10/01/2015
Report by KPMG :
Real Estate Market in Asia: 2014-2015
With the Real Estate scenario changing across globe, it brings along the need to look a little deeper into the macroeconomics and other influential factors causing the spur. This article shall emphasize on the current and future trends in Asian Real Estate development factoring in the possible causes and outcomes leading to the same. Let us take a closer look at each nation and its economy to decipher the changes better…
China
China saw an overall slowdown in Real Estate growth in 1Q2014 with the sector contributing to 20% of the nation’s GDP combined with the ancillary industries. The factors accountable for the same were tightening of monetary policy, weaker industrial production (PMI measuring below 50) and slower fixed asset investments (Real estate rose to only about 25 percent of fixed asset investment). Credit unavailability further led to slower growth and lower transactional volume in the sector. The GDP growth was seen slowing down to 7.4% in 1st quarter.
Beijing residential markets saw a downfall with average price falling down by 5.4% and transactional volumes stooping down by 17.8% in 1Q2014 while Shanghai witnessed a marginal improvement in residential markets during the same period. Retail markets also demonstrated an overall decline with overall supply reducing and vacancy declining by 50 basis points to 9.5% in 1Q2014. Rentals also decreased in Central and Northern China with no fresh supply in retail markets. This however did not dissuade international retailers from entering Chinese markets giving some stability to rentals in Tier 1 cities.
However, logistic markets continued to show positive growth driven by rising demand from e-tailers with the nationwide Logistics Rental Index continuing to show positive by 1.2% in 1Q2014. Demand for build to suit facility is also expected to soar in near term. Similarly growth was seen in Official spaces reflecting the countries positive take on the government’s reforms and liberalization policies. The leasing market also saw stability and some growth in the country as compared to last two quarters.
Combating the slowdown in various areas, government has relaxed apartment buying norms and mortgage loan application norms for buyers. Two meetings were also held in Beijing for revival of residential markets and the measures taken are more focused on long term solutions.
Hong Kong
Hong Kong showed moderate growth in 1Q2014 with unemployment rates on the lower side causing actual increase in wages. The net export growth was sluggish but tourism gained momentum. Inflation was also seen subsiding slightly and progress was noticed in insurance and finance industry.
With financial sector’s increase in demand for leasing space in central & admiralty regions of Hong Kong, the leasing market here grew rapidly with tripled growth in net absorption free area from 1Q14 to 2Q14 arriving at a net figure of 1,07,650 square feet. Kowloon east developed as the preferred office location for the country with increase in supply and payments made for new office space to the tune of HKD 5.4 billion. It also saw maximum number of new leases standing at 56%, more than half of entire Hong Kong.
Other regions saw decline in vacancy rate with average vacancy rate falling by .3% to 4.1% in 2Q14 on account of insufficient support from banking & finance & low availability of adjoining space. In most of the regions rentals decreased by 1.5% - 4.2%, while still maintaining stability in the central region.
Retail markets also plummeted in the 1st quarter digging holes into the pockets of the landlords who are having a tough time looking out for new tenants. Retail market sales also declined due to shift in demand by Chinese tourists from luxury goods to more affordable ones. Retailers showed reluctance in expanding in Tier 2 cities evident from a 30% decrease in demand in 2Q14.
Residential markets were seen improving with volumes rising from 6,178 in April 2014 to 6,978 in following month due to relaxation on Double stamp Duty Policy by government. Secondary markets also saw healthy volumes with a 21.5% increase during same period. Lower budget housing seemed to gain momentum with luxury housing rents falling by 4.1% in 2Q14 making affordable areas with lower rents more popular. The expected supply between 2014-2017 is 20,070 units p.a on account of completion of new projects.
India
India is fighting against a huge housing shortage with the current deficit of 60 million units and a vision to create 110 million units by the year 2022.This enormous tasks comes with further challenges such as inadequate lending reforms, high interest rates, issues faced for approvals and permissions, Fees and taxes contributing to 35% of the cost, expensive land cost, limited investments by the government, so forth and so on.
The rapid urbanization is aggravating the challenge as 70% of such housing is to be developed in nine states and 90% of such houses are to cater to the economically weaker section of the society thus making the need for building affordable housing inevitable. The total investment needs to grow at CAGR 12-13% p.a to build the same along with supporting infrastructure by 2022 involving USD 3.5 trillion investments while the current average growth rate stands at 5-6% and central and state government contribution of only 3% to the sector.
In addition to measures taken by government such as relaxing FDI norms, lowering bank interest rates and raising long term infrastructure bonds for lending to builders, the need to introduce an action plan based on six themes is surmounting,
Government shall take multi layered initiatives to enhance project delivery capabilities and create supportive policies in sync with the vision
Make strategic investments – Extenuate fees and taxes and facilitate ESW & LIG with lower interest rates, subsidies and micro financing options
Streamline and simplify existing norms and revise LARR act to remove complexity.
