City&Country: Investing in real estate in 2011

The economic climate in 2010 was considerably more positive than the previous year, as economies began to recover from the global financial crisis. The focus has now shifted to 2011 and what it augurs for real estate investors. A poll conducted among property consultants from around the world has revealed some promising destinations for property investments in the new year.

According to Cushman & Wakefield's latest Economic Pulse report on Asia-Pacific and Europe, Asia led the way in 2010 in terms of growth, with China, India and Singapore becoming the fastest growing economies in the region. Europe, while not faring as well, registered better than expected economic growth in 2010.

The improving economy has impacted the real estate market favourably, albeit at differing paces and levels.

The property consultants polled by City & Country predict strong returns to come from several major Asian cities, while in Europe, the UK remains the top draw.

The office sector takes the lead in projected demand. Cities such as Guangzhou, China and London are facing a shortage of supply, which will drive up capital values and rents.

Closer to home, according to Savills, Singapore's office market is still performing some 30% below the peak prices of 2007, while demand for grade A office space in Mumbai, Delhi and Bangalore is expected to remain high. Jakarta is expected to remain a hot spot for investment in office space with projected increased yields and capital gain of 8% to 12%, says CB Richard Ellis Indonesia.

On the residential front, the Singapore high-end market is likely to benefit from high property prices in Hong Kong as investors from Hong Kong and China look for cheaper alternatives.

Mumbai, India, has been identified as a good investment spot for mid-segment residential as supply is running low. Apartment leasing in Jakarta and rents are expected to grow further as the economy continues to improve.

Residential properties in London, meanwhile, have been attracting investors from across the globe and little is expected to change in 2011.

The retail market in London is also projected to experience robust demand as rents continue to rise in many of London's top streets. Demand will also be aided by several important events such as the 2014 Olympics and a royal wedding in 2011, which will add to the flow of tourists into the city.

Exciting investment opportunities in Malaysia's fairly untapped retail market are projected, partly due to an increasingly affluent population. A good quality retail portfolio is expected and it is likely to draw strong interest in 2011.

In Jakarta, a trend has emerged in the retail market in secondary locations — the rise of themed retail centres. However, Greater Jakarta still offers the best retail opportunities in 2011.

According to Cluttons, the UAE industrial market is expected to offer medium-risk investment, while the residential market in Brazil can offer good returns. However, the risks are high.

Read on for the foreign consultants' views on what could be 2011's best investment prospects in cities around the world.

David Green-Morgan
Head of Asia Pacific research, DTZ
Base: Sydney, Australia

Offices in Guangzhou, China, will offer good investment opportunities in 2011. In DTZ's Guangzhou Property Times 3Q2010 report, it was noted that the volume of office investment transactions reached 449,300 sq m in the first eight months of 2010, amounting to growth of 64.8% y-o-y.

Boosted by the completion of quality office space, the DTZ index shows that prices have risen 0.7% q-o-q, while the city’s average rents rose 0.4% q-o-q to RMB120 (RM56.68) per sq m per month in 3Q. Due to the lack of new supply, the availability ratio dropped by 2.1% to 7% over the quarter.

The lack of supply in Guangzhou is expected to result in very strong rental growth, which will in turn push capital values up. We can expect to see 10% to 15% returns in this market. The biggest downside risk is the demand not being as strong as anticipated and thus an excess of supply forcing vacancies higher.

Anuj Puri
Chairman and country head, Jones Lang LaSalle INDIA
Base: Mumbai, India

Mumbai is ideal for mid-segment residential investment while Gujarat State is the perfect option for industrial real estate investment. As for commercial investment, Mumbai, Delhi and Bangalore are the primary destinations. All these cities and segments saw recovery from the preceding slump and showed considerable growth in 2010.

Demand for mid-segment (RM150,000 to RM400,000) residential units in Mumbai is far greater than available and future supply, therefore growth is expected in 2011. In the industrial sector, cities such as Ahmedabad, Vadodara and other port cities in Gujarat are seeing the highest growth. This is mainly driven by logistics and warehousing.

In the commercial sector, Mumbai, Delhi and Bangalore continue to be the business hot spots in India, and therefore the demand for grade A office space continues to be high.

We expect investment in any of these options to fetch returns of 15% to 20% over the long term.

