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Asia-Pacific cities in Tomorrow's World: Does multifamily fit within a core portfolio?

Asia-Pacific cities in Tomorrow

The seventh installment of our Asia-Pacific cities research series touches upon factors to consider in multifamily investments within a core strategy, in the Asia-Pacific region.

Regional residential markets (similar to other real asset classes) have benefited from record-low borrowing costs and relatively sturdy economic conditions, particularly in the immediate years after the Global Financial Crisis (GFC) in 2008. Many core regional markets, being gateway or capital cities or financial centres, have benefited from robust overseas demand. Historically, demand for housing is likely to be localised, however global cities such as Hong Kong, Sydney and Singapore tend to draw a higher proportion of foreign holdings.

For example, at the peak of the demand cycle in 2010, an estimated 50% of new developments were purchased by the Chinese. This reflects Hong Kong’s world city status within China, Renminbi (RMB) and Hong Kong Dollar (HKD) differential, and expatriation of capital for diversification. Increasingly, Chinese capital has also started to flow into cities such as Seoul and Bangkok, taking advantage of currency or price advantages. For institutional investors, do multifamily investments work in Asia-Pacific?

There are some factors to consider in multifamily investments within the context of a core strategy (Fig.1 and Fig.2):

  1. The competitive landscape will be a challenge in some markets which are already constrained by supply shortage. For example, the surge of pricing in Hong Kong in recent years reflects a sharp fundamental  imbalance, resulting in extremely low yields. The majority of new developments are also for strata-title sales, a reflection of the price cycle as developers can extract the highest margin – instead of selling it en-bloc for income. As such, the availability of en-bloc investable stock for sale in Hong Kong is extremely limited. Therefore, investability is an issue to consider across most regional housing markets.
  2. Housing policy restrictions across some key markets also make it unattractive for institutional investors to access this sector. In Hong Kong and Singapore, special and additional stamp duty imposed on foreign/corporate purchases to deter speculation can amount to as much as 23.5% of the purchase price; a big dent on projected total returns.
  3. Low yields aside, price volatility can also make it challenging for core investors. In Hong Kong, price variation in real terms ranged from around -70% to 300% over the past two decades.

Fig.1: Hong Kong - up and away

  

Source: Macrobond, government statistics, 2017 

Fig.2: Singapore - led by policy tightening

 

Source: Macrobond, government statistics, 2017

 

Despite some real challenges, diversification benefits can be obtained in the increasingly important multifamily segment of the real estate market. While housing in most core Asia-Pacific markets are sold to retail occupiers/investors, there are still opportunities in markets such as Sydney, Melbourne and Tokyo. This is due to availability of smaller scale en-bloc housing for sale through minor refurbishment and income generation, lower levels of government intervention, higher level of transparency and attractive yield spreads. Even as housing prices in Sydney have risen around 70% in real terms since 2009, very supportive demographics and economic resilience will help to mitigate pricing risks.

In Tokyo, residential prices have stayed relatively stable, hovering at a 10% variance around the average number over the past decade. In Singapore, as rental correction continues to dampen pricing, there may be opportunities for bulk purchases at discounted pricing (which may help to offset additional stamp duties) as values inch towards the tail-end of the cycle. Therefore, we believe that despite some real challenges, it makes sense for investors to consider multifamily as an alternative bucket in a diversified portfolio.

 

Fig.3: Tokyo - improving steadily

  

Source: Macrobond, government statistics, 2017 


Fig.4: Sydney - epitomises megatrends

 

Source: Macrobond, government statistics, 2017

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