Form nodal agency for better coordination and grant infrastructure status to affordable housing
Greater fund inflow to urban housing development and promote PPP framework
Empower local authorities towards decision making and creating faster approval mechanism supported by new age technology.
The real estate industry has the potential to feed 250 ancillary industries and double the employment need of the country giving it the much needed impetus and leading to its growth.
Indonesia
Indonesia has witnessed an economic slowdown with expected GDP growth in 2014 hovering between 5.5-5.9% against that of 6.5% in 2011.The slowdown is mainly due to reduction in prices of goods majorly exported by the nation such as natural rubber, Gold and Crude Palm oil seconded by factors such as rising inflation, inadequate infrastructure, corruption and slowing down of consumption and investment. However 2015 is likely to see a boost in the economy with GDP growth rising to 6% with rapid growth in real estate sector, increased in domestic consumption and rising urbanization.
After a 58.6% lower absorption n office spaces recorded in 4Q12, a positive change was welcomed in 3Q13 with a rise in absorption by 76%. This continued to improve by March 2014 seeing an increase of cumulative demand by 3.4% YOY standing at 4.4 million square meters and with occupancy rising to 94.4% by 0.8%. Despite countries subdued economic performance, the demand for office spaces is to remain positive in 2014 with highest increase in rentals in 1Q14 giving stability to landlords. Fresh supply of over 1,82,000 square meters of space is expected by second half of 2014.
The country is attracting international retailers especially in Jakarta expanding to other cities with its consistent retail sales rate of 5-6% for over a spell of ten years. A small downturn of 0.9% in Retail sales index conducted by Bank of Indonesia was observed YOY in May 2014 vis-à-vis previous month. However this does not change the positivity in the sector which is expected to remain bullish in future. The retail market occupancy has also increased to 84% in 1Q14 from 81.4% in 2012 showing positive signs.
The demand in residential Sector is expected to increase due to sturdy economy but would be subdued as compared to neighboring economies due to bottlenecks such as high tax rates, higher cost of construction and higher mortgage rates. Despite of this the residential property price index has seen a steep rise by 7.92% in 1Q13.
International events and rise in visitors to Indonesia has caused a boom to its Hotel market which is expanding a steady manner and should be seen gaining momentum in both short and long term.
Japan
Japan’s GDP was seen stabilizing with GDP growth rate at 5.9% due to increase in consumption, favorable monetary policies and the new economic policy lay down by the government. Several reforms are being undertaken to maintain the economic robustness including lowering the corporate income tax rate, and deregulating the agricultural industry, labor practices and the healthcare system.
The real estate markets here has shown aggressive growth with lenders willing to finance stable borrowers building properties at prime locations and builders and Japan’s Real Estate Investment Trusts aggressively making use of the available financing. The hotel industry is also flourishing with rise in inflow of visitors due to weakening Yen and declaration of Tokyo as the venue for 2020 Olympics.
The office rentals in Tokyo have soared by 2.3% YOY in 1Q14 with the same pattern in most of Japan. However in few areas, a decrease in rentals is also observed due to excess supply over demand and vacancy rate of 10%. Rentals are however expected to show positive signs as vacancy rates come to 5% and below in following years.
A decrement is observed in long term retail rentals if compared from 2009 to 2013 and actual yield on prime retail properties decreased by 20BPS to 40BPS between 3Q13 and 3Q14. It is expected to improve with progress and growth of the economy.
The increase in consumption tax rate after 2014 plays a major role in expected decline in housing project in FY 2015 (8% decline ) as against the growth in FY 2014 (10.6% YOY growth) .Besides rise in construction cost and expensive labor shall also act as a hindrance to the growth in coming year. The residential property rentals are non-fluctuating in nature making them less attractive for investors as compared to office and retail spaces.
Korea
Growth in Korea has been slow with GDP growth figures at 3.9% in 1Q2014. The internal consumption stands low at 2.6% and the South Korean exports are seemingly gaining momentum. The interest rates and stock process seem to stabilize while the consumer price growth is still way below the target of 2.5%.
Coming to Real estate dynamics, the absorption rate of official space was good at 1.58 lacs square meters against the supply of 1.75 lacs square meter and the rentals increased slightly in most of the areas with vacancy rate decreasing in the range of 0.49% to 1.54% apart from Gangnam business district showing a rise in the same.
The outlet store markets registered a double digit growth in 1Q14 by maintaining lower margins and therefore witnessing higher transactional volumes as compared to department stores attracting interest of large retail companies to spread their portfolio. The convenience and specialty stores marked the maximum growth in the retail markets.The trading volume for the 2013 retail investment market more than doubled from the previous year, reaching KRW 2 trillion.
