06/02/2008

Asian property shines

Falling interest rates and high relative yields could benefit a long-term investor in Asian property markets, according to research published today by leading investment house, Standard Life Investments.

In the latest edition of Global Insight, its monthly investment view, Standard Life Investments outlines why, with Asia Pacific economies withstanding the worst of the slowdown originating from the US and a move towards looser monetary policy, investors’ appetite for physical property within the region should remain solid.

Richard Batty, Global Investment Strategist, Standard Life Investments, said:

"The deterioration in the global economy, in particular the possibility that the US could enter a recession, has been vexing investors in recent quarters. In many different countries, concerns have moved on from the US sub-prime mortgage market last summer to the impact on corporate earnings of a much wider squeeze in credit availability. One important conclusion in our research has been that both the fiscal, but especially the monetary, response would be greater than investors expected. Such a response is positive for certain long duration assets, such as global bonds and some equities, but also parts of the commercial property market."

"While economic growth across the Asia Pacific region will certainly slow, it is not expected to see recession. At the same time, emerging market central banks are building up foreign exchange reserves. This is an important development as it means that the Asian region is much less vulnerable to changes in global liquidity flows than, say, during the 1997-98 emerging market crises. Any headwinds to growth can also be met by local interest rate cuts, especially if continued appreciation of the Chinese RMB allows Asian currencies more flexibility."

"A final point concerns local demand for property assets. Liquidity, for example, still appears plentiful for investors such as pension funds, endowments and sovereign wealth funds. Further diversification into other investments appears likely. Property could be a natural home for such traditionally long investment horizon funds."

"Our analysis emphasises the importance of the broad monetary cycle to support commercial property returns, especially in the Asian region. The prime example is Hong Kong, which with its direct US dollar link has seen interest rates mirror those of the US Federal Reserve. Net property yields look attractive against effective funding costs. In Hong Kong, for example, interest rates are now below inflation, which is running at 3.8%."

"Commercial property across the region appears to offer value relative to funding costs. This is important in comparison with the lower relative yields on offer in many western property markets. Demand for office space remains high in Singapore, Hong Kong, Japan, China and Australia on the back of strong office employment growth and limited supply. Vacancies continue to fall and current levels are well below the long term average, while rental growth continues. From 2009 onwards, supply is expected to outstrip demand, but it is important to take account of stock that needs modernising."

"We currently hold an upbeat view on the Hong Kong property market and a somewhat cautious view towards the Singapore property market. However, the performance and the valuation of listed property shares in these two markets have partially reflected the diverging fundamentals. In terms of opportunities, we think the significant plunge in Japan, Australia and Hong Kong listed China property shares in recent months, as well as in the smaller markets in Asia, can provide investment opportunities for a longer term investor."