Southeast Asia’s property markets are poised to see a surge in investment in 2014, according to a survey of 250 regional real еstatе developers and investors conducted by the Urban Land Institute. The 2014 “Emerging Trends in Real Еstatе: Asia-Pacific,” released today in Hong Kong, listed Manila as Asia’s top spot for residential-property development in the coming year. Jakarta came in third, Bangkok fifth and Ho Chi Minh City 10th.
“This year you have a situation where the economic fundamentals are weaker, China has not been as strong and you have the prospect of tapering in the U.S. You would think investors would be less interested in picking up real еstatе, but that hasn’t happened,” said Colin Galloway, the forecast’s principal author. “But investors are looking at smaller, emerging markets to try and get the returns they can’t get in traditional core markets.”
In its eighth year, “Emerging Trends,” prepared by the Urban Land Institute and Pricewaterhouse Coopers, has emerged as one of most widely read forecasts in the real еstatе industry. This year, 250 private developers, real еstatе firms, builders, bankers, REIT executives and institutional investors were surveyed, with personal interviews conducted with 120.
The trends for 2014 follow two main themes: Japan has re-emerged as the region’s top target for new investment, and the combination of shrinking capitalization rates, rising prices and looming taper-related interest-rate hikes has investors looking toward emerging markets for the best returns.
The residential sector, the report concludes, will trail the office and industrial segments in popularity among investors in 2014, due to higher interest rates, already-high prices, and macro-prudential measures being taken in several countries to cool the property market. Singapore, Kuala Lumpur and Hong Kong lead the list of markets that are “particularly exposed,” Galloway wrote.
There are bright spots for Southeast Asia, with Manila emerging as this year’s top investment pick.
“Of all the markets, that’s the one where people are looking to get in most,” Galloway said. “It’s easy to function there on a cultural basis. The levels of corruption are not as high as they once were. It’s has an English-speaking, educated workforce, and there is new interest in the Philippines from multinational companies looking to set up back-office facilities there, which drives demand from expatriates.”
The reason for Jakarta’s popularity, however, isn’t as easy to understand.
“It’s a bit of a mystery, really,” Galloway said, admitting that when Indonesia topped ULI’s 2013 list of investment picks, “we thought it was a fluke.” But when 2014’s results were tabulated, there again was Jakarta sitting at No. 3, behind only Manila and Tokyo.
“Indonesia is ‘difficult to operate in for lots of reasons … It has immense potential, as far as the whole outline of land development is concerned, but the problem that prevents us from going in is that of getting a clean land title.’ Beyond that, there is little incentive for local developers to partner with foreigners,” Galloway wrote, quoting one of more than 50 developers and investors he personally interviewed.
But investors are not betting on Jakarta “on blind promise,” Galloway said. “It has a strong economy, the consumer story is very good and it’s very short on stock. It has the highest rate of capital appreciation in Asia. And, despite the shortage of stock and lack of quality, if you are able to get in, you can do well.”
Other Southeast Asian residential-property markets
Bangkok (5th) – Survey respondents listed the Thai capital among their favorites more frequently this year, but experts remain guarded. The report classifies Bangkok as a “relatively less-competitive, higher-return market than Asia’s more-conventional destinations,” but cites risks in finding quality buys. Prices and rents have been rising and vacancy rates falling, however, so there’s upside in buying from an investment stance.
Ho Chi Minh City (10th) – Clobbered by two years of soaring inflation and bad loans, Vietnam’s largest city likely has hit bottom and investors say now is the time to get back into the property market there. “Residential real еstatе is a more-attractive investment than before,” the report states. Interest rates and gold prices are down and, a despite a severe shortage of quality stock, the pool is expected to increase 50 percent by 2121.
Kuala Lumpur (15th) – Investors and developers dealt Malaysia the biggest hit in this year’s survey due largely to a huge glut of supply. “While there is now less supply in the pipeline, there has been a speculative element to recent construction activity, especially in high-end residential projects. As one fund manager said, “last time I went to Kuala Lumpur, you see those residential buildings, empty blocks after blocks.”