We may be in the thick of a subdued atmosphere of caution and uncertainty, but there’s something to be said for Dr Megan Walters’ unabashed enthusiasm – not just for property, but particularly the Asia-Pacific region.
Based in Singapore, the head of research, Asia Pacific capital markets for Jones Lang LaSalle (JLL), hovers around the word ‘cautiously’ when discussing her ultimately optimistic outlook.
The next 12 months are likely to be uncomfortable, she concedes – but she refers to the Asia Pacific as the “bright spot” in the global property universe.
Within the region, people are “cautiously optimistic about the global growth prospects”, she says, but in its favour are the dynamics of its population.
“At the end of the day, growth in Asia Pacific is fundamentally driven by people with savings, rather than credit,” says Walters.
All of the basic human functions generate economic growth, she points out. “It’s sustainable levels of growth as opposed to what you might describe as credit-driven levels of growth that we saw, really, throughout all advanced economies in the boom from 2004 to 2007. It’s not to pick on any particular country; we were all caught up in it.”
Walters doesn’t think Asia has gone wrong though, and she’s more than a bit excited about its prospects, particularly China.
“China is one of the biggest drivers of global economic growth. It’s one of the key components of the growth part of GDP, globally.”
As for concern in Australia that China’s appetite is far from insatiable, Walters argues China has a large population that must continue to urbanise to developed nation status – more specifically, a 70-80 percent urbanisation rate. At the moment, it sits at 50 percent, with the International Monetary Fund (IMF) projecting an urban population of 67.8 percent by 2030.
“So you’ve still got a lot of people in rural economies that need to move up the value chain in terms of going through the manufacturing process, moving to services-based employment. I think China’s still got a very long way to go in terms of its build out of residential units, offices, industrial [and] retail property, all of which takes commodities.”
Walters doesn’t see any slowdown in this urbanisation process, except where China may engineer one in the short term to ensure a sustainable level of growth of about 8.5 percent. The IMF has forecast China will achieve 9 percent next year, she notes.
“The Chinese Government, as far as I’m aware, has deliberately chosen to slow down its rate of economic growth because it’s running at a speed it was feeling was unsustainable ... Now that’s quite different from some people who believe China’s headed for some kind of hard landing. I don’t see that.”
Urbanisation is where the progress is occurring, with 30 million people a year moving to cities.
“That requires a phenomenal amount of housing and all forms of commercial property to be constructed over the next 10 to 15 years.”
In advanced economy cities, she adds, net additions to office stock are between 1 and 3 percent per year (taking into account demolitions).
“The current new supply of office space in the development pipeline is around 2.7 percent for Sydney CBD and around 6.7 percent for Melbourne CBD, to be completed by 2013. The new supply of office space measured by net absorption in emerging economy cities can be as high as 20 percent a year.”
On the issue of funding such development, Walters says the money is there for projects that have the right characteristics – it’s all about keeping it simple.
“For good quality developments that are mainstream, with clear structures that are well understood, that have identifiable tenant demand at the end of the day, there’s money out there available,” she says.
“I think what people don’t want is complexity. We’re back to a much more sustainable, straightforward style of investment.”
Walters says a lot of the money is coming from within domestic China – a nation that spends around 48-50 percent of its GDP on fixed asset investment while most advanced economies spend closer to 20 percent.
Adding another dim-ension to China’s growth is that state-owned enterprises are “fully engaged with western businesses”, says Walters.
Her particular focus on China comes down to its expansiveness. It pulls in exports from all over the region, she argues.
“It’s totally integrated into the supply chain around the region. And so that draws in components and exports from Taiwan, South Korea, Japan, South East Asian nations, commodities out of Indonesia, oil, coal out of Australia. It sucks it all in. It’s a big engine and it’s pulling everything else into it.”
She also suggests Japan is not in as bad a situation as many believe, noting that it is now the third largest economy, having been overtaken by China.
“There is a continued demand for good quality property in Japan,” she says, adding that it produces technology components that people want to buy.
“I appreciate there is a government debt issue. But for investors looking at a three- to five-year investment
horizon, Japan’s a great real estate market.”
Walters acknowledges the current debt woes of many advanced economies, but she measures the health of a market by transaction volumes each quarter – Japan has rebounded after a poor second quarter, following the tsunami, with real estate volumes up to US$4.7 billion for the most recent quarter.
However, she suggests India has some way to go in attracting greater investment, with it being “less connected” than other Asia Pacific economies. Property rights are an issue, Walters says.
“Landlord and tenant markets do not spring to life fully formed. So investors can’t come to Asia and expect there to be landlord and tenant markets in the same way you have them in New York and London. They take time to develop,” she says.
“So first of all you need rights. You need the ability to transfer rights to a third party, whether that’s to rent out the building or to sell [it], and then you need the ability to have those rights enforced. So you need a rule of law, you need a court system that works.”
Investment trends
In terms of investment trends in general, Walters identifies two in particular: firstly, “in the continued rise of the international investors with global allocations to real estate”.
Secondly, and in the longer term, the rise of investors from the “official sector” in Asia Pacific – sovereign wealth funds, government managers of countries’ international reserves and managers of government pension schemes – moving into real estate investment in the region, as well as into other markets, such as the US and UK.
“These groups are starting to consider increasing allocations to real estate,” Walters notes. “The classic example over the last 12 months has been the National Pension Service of Korea.”
Walters identifies Australia as a “key destination for global capital”, pointing to Jones Lang LaSalle’s Transparency Index, on which Australia is placed as the world’s most transparent market. Moreover, the Asia Pacific region is increasingly relevant to Australia.
“Whereas 20 years ago the US mattered to Australia, now emerging Asia does. Historically, a 1 percent shift in US GDP had an effect of 0.4 percent in Australian GDP, now that effect has completely disappeared.”
Ultimately, Australia is a key market in Asia Pacific.
“It provides real estate investment opportunities with excellent quality institutional arrangements, [for example], rule of law, financing with close links to the emerging economy growth story,” Walters says, adding that she has a positive outlook for commercial property in Australia.
“Based on economic growth stronger than other advanced economies and tied to the high growth markets in emerging Asia, international investors are keen to buy here.”
