Rental performance in Asian cities over the next five years is set to outdo that of the European and United States markets, and Singapore is among those expected to have double-digit growth, says DTZ Research in a recently released report.
Individually, cities such as Bangkok, Shanghai and Beijing, which have outperformed the market significantly in the last five years, are expecting slower growth, but other cities are just picking up pace and strong growth is expected. Going by the report, Singapore, for example, is expected to have about 12-per-cent growth in the next five years.
Rental growth is a factor crucial to investment, says DTZ, and last year, the five cities with the highest year-on-year rental growth were all in Asia: Hong Kong, Singapore, Bangkok, Shanghai and Kuala Lumpur.
Since the stock market correction at the start of the 1990s, the attraction of real estate as an asset class has been particular evident.
One strong reason for this, says DTZ Research, is the fact that real estate has outperformed other asset classes in the long term.
According to the FTSE Epra/NAReit Global Real Estate Index, real estate companies have outperformed equity for the past five years. In part, this relates to the stability of the income component of total return.
However, in the past two years, the property market’s performance has also been driven by rising capital values and yield compression.
In Asia, in particular, the real estate market has grown significantly in terms of market size, liquidity, transparency and access to product. This is due to strong economic growth and increased foreign investment, says DTZ Research.
With the driving force of the Chinese market and the recovery of the Japanese economy, the region’s economic growth looks set to continue in the next few years.
As an asset class, property provides security against which banks and other providers of debt finance are willing to lend.
Equity returns may be leveraged and yield premiums over finance costs can generate sufficient income to cover both interest payments and the repayment of the principal.
Real estate presents opportunities for the active management of an investment, which are not available to other asset classes. Active property management can provide yield enhancement over the long term that would further maximise value.
Since the Asian currency crisis, the Asian real estate markets have recovered substantially during the past few years. Core areas in major cities have enjoyed both high occupancy rates and high rentals due to the revival of the occupier market.
The majority of this demand comes from the finance, insurance and professional services sectors.
Last year, some cities, such as Hong Kong, recorded their highest rental increases of the past decade.
Supply is very limited in most districts of the major cities and in several cities, vacancy levels have dropped significantly in recent years.
Also, commercial property is well-known for stable income returns due to tenants being contractually bound to pay rent, says DTZ Research.
In contrast, other asset classes such as equity are susceptible to market fluctuations and volatile returns. Property returns have proven to have low correlation with other asset classes due to the differences between the overall business cycle and the property cycle.
This makes real estate attractive as part of portfolio diversification strategy. The inclusion of real estate in an equity and bond portfolio can raise the overall portfolio return (for a given level of risk).
Property offers liability-matching opportunities to investors, in particular, pension funds.
Investment yield is one of the key drivers for investment in real estate. Here again, Hong Kong, Tokyo, Singapore and Taipei are the best-developed markets in Asia, where yields have been compressed at the same low level as most European markets.
DTZ Research is of the view that while the majority of Asian cities are still above the 6-per-cent level, there is substantial growth potential in capital value. Strong returns in Asian markets will continue to attract global attention.
Source: TODAY, 04 November 2006