Hospitality industry is flourishing on account of foreign investors contributing to 80% of total hotel revenue with a record high 120 million visitors in 2013.The supply of hotel rooms was deficient as compared to demand with occupancy rate in Seoul varying from 78%-84%. With the increasing revenues, investment in hotels is becoming an attractive space for investors and Long-term lease agreements are becoming more prevalent.
The investment market of Korea in real estate is also expected to gain pace with newer investment opportunities coming into existence.
Malaysia
Malaysia’s real estate supply is expected to exceed the demand in the current year far exceeding the demand as all builders want to finish stocking up the supply side before the Good and Service Tax is implemented by the government.17 million square feet is expected to come online between 2015 – 2017 and the demand shall have to double by then to absorb such supply which is unlikely given the anticipated slowdown in the exports to China slowing down the demand for official and industrial space and also impacting residential rentals adversely.
The challenges seem graver with the rising cost of infrastructure and logistics, higher property gain tax recently imposed, banning of interest capital schemes and the impending GST.The financing difficulties also pose a challenge for the buyers. However positive signs are seen in commercial space with governments plan to increase the population of Kuala Lumpur from 6 million to 10 million combined with strong foreign capital inflow. Rapid urbanization shall also contribute positively to the real estate industry and increase in consumption shall be seen in office spaces.
The onus lies hugely on the government to stabilize the industry with better reforms, relaxing taxation and availability of easier and cheaper credit. How Malaysia shall fare in this sector is something that we need to wait and watch.
New Zealand
The country is faring well in economic terms and all factors show a positive trajectory strengthening the economy and encouraging requisite spending-
Falling unemployment rates – 5% from around 6%
GDP growth – Average of 2.8% from FY 14-FY18
Positive Inbound migration
Lowering inflation -1%-3% range
Soaring New Zealand Government’s operating balance before gains and losses- Expected surplus of NZD 3 billion from deficit of NZD 2.6 billion this year.
The demand for office properties have increased as indicated by the steadily declining vacancy rates and increase in the office rentals. Not many new properties coming up are also contributing to this both in case of prime and secondary grade office. The average yield is also higher for places like Auckland at 8.4% steady for prime grade office in Wellington measuring 8.1%.
Increase in sale in retail sector with additions such as recreational goods, footwear, clothing and accessories have given a boost to retail markets. The yields are also stable at 6.85 % between September 2013 – March 2014.Expected increase in population with rise in construction of supermarkets and hardware stores adding further 6,400 square meter to the retail space is certainly going to impact the retail sector positively lowering down the vacancy rates and increasing the rentals.
Substantial growth in the residential housing sector was seen with YOY increase in prices by 8% between 2Q13 and 2Q14 and similar growth in anticipated though at a slower pace in future. Factors contributing to such drastic price rise were limited supply, economic growth and inbound immigration. Auckland anticipates 13000 units to be constructed year on year to meet the current housing shortages.
Singapore
Ranked as one of the most competitive economies in Asia, the country’s economy is anticipated to soar between 2014-2018 while remaining moderate in the year 2014. Country saw a decline in unemployment rate in 1Q14 at 209% with the median wages of labor community rising by 5% due to higher vacancies and lower supply. The growth recorded n 1Q14 is steady at 4.9% and expected to rise further to 5% YoY from 2014 – 2018. Construction and manufacturing industry have a major share in this growth contributing 6.8% and 9.8% respectively.
The real estate industry continues to remain upbeat showing signs of upsurge with 1Q14 investment up by 24% at SGD 4.7 billion with housing sector contributing 41% to it. Increase in residential property is soon expected with steady rise in population which is expected to reach 6.1 million mark by 2018, 13% above the current population in 2014.
The exponential rise in demand has led to paramount increase in office space supply over the last decade with fresh space of 7.43 million square feetdelivered only in a matter of three years (2009-12) .1Q13 reveals total office space available in Singapore at 52.49 million square feet with an average of 1.10 million square feet space added year on year in last 10 years.The huge supply is met by robust demand which is led by competitive pricing of offices vis-à-vis other countries thus attracting companies dealing in diverse sectors from all over the world to develop their base here and expand operations. The office space is still low compared to demand thus raising rentals for Grade a space by 10.1% in 1Q14 with further upward trend expected.
The Insurance, energy and commodities, professional services, and IT firms have positively affected the leasing activities giving boost to leasing markets. Major inquiries from China, India and Middle East have also created positive trends for the markets reducing overall vacancy rates.
