Colliers International, Singapore

Colliers International’s inaugural Asia Pacific investment market overview report revealed that the real estate investment market in Asia Pacific continued to experience a further contraction of market volume in 1Q 2009 – against the backdrop of the global financial turmoil and the sustained problem of credit crunch. 

Slated to be released on a quarterly basis, the report tracks the real estate investment performance of 22 cities in 13 countries across Asia Pacific. 

As of 1Q 2009, the total value of regional investment sales transactions plummeted by more than 50% on a quarter-on-quarter basis to US$2.114 billion.  Sizeable investments deals with lump sum prices at US$50 million and above were scarce.  This is because owner occupiers and cash-rich private investors who have been looking to acquire quality developments in Asia Pacific have their targets confined largely to mid-priced assets.  Institutions and real estate investment funds were inactive, with most of them waiting for better market entry points in the coming months, while individual institutions were still going through the process of deleveraging.

Real estate investment yields have gone up further by 25-75 basis points in 1Q 2009.  This is attributed to investors holding back from entering the real estate market due to insufficient financing from banks in the private sector, perceived increase in liquidity risk and a further consolidation of the global economy.

Mr Piers Brunner, Chief Operating Officer, Asia, says, “Although the regional real estate investment market in 1Q 2009 was relatively quiet and despite the fact that the market will continue to be challenged by the economic environment for the rest of 2009, we believe there are still potential investment opportunities in the region in the coming quarters. 

The market has further room for improvement when banks strengthen their capital structure and become more pro-active in offering loans to the real estate sector.  Therefore, the region’s real estate investment yields in the coming quarters of 2009 are likely to edge upwards, though at a slower pace compared to 4Q 2008 and 1Q 2009.

In fact, given many economists’ projections that an economic recovery is in sight in 2010, it is now an opportune time for investors to identify their targets, take advantage of the current price weakness and act before the market takes off again.”

Highlights of Key Markets 

Singapore
Singapore only managed to accumulate some S$242.25 million worth of investment deals in 1Q 2009, which was just a mere 1.9% of the S$12.69 billion investment sales amassed during the height of the market in 3Q 2007.

Mr Dennis Yeo, Managing Director of Mainland China, Taiwan and Singapore, comments, “The sluggish investment sales market in 1Q 2009 was the effect of the global financial market upheaval and the deflating world economy, which continued to weigh and batter upon the local investment property market. The unprecedented crisis had worn market confidence, resulting in declining property prices and cautious investor sentiment. With banks more cautionary and stringent towards lending, acquisition activity was further curtailed.”

The residential sector was the main contributor with some S$177.72 million amassed, accounting for 73.4% of total investment sales value in 1Q 2009. 

Although investment sales volume is expected to remain thin in the coming quarters – given the expected prolonged downturn in the global economy, as well as a more stringent borrowing environment, there has been an observed bridging of the price expectations between buyers and sellers, particularly in the office sector. 

Hence, investment sales activity could still pick up marginally in the coming months, although these could be confined to deals valued at primarily below S$100 million.

Mr Yeo says, “The values of Grade A office buildings is estimated to have declined by some 25%-35% from its peak in early 2008. As such, now could be the right time for those investors who are on the lookout for investment opportunities to enter the market and park their monies in good commercial buildings.  

Additionally, with business parks being favoured by the IT and manufacturing industries, as well as by companies with backroom and supporting facilities that do not need to be located in the central business district, they present another opportunistic investment option at a relatively lower cost, but offering high quality space in a conducive environment.” 

Hong Kong
The overall investment sentiment in Hong Kong remained cautious in 1Q 2009, with the bid-offer spread remaining wide.

New leasing demand in the office sector remained scarce, while the majority of existing tenants stayed cost-conscious. Meanwhile, it was observed that several sizeable multinational tenants have also downsized their pre-committed space; hence, adding on to the office supply in the market.

One key hurdle for investors was the availability of bank financing. However, the market can expect to see an improvement on this aspect soon as the local PRC banks have recently become more active in offering financial packages. Nevertheless, the yield spread between real estate investment yields and banks’ lending rates continued to see an expansion in 1Q 2009, signifying that investors had factored in a thicker risk premium in their bids.

Looking ahead, the prevailing trend of corporate downsizing and cost rationalisation will cause rents and capital values to decline further over the next 12 months.

However, long-term investors could still consider investing in prime office buildings in Central/Admiralty, given that the prices for strata-title office there have decreased by 45% from the peak price of HK$26,112 per sq ft seen in July 2008.

The other investment opportunity is development sites. Since land owners bear no income with their bare sites, they see certain pressure to sell and many will be open to price negotiation.

Greater China
The Greater China market constituted to over 75% of the total volume of investment transactions (US$1.59 billion) in the region in 1Q 2009.  This is a significant shift from the 50% registered prior to the onset of the global financial crisis in 3Q 2008. 

