Since July 2007, the U.S. sub-prime mortgage problems and the increases in credit spreads over government bonds have triggered concerns about a global credit crunch, and caused global stock market volatility.
However, financial institutions in Asia are in a relatively good position with respect to the credit crunch since they have less exposure to sub-prime mortgage instruments than those based in Europe or the US. Some foreign capital is being redirected to Asian property markets, seeking to benefit not merely from the natural appreciation of real estate in dynamic economies, but also from appreciation of Asian currencies against the US dollar, particularly the RMB.
Foreign investors have shown no sign of scaling back Asian real estate investment activity, especially given the relative scarcity of investment grade properties. The combined value of the quarter’s ten largest investment deals in Asia amounted to US$9.3 billion.
In Singapore, a total of S$15.69 billion worth of investment transactions was recorded in the third quarter, a y-o-y increase of 94%, reflecting continued strong local and global investor interest in office properties as well as Singapore’s positive economic fundamentals. The main market drivers were office transactions and continued activity by developers adding to their land banks. At S$40.95 billion, total investment sales in the first nine months of 2007 have already exceeded the total for 2006 as a whole by 34%.
Investment activity in the office sector more than quadrupled q-o-q in the third quarter, with the S$6.83 billion in transactions accounting for 43.5% of investment sales. With rents at an all-time high, REITs and foreign funds remained keenly interested in prime office properties. The sale of Chevron House (formerly Caltex House) to Goldman Sachs for S$630 million (S$2,783 psf) set a new benchmark for office transactions. The sale ranked tenth in the list of the top ten largest investment deals.
CapitaLand divested its interest in Wilkie Edge, a mixed development including office space, to Capital Commercial Trust for S$182.7 million. CapitaLand also acquired the remaining 50% stake in One George Street and The Adelphi from its partner in Eureka Office Fund Pte Ltd for S$715.75 million. K-REIT and Suntec REIT each paid S$941.5 million for one-third stakes in One Raffles Quay. The deals took number 6 and 7 in the list of top ten investment deals in Q3 2007.
In the second quarter Japan’s real GDP growth fell 1.2% y-o-y, entering negative territory for the first time in three years. However, the consensus opinion is that the negative growth is largely a reaction to the high pace of expansion over the previous two quarters, and the economy is likely to expand at a moderate pace. Although the US subprime crisis influenced the Bank of Japan’s decision to keep the overnight call rate at 0.5%, the BOJ remains optimistic about the economy in most regions.
Despite some volatility resulting from the potential global credit tightening, investment market sentiment remained largely positive in Hong Kong, supported by strong economic fundamentals. Local investors continued to dominate the market while institutional players value the market’s transparency and liquidity. Notable en bloc office transactions in the third quarter included the sale of Oterprise Square for HK$2.07 billion and a 45% stake in AIG Tower in a structured deal.
Investment interest in Seoul’s major districts remained intense in the third quarter, with many investors seeking properties through transactions due to the limited supply of buildings on the market. However the sales of Seoul City Tower and Daewoo Center, both located in the CBD, established new benchmarks for capital values. With the steep rise in capital values in major districts, investors increasingly considered opportunities in secondary areas including Sangam Digital Media City, Pangyo IT Valley and Bundang-gu.
The series of macro-economic and regulatory measures introduced to curb investment activity through the end of June 2007 did not lead to any significant reduction in interest among overseas investors in China.
In Beijing, Singapore-based serviced residence management firm Frasers Hospitality bought a luxury residential project, Tower D of OFFICE PARK, located in the core CBD from Sino-Ocean Land Holdings for RMB 980 million. Czech real estate investor ECM bought the 768,485 sf Metropolis Tower, which is Tower C of the Zhongguancun Financial Centre, for RMB 1.06 billion.
Despite additional government measures to curb foreign investment in real estate, Shanghai’s investment market remained buoyant in the third quarter. China Real Estate Opportunities invested approximately US$708 million to acquire a portfolio of mixed-use projects including City Centre in Changning and Central Plaza in Huangpu, and Hong Kong-listed Tian An China Investments and Capital Strategic Investment established a JV to acquire Novel Plaza for US$105 million. Other major deals included Grosvenor’s acquisition of 28 duplex apartments at the Lakeville Regency and Pacific Star and SEB’s purchase of Cross Tower.
Despite continuing macroeconomic control measures, positive sentiment prevailed in Guangzhou’s investment market in the third quarter. Attractive investment yields underpinned investor interest in the city’s office and retail sectors. Increased overseas participation in land acquisition and development and the growing financial strength of domestic companies have resulted in escalating land prices, as record accommodation values were paid in a number of districts over the quarter. A villa project adjacent to Nanhu Lake was reportedly transacted for RMB 2 billion on an en bloc basis.
Wantanee Khamkongkaew is an independent author evaluating and commenting on leading International Property Consultants in Asia and Greater China, especially CB Richard Ellis.