Survey by HSH Nordbank / HSH Real Estate: Virtually No Slowing of Real Estate Boom in Asia-Pac Financial Centres
Hamburg/Kiel, March 10, 2008 - Last year saw investments totalling US Dollar 121 billion in direct real estate investments in the Asian-Pacific region. This translates into a 27 percent increase compared to 2006. The region’s share in the global investment volume thus rose from about eight percent in 2003 up to 16 percent in 2007. Notwithstanding the decline of the global investment volume, forecasts predict another growth year for 2008, even if the growth curve is likely to flatten to some extent. This is the finding of “Asian-Pacific Financial Centres – Opportunities for Investors,” the latest study compiled by HSH Nordbank and HSH Real Estate. This survey analyses the economic perspectives and developments on the investments markets as well as the real estate and capital markets of the Asia-Pac financial hubs Hong Kong, Singapore, Sydney, and Tokyo.
“The fast-paced growth of Asia, which is driven by a very rapid urbanisation and a rising standard of living, has hardly lost momentum and is developing a dynamic that offsets some of the recessive tendencies radiating from the United States,” argues Peter Rieck, Deputy Chairman of the Board of HSH Nordbank. Other reasons for the fast growth in many Asian metropolises is an expanding tertiary sector with a rising number of office workers, as well as the strong demand for new high-end office floor space at a time marked by supply bottlenecks and moderate construction volumes.
The four investments markets surveyed are dominated by vastly different investor groups. Institutional investors include government funds and pension funds in addition to globally operating fund initiators. “Despite the fact that some of the markets continue to be regulated, the increase in the number of high-wage earners and the demand driven by their net worth have positively stimulated investment activities. This demand-side clientele shows above-average growth in the Asia-Pac region,” Rieck emphasises. In Singapore alone, the share of high net worth individuals increased by 21 percent in 2006. It is the highest growth percentage in the world.
Tokyo – Highest Yield for Residential Property
With 31 million square metres, Tokyo is the largest and simultaneously the priciest office real estate market out of the four financial centres surveyed. The increasing institutionalisation and securitisation of real estate in the form of REITs has drawn international investors to Japan’s investment markets. Last year, prices for office real estate pushed upward at rate of 4 to 16 percent on average, depending on the submarket. Yield rates for office real estate in Tokyo ranges between 2.5 and 3.5 percent for properties in prime locations. Far higher, by contrast, are yield rates for residential real estate, now anywhere between 4.7 and 7.1 percent. Compared to the three other financial centres the survey studied, this is the highest residential yield. The high demand for modern office space has caused vacancies to plunge from eight percent in 2003 down to 2.6 percent today. Office rents gained nine percent last year, with top rents rising by as much as 17 percent. The completion of a number of new office buildings in the years to come will slightly slow the pace of the local rent hikes.
Singapore – Highest Increase in Real Estate Values
Investments on Singapore’s real estate market hit a record high of US Dollar 36 billion in 2007. The office market accounted for a 28.3 percent share of the entire investment market volume. At 114.8 percent, Singapore reported last year’s steepest increase in office property prices of any of the analysed financial centres. During this one-year period, office rents showed a similarly bullish performance as they rose by more than 90 percent. While the growth is likely to slow in pace, rent rates will probably not peak before 2009 / 2010. Nor is the extensive supply in new floor space now in the pipeline likely to put pressure on rent rates until 2011. The interest shown by national and international financial investors will therefore remain high. Yield rates for office real estate ranged from 4.3 to 4.8 percent in this graft-free, affluent city-state, depending on location. Yield rates for residential real estate average a mere three percent.
Hong Kong – Rent Hikes of up to 130 Percent
In terms of growth rates, Hong Kong lags behind Singapore and Tokyo. Last year, real estate prices rose by 19 percent in Central, and by 4.2 percent in Kowloon. Office rents, however, have skyrocketed since 2003. Rent increases in the years thereafter ranged from 30 to 130 percent annually. Although the pace of these rent hikes slackened most recently, rates still rose by more than 20 percent because many companies continue to pursue a growth course. Only in the banking sector did the loan crisis slightly dampen the spirit. Here, yield rates vacillated between 3.3 and 3.9 percent, depending on location. In the residential sector, the average stood at 4.1 percent. Prices for prime property rose by six percent per quarter in 2007. Buyers were Chinese investors above all, but foreign institutional investors, too, who acquired major projects on an order of Hong Kong Dollars 300 to 700 million.
Sydney – Highest Office Yield
Growth rates in Sydney compare to those in Hong Kong. Last year saw an increase in real estate prices by 14.6 percent. Top rents for office space have risen by up to six percent annually since 2005. Even though some of the city’s districts might actually exceed this figure in 2008, it is reasonable to expect medium-term gains of around five percent. Yield rates for office real estate ranged – depending on location – between 5.3 and 7.4 percent, making it the highest returns in any of the four financial centres included in the study. On average, investments in Sydney’s office market have approximated Australian Dollar 1.9 billion annual since 1999.
Structured Real Estate financing still in its Early Stage
Classic underwriting has traditionally played the lead role in real estate financing in the Asia-Pac region. The real estate-related loan volume rose from US Dollar 18.3 billion in 2002 up to US Dollar 54.7 billion in 2006. By mid-2007, the figure crossed the mark of US Dollar 33.7 billion, which matches an estimated 32 percent share in the region’s total loan volume. “Structured financing products continue to be relatively seldom seen in the refinancing business. Their significance is rising apace with the growth of the REIT market. Refinancing deals tend to rely on commercial mortgage-backed securities (CMBS) in particular, whereas the demand for CDOs with higher risk ratings is comparatively low,” Rieck elaborated. The volume of structured financing products has increased from just short of five billion US Dollars to approximately eleven billion US Dollars in 2006. In terms of volume, Japan with its share of 66 percent represents the biggest market in this regard, followed by Australia at 17 percent and Singapore at 16 percent.
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HSH Nordbank AG is a strong regional bank in Northern Europe with total assets of € 206 billion. Some 4,700 of the bank’s employees provide corporate and high net-worth clients around the globe with premium bank products and services. In its core region of Hamburg and Schleswig-Holstein, it is the market leader in the corporate customer segment. HSH Nordbank is an acknowledged partner of the capital markets and international sector specialist. Its main focus is on transportation and real estate. In fact, HSH Nordbank is the world’s largest provider of ship finance and covers the entire value chain in the transportation segment. In the area of real estate, HSH Nordbank is one of the strongest banks in Germany, acting as a provider of services relating to all aspects of real estate.
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