JEDDAH: The subprime crisis and subsequent housing market slowdown in the US has raised fears of recession. A recent report on the real estate market in Singapore and the Far East by KPMG opined that the US could still avoid deep recession and maintain some growth over the next two years. While most European countries were expected to maintain growth in 2008, in particular in Central and Eastern Europe, the UK is expected to feel the impacts from the global credit crunch with economic growth slowing to less than two percent.
Real estate investors, particularly those with high cash liquidity, who have traditionally seen the US and Europe as their natural investment home, are looking toward East. As an investment area, real estate is now emerging globally on the scale of other asset classes. The underlying real estate market reached a value of over $17 trillion in 2007. Seventy five percent of the investment market still remains in North America and Europe while Asia Pacific accounted for around 20 percent. Little of this underlying market is listed, but Asia Pacific leads in this area with around 15 percent versus a global average of nine percent.
The era of exceptional returns from global real estate came to a close in 2007 but registered overall growth for the year, which increased by a healthy 9 percent to reach around $760 billion. Events in the subprime market in the US resulted in a credit-crunch in a number of countries, and closed out a robust period of debt-driven investment.
The credit crunch in mid-2007 however, caused many investors to review the levels of risk they were exposed to. Real estate securities between 2003 and 2006 showed returns averaging over 30 percent but this came to an abrupt end in 2007, dropping 90 percent below the average.
However, the report says, investment in direct real estate experienced steadier returns comfortably averaging double-digits for the past decade and, as a result, real estate as an asset class eclipsed equities and long-term government bonds over the past decade providing average returns of between seven and eight percent. “The success of real estate may have taken a few by surprise, but it illustrates how important it has become to global capital markets,” the report says.
The Asia Pacific region and the vibrant economy of Singapore is at the point where it has become self-sustaining. This reduces the impact of the slowdown in the US and Europe on the economies of the region. A number of financial managers interviewed for the report did not expect Asia to be as badly hit as the US and Europe, with one fund management executive commenting; “Asia is certainly not immune, but it won’t be impacted to the same degree as elsewhere.”
Capital flows throughout the region it seems are at a historical high, and the general sentiment in the market is still favorable.
“Overall, economic growth for the region is expected to remain strong, supported by growing intraregional trade,” the report suggests. “On the whole, returns on real estate investments are expected to decline in most countries, but still remain positive for 2008. Returns from investments in Asia Pacific are expected to generally remain higher than the global average for the coming year.”
Growth of investment in the real estate market, particularly in Singapore, is on the increase. Across the region it rose by 27 percent through 2007 and totaled $121 billion. In the US and Europe, real estate investment slowed in the second half of last year. Over half the investments in Asia Pacific were made in that period.
“The most significant impact interviewees expected was a tightening of credit from banks, in particular for financing large-scale developments,” noted the report. “The impact is expected to result in a “smoothening out of supply”, as one real estate fund manager described it, explaining that deals will continue to happen, but will take longer, resulting in a slowing of the supply cycle.”
Given the underlying growth of a healthy economy, Singapore and the rest of Asia’s position in the real estate markets looks secure. Investment volumes throughout the region have declined recently but are expected to pick back up towards the end of the 2008.
The report points out that private equity and bank loans remained the major forms of real estate capital in the region and that debt funding was expected to continue to support much of the real estate investment immediate future. As one real estate executive put it, “Some of the major real estate funds have significant balance sheets and can afford not to rely on loans, however, most real estate investment in Asia requires debt, and this will remain the norm for some time to come.”
However, one area that is currently cash rich, from the flow of dollars from the current high oil prices, is the Gulf region. The availability of local cash, the rich real estate potential for solid returns for cash investment without the need to debt-finance real estate projects and the virtual certainty of continued growth in the Asia Pacific region with its buoyant economy should make Singapore in particular and the Asia Pacific region generally a high profile opportunity for Gulf investors.