Total retail property stock stands at 36.86 million square feet in 1Q13 &is expected to rise further by 5.65 million square feet by 4Q17. This is led by the rise in demand with giant shopping malls and commercial properties under construction and on the cards. Food &Beverage industry and fashion industry also contributes largely to demand with the former witnessing a spike in sale by 4.3% in January 14 as compared to December 13.The tourism receipts also rose in 2013 to SGD23.5 billion with record tourist reported at 15.5 million giving boost to the hotel industry.
However a decline in residential markets is seen with YoY sale decreasing by 32% between 2012 & 2013 and sale of secondary homes being halved during this period. Marginal price decline between 1.5% - 2% were also seen in resale of luxury condominiums. The buyers are seen declining as they expect the prices to fall further and also on account of stricter financing rules and changes is property tax regime thus contributing to sluggish demand in secondary housing.
Thailand
The political atmosphere in 1H14 and the subsequent decrease in the public spending, 10.9% decrease in tourist population and negative impact on exports and peoples sentiments have caused a slowdown in Thailand’s economy on a whole. The economy witnessed sluggish growth at 2.9% in 2013 also due to similar factors. However with political stability and government initiatives to promote niche industries for export purposes, it is assumed to take pace in 2H14 and an expected GDP growth at 4.5% is foreseen.
Political impact was also seen in decline in demand for office spaces by small to mid-enterprises with a 1.4% decline in occupancy rates in 1Q14 at 90% as they moved to more affordable spaces or downsized their business. A marginal increase by 0.3% of lettable office area was noticed in Bangkok during the same period.In 1Q14, the net absorption figures recorded a negative value for the first time in eight consecutive quarters. Surprisingly the rentals saw an increase in 1Q14 with Grade A areas reflecting a QoQ increase of 1.5% despite the negative sentiments of the people. With the instability issues now settling in we shall hopefully see better supply and demand with decreased vacancy rates in the remaining 2014.
The total retail space stock of Bangkok stands at 5.26 million square meters with shopping malls covering the largest space of 59% followed by community malls then lead by superstores. Further space of 6.36 lacs square meters shall be built by the second half of 2014 with major occupancy by shopping mall again. The vacancy ratio of retail space is very low at 5% and no to negligible changes was seen in retail rentals. However the sale in retail sector was seen declining in 2014 due to a fall in customer’s confidence as measured by Customer Confidence Index which stood at 68.8 in March.
Thailand in 1Q14 saw a massive decline in fresh supply of residential units and condominiums in 2014 due to mixed negative factors .However with changes happening for better the residential market outlooks seems to be improving from here backed by an increase of 26% QoQ in residential unit supply in 2Q14. The average occupancy rate also increases to 64% way beyond the first quarter.
Though there was increase in tourism and hotel rentals from 2012-2013, the short term outlook currently seems negative due to political impact registering a decline in current year. However things are expected to improve in the next quarter with stability and growth taking an upturn.
Vietnam
Despite the staggering world economy, Vietnam has put up a good show with positive employment prospects, increase in FDI, lower inflation than estimated and a decent GDP growth at 5.42%. Sluggishness though seen in Real Estate sector is being paced up by government pumping in USD 1.42 billion for home buyers at a reduced interest rate of maximum 6% for tenure of 5 and 10 years and reducing tax rates to encourage buyers.It is also considering to revise the Law of Housing, Law of Real Estate and has already rectified the Land law creating a positive impact on the real estate markets.
The office market of Vietnam showed a 4 year high occupancy ratio of 89% in 4Q13 where in the demand was higher than the new supply reflecting recovery in the sector. The retail market of Ho Chi Minh and Hanoi acted differently. The stock of retail space in former city increased slightly and the occupancy ratio decline rate subdued over the last quarter of 2014. However Hanoi witnessed its retail space to double from 1st quarter of 2013 to last quarter mostly on account of opening of the Vincom Mega Mall Times City, supplying approximately 100,000 square meters in gross floor area. As a part of commitment made to World Trade Organization, Vietnam shall now have to open its doors for wholly foreign owned retail businesses increasing the opportunity for this sector in future.
Improvement is also seen after several years in the residential sector in 4Q13. An initiative by government of 50% reduction in Value added tax in leasing or selling commercial houses smaller than 70 square meters and lower than VND 15 million square meter has soared up demand for houses in this sector.The asking price in primary residential spaces also decreased from USD 752 to USD 728 per m2 in 3Q13 due to promotion programs, namely discounts, flexible payment terms, move-in conditions, and free management fees and parking fees.
The Real Estate debt market outlook however is bleak with total non-performing loans at VND 138 trillion.To combat this issue, government launched Vietnam Asset Management Company to restructure the banking system and resolve bad debt situation.
An effort has been made through this article to show how Real Estate is faring in different parts of Asia given varied s political and economic scenario with a look at the past and in anticipation of the future depending on the current trends and detailed analysis. Source: KPMG
