Asian property: reaching ever higher

A SUPPLEMENT TO EUROMONEY/DECEMBER 1996

Supply and foreign demand

Foreign companies are driving top-end property prices ever higher. But will underlying demand keep pace with development plans? Gill Baker reports on the property markets of Asia

The ebb and flow of foreign confidence in Asian countries has had a dramatic affect on demand for Asian property. While domestic fortunes will always constitute the core of underlying demand for property, it is overseas players which are driving the top end of the market.

Hong Kong remains the powerhouse of Asia’s property markets and the 1997 hand-over to China was well and truly factored into the market a long time ago. Hong Kong’s success looks set to spill into mainland China’s property market, with massive growth forecast in office supply. In China foreigners are propping up the commercial and top-end residential market in the key centres of Shanghai, Beijing and Guangzhou.

But restrictions in a number of Asian countries on foreign ownership of property have kept most foreigners firmly in the leasehold and rented end of both the residential and commercial markets.

Where market regulations are more liberal, foreign commercial demand for business property has led to growing investment from developers, often from neighbouring Asian countries. Singapore-listed Wing Tai Holdings is a typical example in its attempt to replicate its transformation from garment manufacturer to property developer in Singapore through its 45% owned Malaysian associate DNP Holdings. Analysts say DNP holdings has amassed 10.6 million square feet of residential and commercial land in Kuala Lumpur, Penang and Prai in Malaysia.

Many Asian property markets have started to mature. Research and valuation are taken ever more seriously and large-scale property development and investment companies have entered even the smaller markets. But a shortage of experienced analysts dogs Asia’s property market ­ a surprising number of research houses still do not cover the sector.

Opportunities for speculation abound in Asia’s diverse property markets. Hong Kong is riding another boom, Singapore is slowing down, while some say Thailand is on the brink of collapse.

Hong Kong

The Mass Transit Railway Corporation project and the hand-over to mainland China are old news in Hong Kong. Land reclamation is now the largest single factor affecting Hong Kong’s cramped property market. Although the market is at its crest, the island’s encroachment into the sea could be its eventual downfall. Analysts fear that land reclamation and continuing property development will cause an over-supply in the market. Listed Sun Hung Kai Properties, the largest property company in the territory, has said it will spend HK$14 billion ($1.7 billion) on development in the current financial year to June.

Most analysts still agree that Hong Kong’s property market is the one to watch. “Hong Kong is one of the best markets in Asia because of the shortage of supply and substantial demand, particularly in the top-end luxury residential market, and that will continue throughout 1997,” says David Runciman, Asia chairman for international property consultancy and estate agency Richard Ellis. Residential prices in Hong Kong have been hitting the highs reached in the 1984 boom at the peak of the last property cycle, and the bull run is expected to continue according to ING Barings.

Residential and non-residential sales rose an impressive 31.7% month-on-month in October, with 13,889 agreements signed for property across the board, according to latest Land Registry figures. Apartment sales alone were valued at HK$18 billion.

The performance of Hong Kong’s commercial sector, however, is open to debate. “There is a lot of speculation going on and some hope that Chinese money will come into the market,” says an analyst at ING Barings. In the long-term, however, there is still the spectre of over-supply in the office market in particular. The question is whether or not there will be sufficient demand in the future.

The Hong Kong and Chinese economies have been slowing relative to their heydays of double digit growth, yet property prices are still rising. Rents in Wan Chai North, Admiralty, Causeway Bay and North Point rose in October according to the Vigers/Bridge Hong Kong property index.

Singapore

Singapore’s property market appears to be defying the economic signals, remaining steady despite the slowing economy.

Although sentiment is weak in the residential market, according to Tan Khow Siong, property analyst at Deutsche Morgan Grenfell, the standstill between buyers and sellers has kept prices stable. Research by Richard Ellis describes the deadlock between buyers and sellers as “a temporary disparity in expectations between sellers and buyers as both wait for a clearer direction of the market”.

Says Scott Poland, a London-based analyst at Citibank’s real estate division: “There has been a lot of speculation on the residential side, and that is where the concern is going to be. It’s going to be a tough year in 1997.”

The Singapore government’s measures to curb speculation, introduced in May, had, and continue to have an impact. Applications to buy private properties fell 40% from May to June this year. The measures include restrictions on housing loans and the introduction of a tax on income gains from property sold within three years.

But despite the crackdown, there were 11,000 applications for the 592 units in Pidemco Land’s new executive condominium developments of Eastvale and Westmere. And the market saw the launch of 15 new private residential developments in the third quarter, putting an extra 2,300 units onto the market. Richard Ellis still expects to see a 10% average price increase for the full year.

The market is likely to remain patchy for the rest of the year unless the price deadlock can be resolved. But with the hand-over of Hong Kong, Singapore will continue to attract more business, and money.

Philippines

“We are in a sort of a limbo at the moment. We entered 1996 relatively bullishly but towards mid year there crept in more anxiety about supply,” says Raffy Manalaysay, director of research at broker Crosby UBP Securities in Manila. “Now people are waiting for the so-called bubble to burst,” he adds.

