Optimism is Tempered by Concerns over High Property Prices

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SHANGHAI (November 29, 2012) – The outlook for Shanghai’s real estate market over the next 12 months remains positive, with the city ranked as the second most favored location for investment and fourth most popular for development in the Asia Pacific region, according to Emerging Trends in Real Estate® Asia Pacific 2013, published by the Urban Land Institute (ULI) and PwC.

The widely anticipated forecast provides an overview of Asia Pacific real estate investment and development trends, real estate finance and capital markets, and trends by property sector and metropolitan area. It is being released today at the ULI Mainland China Annual Meeting in Shanghai.

Shanghai’s office and retail markets have proved mainstays for foreign funds looking to invest in Chinese real estate. Both sectors received high ratings in the Emerging Trends report, reflecting the city’s relatively user-friendly business environment, growing volume of institutional-grade properties and historic market performance. However, in spite of Shanghai’s strong ranking, the city has lost some of its appeal to foreign investors, the report notes. Property prices are considered to be relatively high, the market has become saturated, and regulators have become less open to foreign investment, as they have increasing confidence in the ability of local real estate practitioners to finance and develop properties. While Shanghai will remain firmly on the radar of foreign funds with a mandate to invest in China, activity in the city will remain muted for the short term, predicts Emerging Trends.

For Asia Pacific as a whole, steady economic growth, rising incomes, and stable or increasing property values are all contributing to an overall sense of optimism. However, the outlook is tempered by growing concerns among investors that prime assets in key real estate markets are becoming overpriced. For instance, capitalization rates across Asia remain more compressed than in many western markets, and yields for core office stock in cities such as Beijing, Hong Kong and Singapore are returning as little as two percent.

“With high rents, high capital values, low yields, and an abundance of local capital, many international investors are struggling to see attractive investment opportunities in Asia Pacific’s prime real estate markets,” commented ULI Trustee and ULI North Asia Vice Chairman Richard Price, Chief Executive, Asia Pacific for CBRE Global Investors. “As a result, investors are expanding their horizons as they seek compelling investment opportunities. Some are looking at frontier markets such as Indonesia, while others are revisiting often overlooked capitals such as Kuala Lumpur and Bangkok, which explains the strong showing for these locations in this year’s report. Secondary markets such as Kowloon in Hong Kong and second-tier Chinese cities are also experiencing increased interest from international buyers. At the same time, core investment markets in many mature, western markets are seeing a surge in demand from newly formed Asian Institutional Investors seeking to capitalize on the post-global financial crisis corrections there.”

“China’s secondary cities are top-ranked in the survey’s ratings for Asian industrial and distribution projects, with almost half of those surveyed recommending acquisitions there. This no doubt reflects the need for improved logistics facilities in China’s western provinces as factories migrate increasingly away from established manufacturing sites,” commented K.K. So, Asia Pacific Real Estate Tax Leader, PwC. “And for retail properties, Shanghai and China’s secondary cities also feature strongly, again as witness to the rise of the mainland consumer and a government policy favoring consumer-led economic growth over the old model relying on infrastructure construction.”

Top Investment Markets for 2013
Overall, respondents were more bullish on the prospects for individual cities, awarding higher scores than in the previous two years. In addition to Shanghai, the top investment markets for 2013 are predicted to be:

• Jakarta – Topping the rankings for both investment and development for the first time, Jakarta is described as a “surprising” choice given the city’s lack of investment grade stock and its economy, which while growing, lacks the enterprise, scale and infrastructure of its more developed neighbors. However, Jakarta is seen by many real estate professionals as the most favorable emerging market in the region, with business transactions generally easier and more transparent than in other frontier markets such as Vietnam. The country’s interest rates and inflation are stable; the gross domestic product is growing steadily; and foreign direct investment grew by 39 percent in the first half of 2012. Demand
•  for property is strong, resulting in year-to-year office rents leaping by 29 percent. Despite some challenges, such as difficulties securing bank debt and locating reliable local partners, Jakarta holds significant promise.
• Singapore – Singapore retains its popularity among real estate investors who see the market as a safe haven offering solid, but not spectacular, returns that are underpinned by the city’s position as a global financial hub. The city’s office market has recently run out of steam with significant amounts of new Grade A office space drawing tenants away from existing buildings, a problem which is compounded by a shrinking head count in the local financial sector. Rising vacancies and falling rents are causing problems for some international funds looking to exit the market.
• Sydney – Sydney has seen a limited amount of new supply of commercial space in recent years, although a significant amount of office and retail space is in the pipeline for 2015. A shortage of institutional grade property has continued to suppress sales volumes and kept prices buoyant, driving up total returns for office assets. Australia has absorbed more international real estate investment over the past year than any other country in the Asia Pacific region. Office assets remain a popular target for these funds and some analysts believe that foreign investors account for 30 percent of the transactions in the sector.
• Kuala Lumpur – Kuala Lumpur is beginning to enter the real estate limelight, offering a stable market with good opportunities for opportunistic returns. While property sales slowed noticeably in most Asian markets during the third quarter of 2012, Kuala Lumpur was the exception. The long-term prospects for the commercial property market are deemed by many to be strong, due to the success of the government’s Economic Transformation Programme in drawing foreign investment.

In addition to Shanghai, other cities in China, including Beijing and several second-tier cities, were placed in the top ten listing for both investment and development prospects. Despite concerns about overpricing in some sectors, the report notes that major price shifts must be viewed in the context of local market conditions. For example, Shanghai has 50 million square feet of Class A and B office space, compared to 450 million square feet in New York or 800 million square feet in Tokyo.

Review of Chinese Markets

• Beijing – Beijing’s office sector has seen amazing rent and price increases in the past three years, successfully absorbing an enormous pipeline of new supply that most analysts had expected would swamp the market. This reflects strong demand by businesses of all types, both foreign and domestic. However, due to the government’s concern about oversupply and the fact demand has not always been market driven, there is now caution as to how long this increase will continue. Still, with vacancy rates very low and an equally small pipeline of new supply coming in, the market can probably stave off pressure for the foreseeable future.
• China Second-tier Cities – Interest in China’s second and third-tier cities has grown quickly in recent years with Chongqing, Tianjin and Shenyang becoming especially popular destinations. However, working conditions and cooperation with local government officials can be difficult. Finding a good local partner is essential to success and this type of investment is widely regarded as long term.
• Shenzhen – Shenzhen is beginning to enter the real estate limelight partly due to its status as a high-tech hub, which ensures it continues to receive investment despite a decline of the local manufacturing base in the Pearl River delta. The office market in the city has continued to thrive, with prices rising more than 50 percent since the beginning of 2009. Meanwhile, the concern is that net additions to prime office space will increase existing stock by about 40 percent in the city.

Emerging Trends is based on the opinions of more than 400 internationally renowned real estate professionals, including investors, developers, property company representatives, lenders, brokers and consultants. It is being released at several events throughout Asia that are being hosted in November and December by PwC and ULI Asia Pacific, which serves ULI’s nearly 1,000 members in the Asia Pacific region.

About the Urban Land Institute
The Urban Land Institute (www.uli.org) is a global non profit education and research institute supported by its members. Its mission is to provide leadership in the responsible use of land and in creating and sustaining thriving communities worldwide. Established in 1936, the Institute has nearly 30,000 members representing all aspects of land use and development disciplines.

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