ULI Sees Turbulent Times for Asia Pacific CRE

Declining asset prices, rising cap rates, and rising foreclosures have characterized the commercial real estate sector in the U.S. of late, but this gloomy scenario will likely become more familiar in the Asia Pacific region as well, according to the Emerging Trends in Real Estate Asia Pacific 2009 report, recently released by the Urban Land Institute and PricewaterhouseCoopers L.L.P. The report provides an outlook on real estate investment and development trends, as well as trends by property sector and metropolitan area. The report is based on the opinions of a range of real estate professionals, including developers, investors, property company representatives, lenders, brokers, and consultants. The report found a significant and possibly permanent change, as Asian banks have re-rated real estate for risk, and with debt being re-priced, investors will demand higher yields. Financing acquisitions with high leverage appears to be a thing of the past.No area of the Asia Pacific region is immune from the effects of the economic downturn and the credit crisis, according to Stephen Blank, ULI’s senior resident fellow for finance. He noted that Hong Kong, which many experts thought might largely escape the effects of the global downturn, is feeling some pain. “Residential prices are down, and the downtown office sector is showing some weakening,” Blank said. Not surprisingly, Blank notes that the financial services sector across Asia Pacific has been severely affected. “But the manufacturing sector has also been hit pretty hard,” he said. Many of the survey’s interviewees said they will be selective in their investments. One interviewee said he would be “picky about markets and partners.” Blank notes that commercial real estate pricing is off about 20 percent from their highs in the U.S., and survey participants expect the same to be true in the Asia Pacific. Blank said, though, it may be too early to be certain how steep pricing declines might be, because transaction levels have been muted. “We’ll have to wait until the refinancing ball gets rolling, to see what the banks do,” he said. “There could be more volatility.” In terms of investment, Tokyo, Singapore, and Hong Kong rank one, two and three, respectively. Shanghai fell from first to fifth place, ranking after Bangalore. Bangalore, Mumbai, Taipei, New Delhi, and Kuala Lumpur are all new entrants to the top 10. The office sector took the top ranking for both investment and development. Ho Chi Minh City is ranked the best market for buying office properties, followed by Tokyo, Mumbai, Shanghai and Bangalore. The industrial/distribution sector ranks second for favored property types. Shanghai gets the top buy rating, followed by Ho Chi Minh City, Bangalore, Mumbai, and Guangzhou. Retail ranked third, with Ho Chi Minh City gaining the top buy rating, followed by Mumbai, Shanghai, Bangalore, and Beijing. Residential (rental) apartments rank fourth in property sectors, with Ho Chi Minh City, Mumbai, Bangalore, Tokyo and Taipei the top five buy markets. Hotels saw a major change in investor sentiment in this year’s survey, tumbling to fourth place after being the favored property type last year. The top five markets are Mumbai, Bangalore, Ho Chi Minh City, New Delhi and Shanghai.