One key reason was that individual risk-loving investors made pre-emptive moves well before the recent revision of the Chinese Insurance Law in mainland China.  The new law not only enables local insurance companies to invest directly in real estate, it also allows the re-allocation of a huge volume of funds of RMB 100 billion into the local real estate sector.

Looking ahead, the relaxation of investment regulations and the lowering of equity ratios for development projects act as positive stimulation to the real estate market in China.  Shanghai’s residential, office in the CBD area and retail property markets are perceived as opportunistic for investment, as these markets are supported by resilient end-users’ demand, sustained demand by MNCs as well as sustained growth of retail sales, respectively.

Highlights of Emerging Markets

Bangkok, Thailand 
With property prices in Thailand still relatively low compared to many other countries in Asia, the city continued to attract a broad range of investors, including property funds and major developers in 1Q 2009 – despite the global credit crunch and political instability in Thailand.

Strong interest in purchasing land plots, hotels and offices from investors were observed.  However, as the prices of prime condominiums flatten, land prices – based on future price appreciation – may now look expensive.

Going forward, against the current economic backdrop, local investors are expected to still play a key role in the local property investment sector, and are refraining from seeking overseas assets, due to a higher degree of uncertainty in other cities.

Ho Chi Minh City, Vietnam 
The new legislation which started in January 2009 enables foreigners in Vietnam to now own apartments for up to 50 years, exclusively for their personal use. It is estimated that some 21,000 foreigners are eligible to own property in the country. 

Going forward, the newly-implemented legislation is expected to foster demand growth for residential properties and push the average sales prices upward by 20%-30% in the near term. 

Additionally, due to a less stringent and shorter approval process, as well as a more transparent real estate policy, the amount of investment in the local real estate sector is expected to rise.  Both investors and developers will welcome the adoption of the new standards, as the time frame for project authorisation will now be shortened from three years to about a year. 

India
Due to the global credit crunch, a number of private equity players have put on hold their investment plans that were committed before the onset of the global financial crisis. 

Nonetheless, the market witnessed an increase in the number of mid-priced housing projects that have been made affordable to the mass population. 

Going forward, the Land Special Purpose Vehicle, a joint-venture arrangement between the developer and the landlord, are expected to grow more popular with private equity funds when market valuations drop. Under this arrangement, developers can avoid making a huge capital investment during the initial stage of land acquisitions. 

The local government has also implemented two stimulus packages in late 2008 – the removal of the all-in cost ceilings on interest rates at which companies can raise external commercial borrowings to develop integrated townships, and the amendment to the Foreign Investment Policy – and is also planning to change the foreign direct investment (FDI) rules. 

While the two stimulus packages are expected to provide alternative funding for genuine developers in the long term, the FDI rules amendments will enable developers to complete the ongoing small-scale non-FDI-compliant projects that have either been deferred or stalled due to financial problems.

Highlights of Key Markets in Australasia 

Sydney
Despite an increase in buying activity from private investors, there have been no sale transactions of prime grade offices over the past 12 months.  The CBD office market witnessed a net negative take-up of 40,413 sq ft in the second half of 2008 – the first time ever in the past four years.  

Accounting for an estimate of over 100,000 sq m sub-lease space available in the market, office vacancy rate is within the range of 6.5%-7.0%.  Gross face rents have decreased by an average of 2.5% across all grades and precincts. 

With a dramatic contraction of leasing demand, more lease incentives – an average increase of 10% since the beginning of 4Q 2008 – have been provided by landlords.

Auckland
The volume of investment sales of office space saw a dramatic contraction in 2008 as both buyers and developers have been constrained by credit tightening.  

Overall CBD office vacancy rate was 7.7% as at the end of 2008, while office yields eased 75 basis points to 150 basis points from the lows registered in 2007. Average prime office rents remained stable over the last quarter of 2008 but is expected to stage a moderate fall in 2009.  

Meanwhile, the city’s retail vacancy rate remained flat at 2.8% in December 2008, while the average retail yield is currently at approximately 7.5% and is expected to soften in 2009. With a slowdown in consumer spending and an uncertain economic outlook, investors are expected to act cautiously in the retail property sector over the near term.

About Colliers International

Colliers International is a global affiliation of independently owned commercial real estate firms. The organization's 12,700 employees span the world in 294 offices in 61 countries. On a worldwide basis, Colliers manages 1.1 billion square feet, and has revenue of USD 1.6 billion.

Contact Information

Ms Seah Li Ching
Assistant Manager, Marketing & Communications
Tel: 65 6223 2323
Direct: 65 6531 8545

Mr Dennis Yeo
Managing Director - Mainland China, Taiwan and Singapore
Tel: 65 6223 2323

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