Hong Kong
It won't be easy, but property opportunities still abound in 2018

It won't be easy, but there are plenty of opportunities in 2018

It won’t have escaped your notice that there have been a lot of reports recently from , banks, research houses and all speculating on the possibility of a major financial correction.

The root cause of these fears is high asset prices – stock markets worldwide are close to record highs, 10 year government bond yields are at all-time lows and even the is seeing remarkable bids at auction due to global liquidity.

Real estate has of course been part of this trend: Grade A office capital values are at historical highs in many parts of Asia Pacific while cap rates have compressed to record lows. It’s not just offices of course, as anyone who has bought an apartment in Hong Kong recently will be well aware!

APAC Grade A Office Capital Values

These record asset prices sit on a mountain of global debt, which now represents a dizzying 330% of global GDP. In this region, China presents the biggest debt problem, with even the head of the People’s Bank of China expressing .

A banking crisis in China is one thing that could trigger a fall in asset prices, but there are others. We have geopolitical tensions focused on , the South China Sea and . The UK is not Europe’s only problem child: the solvency of the Italian and Greek banking systems is often questioned while German leader Angela Merkel is currently struggling to form a government.

The rise of populism and nationalism in the US and Europe is a problem for Asia Pacific because the two often go hand-in-hand with economic protectionism, dangerous for our trade-dependent region.

When you tot up all the reasons to be fearful, the world and its economy seem rather fragile, however, there are also a lot of reasons to remain relatively cheerful too, especially as a real estate investor.

The International Monetary Fund identified a “” in mid-2016 which it says “continues to gather strength” and it is forecasting rising GDP growth through 2021 and has revised its forecasts upwards for China, Japan, Korea and ASEAN.

Despite the imposition of capital controls, this year China has exported significant real estate capital, targeting mostly Hong Kong, the US, the UK and Japan and it seems likely that the total of outbound capital will exceed that seen in 2016.

China outbound by destination

China has a wealth of growing companies; while conglomerates such as HNA Group and Wanda Group are slowing their overseas property buying, others such as Ping An and China Investment Corporation continue to invest.

Meanwhile the asset allocation of global pension funds to real estate keeps creeping up and now stands at 8.8%, up from 7.3% in 2010. That 1.5% rise does not seem much but remember that is 1.5% of global pension fund assets of $36 trillion!

A major concern of real estate investors is a lack of available stock in this region; in fact at a recent conference in Singapore, delegates actually said a market correction next year would be a boon to them. However, it is worth noting that if you look at rental cycles, the picture is not one of uniform performance across the region’s cities and opportunities still exist. If the capital growth of recent years cannot be sustained, a greater focus on income will be rewarding.

We get very focused on cycles, but sometimes forget the great swell of secular trends in Asia Pacific. Urbanisation means Asia's growing cities hold enormous promise; these cities have younger, better educated, tech-savvy populations, larger middle classes with more spending power, a greater tendency to adopt new lifestyles and ways of working, and provide a much greater choice for the investor.

China, India and South East Asia all have large and rapidly-growing cities but it is worth noting that even in Japan, the population of larger cities such as Tokyo is still growing.

Technological advances and social changes are increasingly important for real estate; consider how the rise of online shopping has made warehousing one of the most important and sought-after sectors in the region. Data centres, co-working and co-living space, self-storage and senior housing are all niche sectors moving to the forefront of investors’ minds.

So, there are still plenty of places to invest in real estate across Asia-Pacific and change, especially technological, is creating new opportunities all the time. Perhaps we need not be concerned, but rather cautious. As the comedian and occasional philosopher Groucho Marx said: “It isn’t so much that hard times are coming; the change observed is mostly soft times going.”

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Simon Smith

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