Emerging markets are on a building tear, and nowhere is that more evident than Asia. Flush with capital from years of high savings rates and with a population seeing substantial increases in wealth, countries in the region have focused on providing the housing, infrastructure and commercial buildings needed for the millions of new urbanites that flock into cities from the countryside each year.
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Low interest rates and rapidly growing economies, two situations that are strikingly similar to the ones that created America's home bubble of the 1990s and 2000s, are also at play. Cheap capital has become available to a larger portion of the population as they build up wealth, and a demand for housing that exceeds supply jacks up the price of homes on the secondary markets. This is a post financial crisis boom that has generally bypassed developed countries, especially in the United States. (For related reading on the housing bubble, see Why Housing Market Bubbles Pop.)
Households in advanced economies have taken to deleveraging, and real estate in those countries has suffered as a result. The construction industry will be more of a drag on gross domestic product (GDP) than a boost, and a lack of growth in the sector may keep unemployment high, in both construction and related industries. Governments in several Asian countries have taken measures to cool down their housing markets. While it has been over a decade since the 1997 Asian financial crisis, policymakers still remember the role that real estate played in dragging economies into the gutter. This is a good thing, though. China teeters on the edge of a housing bubble thanks to its monetary policy (keeping the yuan low in order to encourage exports) pointing capital toward real estate investment, and because its growing middle class wants a piece of the pie.
"The Knight Frank Global House Price Index," in the second quarter of 2011, showed that several Asian countries were up over 2010: Hong Kong (26.5%), Taiwan (12.7%), Singapore (6.7%) and Malaysia (6.5%). While these figures seem high (Asia has had the highest home price inflation for the last seven quarters), they also point to government policies aimed at cooling down property inflation gaining traction. Singapore's 2009/2010 Q2 growth rate was 37%, China's 36.8% and Hong Kong's 24.9%. According to the "Knight Frank Prime Global Cities Index," which tracks luxury property prices, Asian cities continued to dominate the top 10 ranking. Hong Kong's prime real estate grew 16.1% over 2010, Beijing by 8.9%, Shanghai by 7.7% and Singapore by 3.4%.
According to "The Urban Land Institute's (ULI) Emerging Trends in Real Estate Asia Pacific 2011 survey," the Asian cities with the best investment prospects are:
3. Hong Kong
5. Guangzhou, China
6. Ho Chi Minh City, Vietnam
8. Taipei, Taiwan
9. Jakarta, Indonesia
10. Kuala Lumpur, Malaysia
Limited land availability and a sophisticated, mature market has allowed Singapore to weather the financial storm better than many others. GDP growth has been somewhat erratic, but is expected to remain fairly calm for the next several years. Investors also appreciate Singapore's stable government.
As China's largest real estate market, demand has been high in Shanghai for years. Most growth in China's real estate market has come in "Tier 1" cities, though the central government's desire to curb rapid growth, before bubbles pop, will likely reduce the availability of credit for mortgages. A survey conducted by the ULI, suggests that investors view Shanghai's residential properties as possible "sales" (37.3% of respondents), with "buy" recommendations at 33.33%.
As the investment hub of Asia, and with limited availability (it's an island, after all), demand in Hong Kong has remained hot despite the financial crisis. However, new developments aren't popping up as soon as expected, with only 20% of investors calling this area a buy compared to 35.7% suggesting "sell." (For related reading, see The 5 Most Expensive Places to Buy a Home.)
The Chinese government is looking to cool off real estate prices by limiting the sale of properties to investors, instead focusing on those looking to live there. Beijing has been a focal point because not only is it China's capital city, but also because the volume of real estate transactions was so high in 2010.
Guangzhou benefits as the mainland neighbor to Hong Kong. For years the Chinese government limited the number of people allowed to enter Hong Kong, as a way to stem the tide, following the British handover to China. The city's economy has grown by double digits as of late, but much of the real estate growth is expected to be in the retail sector.
Ho Chi Minh City, Vietnam
Vietnam has been dubbed the next China by export-driven companies looking for cheaper labor. Indeed, labor costs in China have risen, relative to those in Vietnam, in recent years, and foreign direct investment has skyrocketed from $2.4 billion in 2006 to $7.6 billion in 2009. Exports made up 68.3% of Vietnam's GDP in 2009 compared to 50% a decade earlier. The country has been investing heavily in infrastructure, in order to accommodate the growing population, and survey respondents gave the city a 47.2% "buy" rating.
While Tokyo may be considered the most modern out of the cities in this list, it's also located in a country with a perennially struggling economy. Japan's GDP growth has steadily declined since its heyday in the 1980s, and real estate was one of the primary drivers behind much of the country's economic problems. Low interest rates, designed to spark economic growth, mean that the city is swollen with capital, but with a rapidly aging population demand may not be as high as investors would hope. Of respondents to the survey, nearly half suggested holding out on investing in Tokyo real estate for the time being. (For related reading, see High GDP Means Economic Prosperity or Does It?)
Only the Taiwan Strait separates Taipei from the world's second largest economy, China. Like Japan, the population is aging due to low birth rates, a telling sign considering that real estate prices require more demand than supply to continue growth. Additional pressure has been brought by a shift from downtown Taipei to the suburbs by developers, a major factor in the 65.3% "hold" recommendation.
Indonesia has rebounded nicely from the 1998 Asian financial crisis, but GDP growth is still below that of China and Vietnam. Exports have fallen as a share of GDP for most of the previous decade, but a healthier business climate has led to rapid foreign direct investment (it reached $4.8 billion in 2009). Survey respondents gave the city a 40.4% "buy" rating.
Kuala Lumpur, Malaysia
Malaysia was hit especially hard by the Asian financial crisis, but has since recovered quickly. GDP has increased from $79 billion in 1999 to $193 billion in 2009. The primary drawback is the extreme role that exports play in the economy: they made up 96% of GDP in 2009. While the unemployment rate is low (3.2% in 2010) investors are still on edge about future prospects, with over half of respondents giving the city a "hold" rating.
Analysts are unsure of the exact causes of the housing boom. Some view the price inflation as a function of investment speculation, which has been the case in areas with limited land such as Hong Kong, Singapore and Taiwan. Studies of the Chinese market showed year-on-year price increases in the top cities between 68 and 80%. However, with international institutional investors looking to domestic markets for cheaper acquisitions, international acquisitions have tumbled from 2007 highs.
The Bottom Line
Real estate investors should temper their expectations to a certain degree when it comes to price appreciation and investment return in these cities. Governments have an incentive to keep real estate from becoming overheated and leading to inflation, or a burst bubble. Even with high demand in countries such as China, some Asian markets are becoming more mature and are less likely to see the wild swings in prices. The days of double-digit rates might be over, but compared to Western real estate markets investors may still find that some return is better than a fistful of foreclosures. (For related reading on foreclosures, see The Pitfalls of Buying a Foreclosure House.)
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