Asian Real Estate Draws A Flood of New Money

By Christine Haughney
From

Institutional investment in Asian real estate has climbed so high it has reached what one real-estate executive in a recent survey called "nosebleed levels," with each dollar of available property attracting $5 in capital in some cases, according to the report.

"There's an unprecedented amount of capital that is being allocated to investment in the Asia-Pacific region," says Stephen Blank, an Urban Land Institute senior resident fellow of finance and an author of the study by the Washington, D.C.-based trade group and accounting firm PricewaterhouseCoopers LLP. "There is not a market which international investors are not seriously investing in."

Meanwhile, local and foreign direct commercial real-estate investment in the Asian-Pacific region surged 40% in the first half of 2006 to $43 billion, according to a report by real-estate advisory firm Jones Lang LaSalle Inc. -- partly because of a global trend of capital flowing to far-flung real-estate markets.

"It's the beginning of a deeper and wider flow of international money that will be moving into Asia over the next two to three years," says Tony Horrell, chief executive of European capital markets for Jones Lang LaSalle.

Most of the investment deals taking place in Asia are concentrated in five major markets. During the first half, 51% of the deals in the region took place in Japan, and almost reached the volume of deals done there for all of 2005, according to Jones Lang LaSalle. An additional 40% of the deals during the first six months were closed in Australia, China, Hong Kong and Singapore.

The reports come as Asian commercial real estate is starting to attract foreign money from institutional investors, such as pension funds and life-insurance companies, that has flooded the U.S. and Europe in recent years. Investors continue to covet Asia despite risks of government meddling and returns that have been reduced by increasing competition. Investors often are outbid on high-quality properties because "there are simply not enough good-quality assets to go around," according to the Urban Land Institute.

Increased competition has reduced returns enjoyed by investors who were pioneers in the Asian market, according to the institute. Last year, many investors ventured into Asia expecting 30% returns but realized 20%, and some investors surveyed by the institute predict 10% to 15% returns in the future.

Investors are looking at properties ranging from industrial parks in China to "health-care tourism" facilities in Malaysia, Singapore and Thailand for patients requiring everything from cosmetic surgery to hip replacements, the institute report says.

While U.S. investors funded almost 60% of the recent deals in Asia, more deals are being made by Middle Eastern investors, who used to concentrate their investments on well-known properties in cities such as London and New York. Calling them "the new kids on the block," institute researchers say Middle Eastern investors are expected to be the fastest-growing capital source for real estate in Asia next year. The reason: Eagerness to find a new place for their oil profits at a time when real estate in Western markets has become too pricey and stock markets in the Middle East are faltering.

Western pension funds and life-insurance companies still are fighting for a place at the table in Asia because they are under pressure to step up their allocations to real-estate assets. Real estate has outperformed other asset classes for the past five years, increasing pressure on fund managers to put more money there to achieve higher returns for the many baby boomers preparing for retirement.

"Rightly or wrongly, many foreign fund managers believe the Asia-Pacific markets will offer them the higher returns they need," according to the institute study.

The flow of Western money could dwindle in the face of rising U.S. interest rates, giving the Middle Eastern money that much more impact. "Even if the Western economies dry up, the money is still going to come pouring out of the Middle East," according to an unidentified participant among 175 lenders, developers and institutional investors surveyed by the institute and PricewaterhouseCoopers between June and August.

That report focused on the broader Asian-Pacific market, including Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, the Philippines, Singapore, South Korea, Taiwan, Thailand and Vietnam. The Jones Lang report, part of a broader study on global capital flows, focused on the major Asian markets of Australia, China, Japan and Hong Kong.

While many foreign investors are eager to buy high-quality Asian office towers that may attract foreign companies, they are finding that they often have to compete for less-sought-after properties such as hotels and health-care properties to get acceptable returns. In the hotel sector, many investors have chosen China, where there are 188 such projects under development, according to the institute. Private-equity firms and opportunity funds also have been drawn to Japan, partly because of a recent regulatory change that forces owners to write down property values to market levels, the report adds.

Deals made by foreign investors include the purchase of the mixed-use community Tomorrow Square in Shanghai in the summer of 2005 by Morgan Stanley's real-estate fund. More recently, Goldman Sachs Group Inc.'s Whitehall Fund bought the 22-story Rainbow Plaza apartment building in Shanghai. According to Mr. Blank, Middle Eastern investors have poured money into private-equity funds, and Istithmar -- a Dubai government vehicle -- is shopping for properties in China.

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