Overseas quest for concrete plays

Fund Strategy - 21 May 2012 | By Daniel McDonald

With continued disruption to economies and markets across the globe, property investors are searching even harder to find the right opportunities.

Many want to play it safe and stay close to home, but sometimes playing away from home can work in your favour.

If you look at Europe, ungeared yearly total returns for European (excluding Britain) property are likely to be about 4% for the five-year period to the end of 2016.

Gaze across to the other side of the world and you will see that Asia Pacific (excluding Japan) could average in the range of 5.5 to 6.5% annually over the same period.

GDP figures are also promising with Asia Pacific expected to generate about 4.9% annual GDP growth from 2012-16, compared with 0.9% in Europe. (Trends continues below)

While European property offers areas of opportunity and an element of familiarity, those able to venture further afield could find strong structural and tactical reasons to invest in the Asia Pacific property market.

Peering through the global economic uncertainties, the Asia Pacific property markets show positive underlying fundamentals and they have continued to perform well relative to other markets in the first quarter of 2012.

Total commercial property investment volumes of $91 billion (£56.7 billion) last year were in line with the $85 billion achieved in 2010.

Although market momentum has been slowing, particularly in those markets that are most exposed to global economic conditions, the trajectory of Asia Pacific property is still one of robust growth.

Naturally, growth will follow a cyclical pattern, but the pattern for the region is unlike that of Europe’s cyclicality, which is about a low level of growth.

In addition to the strong fundamentals, Asia Pacific is rapidly being urbanised. The proportion of the Asia Pacific population living in cities shot up by 29.4% in the 20 years to 2010, though 57.3% of the population still lives outside cities.

With the potential for more urbanisation so high, growth prospects for urban property in Asia Pacific are significant.

Prudential Real Estate Investors estimates the size of Asia’s property investable universe will grow at almost twice the pace of Europe and America between the end of 2011 and 2031.

This is creating a property market that will be similar, if not superior, to those in Europe and America in terms of liquidity.

Asia Pacific also offers a wealth of diverse opportunities by sector and geography. Diversity is helped by the region’s many economies, which at certain times may be at different stages of the economic cycle.

This drives each property market and investors are able to take advantage of this by unlocking capital at the optimal stage of one economic cycle and redeploying it to other locations that have become more promising.

This gives Asia Pacific a clear investment advantage over other regions as they do not always operate in this way.

Looking at particular sectors, select office markets have remained strong in the face of recent global uncertainties, supported by improving fundamentals and sentiment. Office rents continue to grow steadily as demand outstrips the space available.

The Tokyo office market is starting to look particularly attractive after remaining flat following the tragic events of March 2011.

It is also widely expected that there will be an increase in demand in both Sydney and Melbourne.

The logistics sector is also encouraging. Demand for good-quality, high specification space is picking up as a result of increasing trade activities within the region, and expansions of international brands building presence in Asia Pacific.

”The proportion of the Asia Pacific population living in cities shot up by 29.4% in the 20 years to 2010”

This is further supported by the boom in internet shopping activity as the increase in affluence across the region drives a surge in consumer spending.

This is likely to generate attractive investment opportunities, such as high-quality shopping centres, to meet the demands and changing consumer habits of a growing, urbanised middle class.

In addition, when investing in real estate, transparency in the market is crucial for investors.

Transparency in Asia Pacific is high for the region’s developed property market and is steadily improving for the key emerging countries.

For instance, Australia tops the latest Jones Lang LaSalle Global Transparency Index, while New Zealand, Singapore and Hong Kong feature in the top 20.

In 2001, the tier 1 cities in India and China were ranked as the 80th and 72nd percentile respectively, and by 2010 they had improved dramatically to rank as the 50th and 55th percentile respectively.

This makes it easier for investors to identify the best opportunities and also enables them to tap into the long-term potential of the region.

Naturally, investment in Asia Pacific property is not risk-free. The prospect of extremely loose monetary policy in America, Britain and Europe could generate worrying levels of liquidity in Asia.

Equally the region would not be immune to a recession in Europe.

However, the region does offer many growth stories with differentiated property markets each driven by their own economic fundamentals and cycles.

This creates opportunities for diversification and outperformance.

At a time of low interest rates and anaemic growth prospects in the western world, the diversification benefits offered by Asia Pacific property markets are appealing and investors would be prudent to look a little closer at what this region has to offer.

^{Daniel McDonald is the manager of the Aviva Investors Asia Pacific Property fund.}

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