Anthony Duggan
Head of research, Drivers Jonas Deloitte
Base: London, UK

The UK will remain a key focus for investors in 2011. The last couple of years have seen strong interest in the UK, in particular London, with both domestic and overseas buyers very active.

The London property market has global appeal and this has been borne out in the diversity of the buyers. All sectors remain in demand: in the centre of London's West End, retail, and in the City and West End, offices and prime residential properties have been in high demand with values rising strongly. Industrial also remains in demand, although largely from domestic buyers.

Further rental growth is expected in the office sector. This will be driven by the acute shortage of development activity across London. As our latest London Office Crane Survey (Winter 2010) highlights, 2011 and 2012 are expected to see the lowest level of completions on record.

Robust demand is expected in the retail sector with London remaining one of the world's foremost cities and attracting shoppers and retailers from across the globe.

The same can be said for the residential market. London's best residential stock continues to attract buyers from across the globe and we see little reversal of this trend.

Returns will be positive but more muted than the strong performance we have seen over the last couple of years as the markets have recovered from the value falls driven by the credit crunch and the recession.

As always, positive returns are predicted on a positive economic environment. While we do not expect the UK economy to double dip, there remain a number of possible shocks that could derail growth.

Craig Ward
Director, regional capital markets, Savills Singapore
Base: Singapore

We believe the real estate markets of Singapore and Malaysia offer the best opportunities and will attract attention next year. We would look at all sectors — primarily office, residential and hotel for Singapore and retail for Malaysia.

Singapore office and residential and Malaysian retail markets performed well in 2010. Singapore's office market jumped in value by around 25% to 30% in line with rental growth. The high-end and luxury residential markets have seen less exceptional growth of around 5% to 10%.

Singapore's office market is still some 30% below the peak prices of 2007. Rents are rising albeit at a steady pace. The next tranche of grade A office space to be leased is expected to break through the S$10 to S$12 psf mark. Initial yields are, as always, a barrier to overcome, however strong potential in rental growth should see a rapid increase in the running yield of the asset.

Singapore's high-end residential market is still discounted by approximately 10% from the peak back in 2007. We are starting to see more depth in the high-end and luxury buyers market. However, it is still not enough to create meaningful bid competitions. We expect this to change in 2011 as we see Hong Kong and Chinese money looking for cheaper alternatives to Hong Kong residential properties and expect Chinese investors and owners to find more established or perhaps relaxed ways of bringing money out of the mainland.

Realistically, Singapore is one of the only remaining first-tier Asian cities to show a meaningful discount from the 2007 peak and therefore remains good value and a transparent investment option in 2011.

Malaysia's retail market remains fairly untapped among international investors, with few exceptions. We believe this is an exciting growth area offering strong entry yields. The improving demographics and wealth in Malaysia, combined with expanding depth of regional and international retailers entering the market, should increase retail performance in 2011 and beyond.

The potential returns in each of the above sectors and markets will be dependent on the individual asset. We expect to see a further 15% to 20% growth in office rents and capital values in 2011, with a caveat that we expect to see a divide between grade A and B office space. The quantum of grade B re-entering the market in Singapore's CBD could substantially reduce the growth potential, particularly in buildings that are subject to high vacancy levels as tenants move from existing grade B buildings over to the newly completed grade A buildings.

High-end and luxury residential prices are starting to climb, albeit slowly. We are awaiting the return of the high-end buyers to the Singapore market to create the bid tension required to push pricing. We are expecting to see an increase in the pool of buyers in 2011 as larger bonuses return to the Singapore market and international money gains momentum into Singapore.

We are expecting to see one or two good quality retail portfolios to emerge from Malaysia in 2011, and we believe these portfolios will receive a great deal of interest. The investment returns in this sector are potentially exponential and really based on buyer experience and the ability to extract rental upsides while minimising running costs. The current increased activity among retailers in the region will enhance the asset managers' ability to extract further value, combining comfortably with higher spending predictions.

David Hutchings

Head of European research, Cushman & Wakefield
Base: London, UK

Some investors are now ready to look up the risk curve in pursuing higher gains. For short-term opportunistic players there are a range of possible markets in Europe that are worth considering — including buying debt positions, funding development partners or looking towards some of Europe's emerging markets, most notably Russia and Turkey.

