Emerging Trends in Real Estate® Asia Pacific 2014

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STRONG REAL ESTATE FUNDAMENTALS SEEN FOR ASIA IN 2014, SAYS EMERGING TRENDS IN REAL ESTATE® ASIA PACIFIC 2014; JAPAN REGAINS STATUS AS A MAGNET FOR INVESTMENT AND DEVELOPMENT
Survey from ULI, PwC Ranks Tokyo, Shanghai and Jakarta as Top Real Estate Investment Markets

TOKYO (December 13, 2013) – Japan has regained its number one status as a magnet for real estate investment and development , due in large part to the government’s ambitious economic stimulus plan, according to Emerging Trends in Real Estate® Asia Pacific 2014, a real estate forecast jointly published by the Urban Land Institute (ULI) and PwC.

The report ranks Tokyo as the top market in the Asia Pacific region for investment and second for development over the next 12 months. In addition to Tokyo, other cities in Japan, including Osaka, Fukuoka and Sapporo, are gaining appeal among investors, notes the report. The positive outlook for Japan, it says, is reflected in a surge of properties purchases in anticipation of rapidly rising prices.

Emerging Trends, which is being released today in Tokyo, provides an outlook on Asia Pacific real estate investment and development trends, real estate finance and capital markets, and trends by property sector and metropolitan area. It is based on the opinions of more than 250 internationally renowned real estate professionals, including investors, developers, property company representatives, lenders, brokers and consultants.

“I strongly believe that the recovery is here and it is real,” said ULI Japan Executive Committee Member Fred Uruma, president and chief executive officer of Touchstone Capital Securities, Co., Ltd. in Tokyo. “The yield expectation may presently exceed reality, but the rental market has truly hit bottom, and a smooth recovery is well on its way at the asset level. However, this time around, the market will be one for those who truly understand the fundamental breakdown of the real estate market in Japan.”

For the Asia Pacific region as a whole, Emerging Trends predicts that real estate fundamentals will remain strong in markets throughout Asia in 2014, with stiff competition for conventional assets in prime markets boosting the popularity of niche property sectors and secondary markets for investments. The report points out that, unlike other asset classes, real estate in Asia “barely flinched” this year in response to the tapering of the U.S. economic stimulus and expectations of higher interest rates. This is due, in part, because of the increase in sovereign wealth and institutional capital being directed to Asian markets, as well as the substantial volume of Asian capital being exported from China, Singapore and South Korea into real estate assets across the region. Japan, it notes, is one of the largest beneficiaries of capital flows from other regions within Asia.

The Tokyo comeback is no surprise to Japanese real estate investors. Hiroshi Takagi, PwC Japan Tax Partner, a leading advisor to J-REITs and international funds, noted that there has already been a significant increase in transactions and prices are going up. Global funds in particular are increasing investment in Japan as they see little downside risk due to the low interest rate environment and optimism about the economy.

Outside of Japan, the survey found continuing interest in assets located in Asia’s emerging markets, including Jakarta and Manila. The reason, says Emerging Trends, is that as “cap rate compression continues to squeeze returns, and with higher interest rates seemingly just around the corner, investors are drifting to markets that can provide the kind of returns they are unable to tap elsewhere.”

Top Investment Markets for 2014

  • Tokyo – Claiming the top spot is Tokyo, which has emerged as an investment magnet soon after the introduction of dramatic economic reforms aimed at boosting the economy. Transaction volume picked up significantly in 2013 and, with the success of the stimulus program yet to be determined, buying is expected to continue next year. Tokyo is ranked second for development prospects for 2014.
  • Shanghai – Shanghai, described as an “evergreen” market for investors, is ranked second for investment prospects. Despite cap rate compression and stagnant rental growth, real estate in the city continues to draw international investors because Shanghai is widely perceived as a well-known, low-risk market for those who are unwilling to venture into lesser-known cities. Shanghai offers a “level of comfort” to funds with a mandate to place money in China, says the report. The city is ranked fourth for development prospects.
  • Jakarta – Jakarta is ranked third for investment potential, despite a lack of market transparency, and difficulties obtaining entitlement, and competition from local businesses and individuals. Newly released office stock in Jakarta is of better quality than in previous years, and there continues to be strong demand from companies seeking space, including the currently under-supplied central business district. Jakarta is ranked first for development prospects.
  • Manila – Manila moves up to fourth place for 2014, the result of a fast-growing economy, the increasing popularity of the city as a destination for multinationals seeking outsourced services, and a growing awareness that the problems long associated with lack of transparency and governance issues are improving. The city is also benefiting from a young demographic, strong capital inflows from local citizens working overseas, and a workforce with a cultural affinity with the West. Manila is ranked eighth for development potential.
  • Sydney – Sydney rounds out the top five markets, holding its appeal for both local and foreign institutional investors despite relatively weak fundamentals in its office and retail sector, and some concerns over the financial and mining sectors. Still, with a limited supply of office space in the pipeline, investors are bullish about the city’s central business district; and its residential sector has experienced a solid rebound. Sydney is ranked eleventh for development prospects.

Investment Prospects by Property Type

  • Industrial/distribution – The industrial/distribution sector is the top-rated property sector for investment potential. Emerging Trends notes that the sector is undersupplied, due to extra demand for storage facilities being fueled by increased online consumer spending in Asia. Best bets for investments in industrial properties: China’s secondary cities, as well as Shanghai and Guangzhou.
  • Residential – Residential ranks second, although the report cautions about high prices affecting housing affordability, the likelihood of higher home mortgage interest rates, and the ongoing impact of government intervention in China to control further price increases. Best bets for residential investments: Manila, Tokyo and Jakarta.
  • Office – Office space is listed third for investment potential, with the mediocre ranking attributed to “fevered competition from too much investment capital fighting over the same deals, especially in core assets. Best bets for office investments: Tokyo, Manila and Jakarta.
  • Retail – The retail sector ranked fourth for investment potential, with some concerns being expressed about overbuilding in some secondary markets. However, opportunities in prime downtown locations still hold much promise. Best bets for retail investments: Manila, Jakarta, Tokyo and Shanghai.
  • Hotel – While hotels ranked fifth for investment potential, the sector is still seen as general solid, due to a rapidly growing tourism industry and relatively high yields. Tokyo leads as the best bet for hotel investment, as the city begins preparations to host the 2020 Summer Olympics.

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About the Urban Land Institute

The Urban Land Institute (www.uli.org) is a global nonprofit education and research institute supported by its members. Its mission is to provide leadership in the responsible use of land and in creating and sustaining thriving communities worldwide. Established in 1936, the Institute has more than 30,000 members representing all aspects of land use and development disciplines.

About PwC

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About PwC Japan

PwC Japan (PricewaterhouseCoopers Japan) represents PricewaterhouseCoopers Aarata, PricewaterhouseCoopers Kyoto, PricewaterhouseCoopers Co., Ltd., Zeirishi-Hojin PricewaterhouseCoopers and their subsidiaries. Each entity is a member firm of the PricewaterhouseCoopers global network in Japan, or their designated subsidiary, operating as a separate legal entity.