The Hindu Business Line : Finding right assets, the `real' challenge for investors

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Finding right assets, the `real' challenge for investors

D. Murali
P. Jaishankar

Chennai, Oct 01

Mumbai has entered the Top 10 list of most promising Asia Pacific cities for real estate investments in the annual investor survey released by PricewaterhouseCoopers.The country's financial capital has jumped to the 10th place from 17th last year, in the investment prospect ranking, while New Delhi and Bangalore retained their inclusion in the Top 20 Asian cities, according to annual investor survey titled `Emerging Trends in Real Estate Asia Pacific 2008', released by PricewaterhouseCoopers and the Washington-based Urban Land Institute.Reflecting their status as prominent global gateways, Shanghai, Singapore and Tokyo were received high ratings for development potential, the report said.

Global gateways

"The overall response from investors towards India continues to be bullish, with strong buy/hold recommendations for the major cities of Mumbai, New Delhi and Bangalore across various property sectors," reads a quote of Mr Gautam Mehra, sector leader, investment management and real estate, PricewaterhouseCoopers, cited in the report. "India is attracting huge global capital, although the sheer volume of new capital has elicited a cautious tone from interviewees." On investors' radar

While India has been on investors' radar for several years, it had proven inaccessible due to government restrictions, which were eased in 2005 to permit foreign investments, primarily through the construction-development route, he added.Significant changes from last year's buy/hold/sell recommendations for Mumbai include higher buy percentages for industrial (57 per cent in 2007 and 64 per cent in 2008), lower buy percentages for retail (79 per cent down to 63 per cent), apartment/residential (67 per cent down to 59 per cent), and hotel/resort (75 per cent down to 64 per cent). Greater amounts of capital will be flooding Asia Pacific real estate markets in 2008, the survey expects. The real challenge for investors will lie in finding the right assets against the backdrop of yield compression and scrutiny by regional governments and tax authorities.

High returns

The report said high returns are especially visible in central business district (CBD) office sectors, where supply shortages have resulted in Grade A rental increases of 60-70 per cent in Delhi and Mumbai for the year to March 2007.

"While regulatory restrictions, land titles and limited exit options continue to be challenges for foreign investors, transparency is improving as private equity players bring in stricter management practices, longer-term perspectives, and more focus on improving building quality, coupled with the growing realisation among Indian developers of the benefits of increased corporate governance levels," Mr Gautam pointed out.

Investment risk

Sentiment was strong among survey participants to either buy or hold all types of properties in Shanghai, Singapore and Tokyo, rather than sell properties. Shanghai, which topped the list for investment prospects, edged up from its second-place ranking last year. Singapore received the highest rating of any of the cities included in the report in terms of overall risk.Singapore is "certainly one of the markets in the area that provides a very stable legal and tax environment, and property rights that are beyond question. And, therefore it is certainly one of the markets where many, especially Westerners, are very comfortable," says one survey respondent.Like Singapore, Tokyo was cited as presenting very low overall risk as an investment market. Characterised by survey respondents as a city with a tight inventory supply and low vacancy rates, Tokyo is a market that is starting to draw more institutional money, in addition to the opportunistic funds that have been invested over the past five years, the report says.

Top 3 cities

The Asia Pacific cities included in Emerging Trends fall into different categories, based on each market's investment and development prospects, and on respondents' opinions about buying, holding or selling specific property types within each market. In the first category are the top 20 investment cities - with Shanghai, Singapore and Tokyo as the top three.In the strong development markets segment, Ho Chi Minh City topped the list followed by Shanghai, Singapore, Bangalore and Mumbai.

Favoured property types

In terms of favoured property types, the hotel sector is ranked highest in terms of investment prospects in Asia Pacific cities, with demand driven by both business travel and rising tourism. In this sector, Ho Chi Minh City was listed as the top Asia Pacific city followed by Bangalore, Shanghai, Mumbai and New Delhi.The second favoured property type for investment is the office sector, characterised as fiercely competitive. Ho Chi Minh City was again listed as the top market followed by Mumbai, Tokyo, Bangalore and New Delhi.Retail sector, described as very dynamic, ranks as the third most favoured property type; and Ho Chi Minh City, Mumbai, New Delhi, Bangalore and Shanghai were listed as the top five markets in which to invest in retail properties.The industrial/distribution sector, which is ranked fourth in offering investment potential, will be recognised as a "major property type" next year, the report predicts. Ho Chi Minh City, Shanghai, Bangalore, Mumbai and Guangzhou were ranked as the most promising markets for investment.The residential for-sale and apartment residential rental sectors ranked fifth and sixth, respectively, for investment opportunities; however, based solely on development prospects, the residential for-sale sector ranked first of any property type. The most promising markets for apartment rental investments are Ho Chi Minh City, Mumbai, Bangalore and Guangzhou, the report said."Urbanisation in Asia Pacific property markets is a self-fulfilling economic factor for the supply and demand for residential space," the report said.With greater urbanisation, and consequently a higher demand for residential property, what is considered critical for sustaining the apartment sector is an understanding of the current and future trends of apartment or residential segmentation, such as low-income, middle-income, or luxury residential."As the years go by, Asia Pacific property markets will integrate more fully with the global economy, and, just as importantly, global property capital markets," the report adds. "If the quality and quantity of research, business intelligence, and transparency improve, then the atypical puzzles and learning curves of the marketplace will be replaced with maturity."

Market trends

The report provides an outlook on Asia Pacific real estate investment and development trends, real estate finance and capital markets, trends by property sector and metropolitan area, and other real estate issues pertinent to the countries in Asia. About 20 markets were included in the report. It is the second Asia Pacific edition of the highly regarded annual Emerging Trends in Real Estate investor survey.Based on the opinions of internationally renowned real estate professionals, Emerging Trends' Asia Pacific version reflects interviews with and surveys of more than 190 professionals, including investors, developers, property company representatives, lenders, brokers and consultants.According to the report, the Asia Pacific property market is still as diverse today as it was a year ago, in terms of opportunities, risks, capital markets, economics, demographics and business cycles. The fact that more businesses understand and recognise the diversity and variations is seen as a step towards market maturity.Greater amounts of capital will be flooding Asia Pacific real estate markets in 2008, the survey estimates.

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