on the Asian property market, Fidelity International launched the Luxembourg-domiciled FF Asia Pacific Property Fund (contact 0800 41 41 61) in February. It invests in established property markets like Australia and Japan, but also emerging ones such as Hong Kong, Taiwan and Singapore. The minimum investment is $2,500.
A potential play on the region’s economic growth, is London-listed Jardine Matheson Holdings (JAR LN), which is “the best large-cap play on Hong Kong’s improving outlook for domestic consumption”, say Steven Li, Billy Ng and Joanne Cheung of JP Morgan. It is the largest employer in Hong Kong after the government, involved in activities as diverse as engineering, construction, insurance broking, financial services and property investment.