For the majority of investors however — who are still somewhat risk averse and sensitive to the security of income offered by property — we would still point towards London as a prime area of opportunity for 2011.

Even though London suffered in the downturn, it still proved to be one of the most liquid and transparent of all global property markets — for occupiers and investors — and these attributes are quite rightly highly valued by buyers today. The market also offers on average a longer and more secure lease term, with upward only rental payments.

London has performed very well in 2010, with prime office rents ahead nearly 20% and prime retail rents up by 10%. At the same time, activity is also up with investment volumes rising around 20% and office leasing up by an estimated 80%.

However, the attractions of the city are not just about risk, the dynamics of the occupier and investor markets also point to good performance potential. The office market may be heavily dependent on a now more cautious banking sector but demand overall is in fact broadly based and interest from sectors such as media and financial and professional services have helped the city enjoy a strong recovery in activity.

With low rents encouraging businesses to renegotiate and trade up where they can, grade A availability is falling. At the same time, development has been very limited in recent years, with schemes aborted or delayed through the downturn, and as demand has rallied, this has put a real supply pinch on the market. This has not only resulted in an increase in rents but looks set to deliver further gains through the next two to three years.

London's prime retail market bucked the global downturn to a large degree, with rents rising in many of the city's top streets through the credit crunch and recession — and it seems set for a further exciting period as it cements its position as one of the top "must have" locations for global retailers.

Events in London, such as the Olympics in 2014, the Queens Diamond Jubilee (2012) and a royal wedding in 2011, will only add to the flow of tourists and overseas visitors boosting the retail and hospitality markets, coming on top of the gains from a cheaper currency in 2009/10.

With grade A availability set to fall further, but substantive levels of new development some way distant, prime office rents are forecast to carry on rising, with an average increase of 8% to 9% forecast for 2011 and 2012, producing a total return (un-leveraged) of 12% to 15% per annum over the period.

Aside from the macro uncertainties which are overhanging most markets globally, the key risks facing London are firstly structural with respect to the potential for new regulations or taxation to undermine the city's role in global finance. However, the main actions being taken are multilateral rather than unilateral, so in general a level playing field should be seen with London little more influenced than other cities, although the increasing tax burden on companies and individuals remains an area of concern.

Investment supply will be a key driver of London's prospects — with the market threatened by either a feast or a famine of available stock. It has been encouraging to note that with values up on their 2009 lows, more sellers are now being seen to feed the growing demand. What is more, refinancing needs in 2011/12 will bring more interesting opportunities to the market, including secure income-producing stock in strong locations. The threat remains that too many banks will run for the exit at the same time, flooding the market, but it appears that most financiers fully appreciate this risk and are generally intent on slowly managing down their exposure.

Steven Morgan
Head of Cluttons, United Arab Emirates
Based: Dubai

Although commercial real estate in London has recovered somewhat from the lows of 2008/09, there is still reasonable value to be had in what is a relatively low-risk marketplace.

Dollar-based investors have an additional exchange rate play as the pound is still relatively week against the dollar. London real estate investment generally needs to be looked at with a medium to long-term view to make the most of increasing capital values.

With yields compressing through increased demand for quality product, capital values for the right offering fared relatively well over the last 12 months within central London

We expect London commercial real estate to perform relatively well going forward as the global recovery takes hold and liquidity is made more available to the marketplace.

The United Arab Emirates (UAE) industrial market can offer medium-risk investment with a medium-term view. There has been increased activity within the Industrial and Logistics sector in the UAE with some landmark deals being closed with attractive returns.

As the UAE goes back to basics after an overzealous property boom focused largely on residential and office development, there are opportunities within the industrial and logistics sectors which have traditionally been at the heart of this trading community.

Industrial and logistics will continue to be a focus within the UAE and returns are expected to firm up.

Another market to consider is the residential market in Brazil. However, the risk is high and investment should be short term.

By all accounts, this particular market fared well in 2010. Reported annual price increases appear to be significant, but be warned — this has the markings of a "Dubaiesque" bubble.

Where there are high rewards, there is generally high risk, and with that comes uncertainty.

