Outlook for commercial property in Asia pacific

Outlook for commercial property in Asia pacific
4 June 2007

Simon Tyrrell, acquisitions manager Asia, at New Star Asset Management and part of the team managing the New Star International Property Fund provides comments on the Asian commercial property market:

“Asian commercial property markets continue to go from strength to strength. Rental growth and continued yield compression are prevalent across many of the region’s developed markets and the dark days of the Asian financial crisis seem a distant memory. Asian markets, such as Singapore, are currently outperforming their strong growth rates of the mid 1990’s, whether measured in terms of capital values or rental rates. The lack of quality office supply is also pushing up demand in many Asian markets as restrictions imposed on construction during the late 1990’s take effect.

“Improving returns from commercial property in Asia have been underpinned by a period of economic re-adjustment. Companies in the region have learnt from the lessons of the past and are profiting from the region’s growing economic and political importance. Strong fundamentals are underpinning Asian economic growth: populations are increasing in size, GDP per capita is rising and markets are benefiting from maturity and increased transparency.

“Financial services and support sectors have expanded particularly quickly as increasingly transparent tax systems and the removal of cross border restrictions to investment and banking attract foreign investors. While growth has been strong in a number of Asian countries and sectors, the region has not over-heated. Instead, the period of growth appears more accurately viewed as a natural re-adjustment with potentially greater rewards yet to come.

“At New Star, the current focus is on a range of properties in Singapore, Australia, and Japan and we have recently started evaluating opportunities in South Korea . These are attractive centres for investment due to the strong growth potential coupled with sustainable longer term outlooks. Singapore, like London, enjoys strong demand from financial services firms (good tenants) and net supply is falling far short of expected demand. Prime office rents rose 52% in 2006 and the fundamentals for the medium to long term look equally as attractive.

“In Tokyo and many of the regional cities of Japan rents are increasing rapidly due to the lack of quality buildings, land prices have started to increase for the first time in 16 years, and, as business confidence improves, a tighter labour market should start to lift wages.

“Elsewhere, Australia and Hong Kong are among the most transparent property markets in the world offering stable and similarly valuable growth prospects. Australia benefits from relatively long leases for the region of 10-15 years while robust consumer confidence and a strong labour market is maintaining attractive retail sales growth, providing good prospects for retail properties in Sydney and Melbourne.

“Markets that are currently being monitored but will not be progressed in the near term are those that are perceived to be more speculative, such as China, Indonesia, Vietnam, Philippines and Malaysia. Despite deceptively attractive veneers these markets have various ‘under-the-surface’ issues related to taxation or ownership restrictions and caution is needed before we are prepared to enter these markets.”

New Star currently has assets under contract in Japan, Singapore and Australia.