Manalaysay is concerned by the rapid price rises of the past three years. But Crosby believes that no such bubble exists, just isolated problem areas, particularly in the high-end luxury residential market. The market has become fragmented with office and residential markets going their own separate ways.

“Our biggest area of concern is the high-end vertical residential market,” says Manalaysay. The ambitious Fort Bonifacio development, a 214 hectare former state-owned site which is being developed into Manila’s third business centre, is expected to have another dozen or so projects under way in the next six to nine months, many of them high-rise luxury residential buildings. But Manalaysay dismisses its effect, and that of satellite development Filinvest Corporate City, as discounted in the market already.

As a whole, the Philippine property market looks fairly healthy: the economy is expanding and finance is available for end-users. While office development continues apace in Manila’s business districts of Makati and Ortigas, there are also signs of growth in the pocket development north of Metro Manila. Says Citibank’s Poland: “The question is whether in two or three years time [Manila] will be overbuilt. The question then will be whether there are enough companies relocating to Manila. I seriously doubt it.”

Malaysia

Tighter monetary policy, which has cooled Malaysia’s economy, has also put a curb on the property market.

Malaysia’s residential property sales index, produced by Malayan Banking Corporation and the Rating Agency of Malaysia, rose from 100 to 163.86 points from 1994 to the end of the second quarter of this year, but fell in the second quarter as the government’s credit tightening measures came into force.

Government curbs include a M$100,000 ($40,000) levy on property purchases by foreigners and an increase in property gains tax to a range of between 15% and 30% for residents and a flat 30% for non-residents.

At Crosby Research in Kuala Lumpur, property analyst Lynne Chiang is cautious about the high-end residential market, particularly in the context of government restrictions on foreign purchases, and over-supply in the sector for the last two years. Chiang is also worried about the latest Malaysian bandwagon of bungalow lots ­ high cost second home resorts. Medium-cost residential property, however, is still looking good, supported by domestic demand. But, says Chiang: “We don’t have any screaming buys. Everyone is waiting for the cycle to slow down.”

The commercial property market is less healthy as over-supply poses a major problem. Although a number of businesses are moving from older buildings to newer offices, tempted by incentives such as rent-free periods and reduced service charges, Crosby sees occupancy rates falling from a current level of 90% to around 85%.

Thailand

Thailand’s property developers have not had an easy ride this year. The marked slowdown of the economy and a massive drop in the stock market have squeezed many firms to the brink of collapse. Small-scale residential developers have been hardest hit, but bigger players are also struggling.

But office construction continues and this is likely to add to the market’s problems in the future. The residential sector has remained static because of oversupply. Bank of Thailand measures to keep a rein on inflation and liquidity have also hit the property market, especially its curb on lending for property development.

The industry has also been rattled by the arrest of Prasong Panitpakdee, managing director of listed Somprasong Land, who, now out on bail, has been accused of falsifying financial statements. He has yet to plead. Commentators believe there is widespread fiddling by many property companies. The most popular scam is to book down-payments for houses as completed sales.

Lack of cash flow is also causing problems for property companies’ debt repayments, and this is likely to have a knock-on effect on the country’s banks and finance companies, a number of which are linked to their borrowers through family groups.

Among the troubled property companies, Rattana Real Estate and Country (Thailand) faces delisting from the Stock Exchange of Thailand after reporting losses for three consecutive years. Even Land and Houses, one of the country’s strongest developers, reported a 15.7% drop in third quarter profit to Baht437 million ($17 million).

Thai authorities have spent the year devising ways to stimulate the property market, including a proposal to allow for listed property trusts. The latest plan is to create a secondary mortgage corporation, majority owned by the government, which would enable lenders to sell their portfolios in the event of a liquidity crisis. But setting up a committee, and drafting the necessary legislation could be a lengthy process.

China’s two-tier market

The old Chinese rule of thumb is: keep a third of your wealth in property, a third in gold and a third in cash. But that maxim could be thrown on its head as foreign investors start to circle the markets of Shanghai, Beijing and Guangzhou.

Hong Kong property companies, led by the listed Henderson Land spin-off, Henderson China, are making serious investments in the People’s Republic of China. This is a growth market as foreign companies set up business in China and look for office and residential space. Research by Morgan Stanley estimates demand for additional office space at 70 million square feet in Shanghai and 60 million square feet in Beijing. But it is becoming a two-tier market: in Shanghai rental and capital values of poor quality buildings are falling as prospective tenants become more discerning.

China’s transition to the free market is not over yet and Morgan Stanley sounds a note of caution: “The property market in China is a relatively new phenomenon, with, as yet, a less-than-well established legal planning and regulatory framework; and what framework there is may be changed in the future.”

Foreign developers such as Henderson China are selling most of their property to foreign buyers, usually in US or HK dollars. Henderson China reported net profit of HK$564 million for the full year to June 1996, with an estimated HK$477 million derived from office and residential sales at the Beijing Henderson Centre, where prices average HK$2,560 (US$330) per square foot. Henderson China’s property portfolio is valued at around HK$12.5 billion, with 22 projects signed and under construction or clearance. But, warns Morgan Stanley, the property market for foreign buyers is finite. Long-term success will depend on the ability to sell to the local market.