Azwardy Azhar
Managing director, CB Richard Ellis Indonesia
Base: Jakarta, Indonesia

Jakarta will be a prime location for investors in 2011. Other cities such as Surabaya, Makassar and Manado in East Indonesia, and Menda and Palembang in West Indonesia have also attracted investor attention in 2010 and are likely to continue to do so in the new year.

We believe the market in 2011 will continue to be dominated by the retail sub-sector, followed by strata title apartments and the office market.

The retail market offers good opportunities in 2011, especially in Greater Jakarta. In 2010, the overall retail market saw an increase in supply with the completion of several retail projects. Secondary locations such as Bogor and Bekasi have seen an increase in demand, largely dominated by F&B outlets.

A notable trend in the retail market in secondary locations is the increasing development of themed retail centres. As the economy continues to improve, we expect to see a 13% to 15% increase in yields and 9% to 15% in capital gain.

The office and residential market are more dependent on the growth of the micro economy. The office leasing market in Jakarta has been increasing steady in 2010, though the average rent showed a slight decrease due to the strong rupiah against the US dollar. We expect the office leasing market to increase by 8% to 9% and the capital gain to increase by 8% to 12% in 2011. As for strata title offices, a yield increase of 9% to 10% and capital gains of 6% to 11% can be expected.

On the residential front, apartment leasing in Jakarta is on the rise along with the rents. This is partly attributed to the influx of Japanese and Korean expatriates as well as the recovering economy. Transactions for apartments have increased in 2010, supported by developers' discount promotions. Further growth is expected as the economy continues to improve in 2011; we project a 9% to 10% increase in yields and 7% to 11% increase in capital gain.

The limitation of basic infrastructure has become a key factor in the real estate market. Jakarta is the most complete city in terms of infrastructure, followed by Surabaya, Makassar, Manado and Palembang. However, with the government actively developing the infrastructure in all cities in the next five to 10 years, more widespread growth can be expected.

The projected performance of these markets can, however, be influenced by the economy, the level of interest rates, the government commitment to provide infrastructure and the stabilisation of ownership of property by foreigners.  

Simon Lo
Director, Research & Advisory, Colliers Hong Kong
Base: Hong Kong

The office market in Hong Kong is expected to show further growth in 2011 with rent growth rising by 17% and capital values by 14%.

In 2010, the market is largely driven by the buoyant financial industries as the average vacancy rate of grade A offices dropped to 4.2% in August from 5% in 2Q2010, while average office rents increased by an impressive 10% q-o-q to HK$53.30 (RM21.58)psf per month. YTD, rents have increased by 31% and capital values by 27%.

The financial sector will continue to drive the leasing market in 2011 and a further catch-up in rents can be expected. Another key point is the severe lack of supply in the next couple of years, which will contribute positively to the rental growth.

John Stinson
Managing director, capital markets Asia Pacific, Cushman & Wakefield
Base: Singapore

The grade A or prime grade office in Singapore is the hottest market in Asia-Pacific. In 2010, it registered very strong performance with the vacancy rate in grade A offices in the central business district (CBD) falling from 6.4% to 3.2%. Rental growth of 15% over the year was noted as well as a 30% value uplift.

Strong GDP growth has resulted in significant expansion in the office markets, in particular for well-located grade A CBD offices. This has led to strong pre-commitment levels to completed stock for buildings in 2011 to 2013. With limited supply and increasing demand in the occupier markets, we see strong rent growth driving asset values in the investment market.

GDP growth is forecast to drop to between 5% and 7% in 2011, down from over 15% in 2010. However, with vacancy rates continuing to decline and positive GDP continuing to drive tenant expansion we see continuing rental growth in the range of 7% to 9% .

Rental growth predictions are now confidently being made by many forecasters up to 2015, so we see continuing strong appreciation in the value of grade A offices next year and further into the medium term. This growth is likely to exceed 20% in 2011. We continue to see core investors seeking to re-weight from their traditional markets in Europe and North America to gateway markets in Asia such as Singapore.

The Asia-Pacific region has adjusted post crisis with increasing intra-regional commerce and trade, which continues to insulate the region from global shocks to sentiment that we saw three years ago.

Moving into the future, there is the risk of sovereign debt issues in the eurozone affecting sentiment. There is also equal chance that if this situation occurs it would increase the momentum of capital moving out of European markets into growing Asian markets such as Singapore.

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 838, Dec 27, 2010-Jan 2, 2011

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