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REAL ESTATE: Asia Pacific (Including China) Capital Markets Market View – Q3 2012
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The Investment Market Remains Stable but External Factors Continue to Cloud Short-term Outlook
Buying momentum in key real estate investment markets in the Asia Pacific region remained strong in Q3 2012. Investment turnover declined by 11% q-o-q to around USD 17 billion, but this figure was still above the three-year quarterly average by 13%. Worries over the Eurozone debt crisis took a back seat to concerns over the regional impact of the Chinese economic slowdown and investors consequently retained a certain degree of caution. No transactions worth over USD 1 billion were recorded, but market segments below USD 250 million continued to grow. 
 
Investment flows remained high in major markets, including Hong Kong, Singapore, Japan and Australia, although transaction volume declined slightly on a q-o-q basis. Activity picked up significantly in South Korea and Taiwan, whilst New Zealand also witnessed increased activity. India and China both recorded a quiet Q3 2012. 
Cross-border investment activity remained relatively stable in Q3 2012, albeit cross-border turnover decreased slightly. Both regional and western investors remained active with Singaporean and Hong Kong property funds and the South Korean National Pension Service (NPS) being the most active groups. Australia, China and Japan remained the preferred destinations for foreign investors.
 
Despite the ongoing worries over external factors including the Eurozone debt crisis and weak United States economy, investors remain optimistic regarding the medium to long term outlook for the region. There is a strong pipeline of deals in key markets in the coming one or two quarters, but given that turnovers of Q2 2012 and Q3 2012 were both at the upper end of historic quarterly levels there is unlikely to be a significant increase in turnover in the final quarter. 
 
Total Commercial Real Estate Turnover in Asia Pacific

altEconomic Update
Weak manufacturing, business sentiment and consumer confidence readings all indicated gloomy short-term prospects for the region. Concern over the economic slowdown in China and its possible impact on the rest of Asia Pacific continued to grow, with China’s GDP growth expected to average around 7%-8% in 2012, its second lowest figure in a decade. 
 
GDP Growth by Country (%, Y-o-Y)
 
 
Lending and Capital Raising Environment
The overall lending environment has improved a bit as several markets including Australia, China, Philippines, South Korea and Thailand reduced their rates policies during the period, whilst India cut its cash reserve ratio and home mortgage rate. However, banks remained selective towards providing lending to developers in markets including Australia, China and India although the pick-up in residential sales in the latter two markets helped improve developers’ liquidity to a certain extent. Banks in other parts of the region continued to adopt a relaxed attitude towards property lending and lending rates staying low.
 
altInvestment Market Activity
India and China recorded a quiet Q3 2012 as both countries faced up to a slowdown in growth and a tight financing environment that is deterring fixed asset investment. It remained very complex for overseas buyers to complete deals in China given the lack of quality stock, difficulty in establishing an appropriate ownership structure and often lengthy period it takes to finalise agreements. Nevertheless, several foreign groups still had numerous transactions in the pipeline. 
 
Acquisitions by Market
 
 
 
Cross-border Investment
China continued to attract foreign investors despite the ongoing regulatory barriers and strong competition from domestic buyers. Office assets in Shanghai remained the primary focus for most buyers. Other foreign groups expanded their gaze to retail properties in tier-II cities, with deals for two shopping centres in Xi’an and Wuhan reflecting this trend.
 
altActive Market Investors
A number of key markets including Australia, Japan, Singapore and Hong Kong recorded a rise in investment turnover for retail properties during the 12-month period to September 2012. Although property funds view the Chinese retail property sector as one of the asset classes in the region with the biggest potential for growth, there is very little quality product currently available for sale, which constrains investment in this sector.  In Hong Kong, the recent slowdown in spending by Mainland Chinese tourists has negatively impacted occupier demand for prime retail space in what was previously a very active segment of the market.
 
China’s industrial sector is gaining more interest from investors, as well as limited land resources allocation to logistics use restricting the introduction of new supply.
 
Top Sectors by Investment Turnover
 
Capital Values and Yields
Slower capital value growth was observed in Asia Pacific during the period, in tandem with deceleration of rental growth in several markets. However, the overall trend for capital value remained upward as key markets in Greater China and New Zealand recorded positive gains in capital value on the back of solid investment demand. Yields remained steady in most markets. More markets saw compression in yields in the office sector compared to retail and industrial. Guangzhou, Singapore, Taiwan, Kuala Lumpur and New Zealand were the markets seeing yields compressed further. Shanghai was the only market to record increases in yields across all three sectors as investors required higher yields to justify weaker rental forecasts.
 
altMarket Summaries
China saw investment turnover decline significantly in Q3 2012 but investors nevertheless retained a strong interest in high quality assets. For foreign investors the main hurdles remained the lack of quality stock and the difficulty in establishing an appropriate ownership structure. Domestic investors, particularly State-Owned Enterprises (SOE), continued to dominate activity as they generally buy for self-use. Local insurance companies completed two major office deals and are expected to become more active.
 
The tight supply of prime office space in Beijing continued to ensure that this asset class remained the major focus for investors given the uptrend of rent and capital value. However, difficulty in establishing appropriate ownership deterred most foreign investors. 
 
This quarter saw upward correction of yields in Shanghai as the outlook for the commercial property market weakened, particularly for the office sector. Investors are reviewing their pricing to justify their purchase decision, with the exception of cash-rich domestic groups who are less sensitive on pricing.
 
altLandlords in Guangzhou remained optimistic on office capital value with more leasing enquiries from domestic companies and SOEs recording in Q3 2012, thereby office prices continued to move upward.
 
Market Outlook
External factors, primarily the Eurozone debt crisis and weak United States economy, will continue to weigh on investor sentiment in Asia Pacific in the months ahead and slow the decision making process to some extent. However, the region is expected to record steady investment activity during the reminder of the year and there is a strong pipeline of deals in several major markets.
 
Investor interest in the Chinese real estate market remains firm despite weaker economic growth, with retail assets particularly sought after.
 
Retail assets will continue to be a focal point for investors in China on the back of long-term growth in domestic consumption, but the limited availability of investment grade properties will continue to inhibit deals. Sectors offering higher yields, most notably industrial and logistics, will attract increased interest. 
altalt 
 

By CBRE 
 
 
 
 
 
 
 
 
 
 
 
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