FOCUS Smaller Asian real estate markets tipped as key diversifiers for growth

By Claire Milhench

Fund managers pick out Singapore, Malaysia, Vietnam as route to avoid crowding in Chinese and Indian property markets.

LONDON (Thomson IM) - The smaller Asian real estate markets are attracting investor interest now that even second and third tier cities in China are looking overpriced, with portfolio managers tipping Singapore, Malaysia and Vietnam as useful diversifiers.

Meanwhile in India, overcrowding in traditional real estate has prompted at least one manager to look at the logistics and distribution sector instead.

Year to date, the S&P/Citigroup Global Property Index shows that Asia as a whole is up 16.76 pct, whilst Europe is down 13.6 pct and the US is down 9.3 pct. However, within Asia there are huge variances in performance. Singapore is up 42.62 pct in the last 12 months, Hong Kong is up 51.71 pct, but Japan is up only 6.94 pct.

Jakes Ferguson, a fund manager at Sarasin Investment Management, is positive on Hong Kong and Singapore, seeing strong GDP growth and a burgeoning middle class as supporting factors.

In Singapore, the growth of wealth management and regional services has seen the office market tighten considerably in recent years. 'It's a very attractive, safe environment, with a lot of oil money flowing in from the Middle East, and all the major financial services companies are growing their operations there,' he said. 'I don't see what is going to turn off this tap.'

Meanwhile, Hong Kong offers a useful way of getting exposure to the roaring Chinese market, where diversified property companies are feeding the demand from the growing middle class for Western-style shopping malls and better homes.

Principal Global Investors, which launched a global property securities fund in May, also has a fairly high exposure to the debt side of Hong Kong-listed property companies, but portfolio manager Simon Hedger says that the stock market offers greater liquidity. There are some signs though, of over-exuberance, with Hong Kong property stocks up some 40 pct in the year to date.

'This is fine as long as market growth continues, but you would have to question the multiples if growth slows, as they are already around 20-30x,' Hedger says. He is also cautious on China itself, warning: 'You don't want to be over-exposed to China, because if a slowdown occurs, those valuations are going to start to look very toppy.'

Indeed, the fear that China is over-heating has led to increasing investor interest in companies prospecting in smaller markets. Aseana Properties, which is listed on the London Stock Exchange, looks for upscale residential, commercial and hospitality developments in Malaysia and Vietnam. The drive towards improved living standards and increased urbanisation, and the favourable demographics make both markets attractive for developers. There is also a lack of good quality, high-end properties, which means that there is a fast take-up of units ahead of project completion.

Monica Lai, Aseana's CFO, suggests these markets should be viewed as diversifiers with Aseana targeting a 30 pct return on equity (ROE) for Vietnam and a 20 pct ROE for Malaysia. 'You can't ignore China and India, but the return from investing in Vietnam is on a par with those markets,' she says. 'But it is harder for foreign investors to get exposure to Vietnam because the stock market is very illiquid.'

Chee Kian, head of corporate strategy at Aseana, argues that property offers an interesting entry point, allowing investors to get exposure to growth from a low base. The more mature and stable Malaysian market is currently 60 pct of the portfolio, but Aseana plans to reorient this towards Vietnam over time.

One obstacle to that process is the red tape: Whilst obtaining land and securing planning permission in Malaysia is relatively straightforward, Vietnam's centrally planned economy means the process there is more complex and time-consuming.

Some liberalisation has occurred. In 2004, Vietnam introduced a new land law to clarify what investors could and couldn't do, and a new enterprise law has clarified foreign ownership levels. Meanwhile, in Malaysia this year, the government abolished the real property gains tax, a 30 pct tax levied on profits made by foreign investors, who can also now own freehold titles.

In India, a similar liberalisation of property laws has led to a market stampede, prompting some developers to seek out less-crowded niches. Since April 2005, foreign direct investors have been allowed to own 100 pct of their projects, whereas previously this was only possible if the project was 100 acres or more in size, effectively excluding developments in towns.

In early 2006, AIM-quoted Eredene Capital raised 100 mln usd in the hope of investing in this newly deregulated sector. But with too many foreign investors chasing after opportunities in the residential, retail and commercial property market, Eredene subsequently decided to focus more on logistics and distribution centres.

'The danger was that the other funds were building identical portfolios, so although we do traditional real estate, we also have this expertise in logistics and port facilities,' said Alastair King, chief executive of Eredene Capital.

King said the company has a pipeline worth 100 mln stg, with projects ranging from pure real estate such as residential and commercial property, to warehouse networks, distribution parks and container facilities. He added that the advantage of investing in logistics developments is that there is no three-year moratorium on the repatriation of profits, as is the case with residential, retail or commercial property. 'This means it is more liquid and less risky.'

He agrees that are pockets of overvalued properties in India's bigger cities, and foresees some corrections shortly, which is why Eredene has decided to avoid those areas. But he argues that Eredene offers a good way for a large property fund to get Indian exposure: 'The vast majority of our investors are institutional funds who want specialist Indian exposure and like the fact that we're doing something different.'

By Claire Milhench: +44 (0) 20 7422 4808; claire.milhench@thomson.com; www.thomsonimnews.com

Source:

Thomson Investment Management News