Property in Asia - where burgeoning mortgage markets and a preference for home ownership - offers investors opportunities for income, despite a difficult backdrop in developed economies.
Singapore, which shares many physical traits with Hong Kong, has witnessed a sharp spike across the real estate spectrum with the recent lowering of LTVs for second homes. With policy risks elevated we have adopted a more defensive approach, avoiding residential developers but looking more favourably at Singapore’s real estate investment trusts. Notably in both Hong Kong and Singapore most mortgages are adjustable rate meaning that homeowners could face a rude awakening once interest rates start to normalise.
The structural story in many Asian countries compensates for a lot of the gloom in the West. Besides healthier economic fundamentals, there are several underlying drivers that should benefit the property sector over the longer term. One positive is the more benign demographics of the region. Whereas parts of Asia are slowly ’greying’ there are still pockets where the demographic dividend has not been fully cashed and, in conjunction with rising incomes, this should help keep housing demand on an upward trajectory.
Urbanisation trends support the property market, with China’s urban population – estimated at 572m in 2005 – set to almost double during the next 20 years. The rapidly changing skylines in China’s major cities and mushrooming of million-plus conurbations are testament to this transformation. In South East Asia the growth in urban areas is forecast to continue at a brisk clip too, with United Nations forecasts of a yearly urbanisation rate of 2-3% for Asean (Association of South East Asian Nations) countries.
Cultural factors, including a preference for home ownership over rental and other idiosyncrasies such as China’s one-child policy, should also be considered. It is said that many parents go out of their way to help their child get on the property ladder, which in part explains why multiple home purchases are common as they are. Moreover, the shallowness of many regional mortgage markets – total housing loans to GDP are estimated at about 14% in China and at less than 5% in Indonesia – means that debt-financed house purchases still have room to grow, with beneficial effects on prices.
Another fillip, primarily affecting commercial property, is the compositional shift of many of the region’s economies, with the tertiary sector gradually growing in importance. Service sector growth should be strongly correlated with demand for office space, providing support for this property segment over the coming decades.
For all the unease about overheating and policy risks in the near term, there are some sources of comfort for property investors. Indeed, while they have spurted higher, prices – particularly in Hong Kong and Singapore – have not seen the vertiginous ascent recorded before the Asian crisis in the late 1990s. Rental yields have fallen sharply in China, suggesting possible speculative froth, but valuations do not look excessive. While investors have to brace for some potential policy-induced hiccups, it is likely that the medium-to-long term outlook for Asian property markets remains promising.