Nicholas Holt recently arrived in Singapore from Vietnam to start his new role as Asia-Pacific Research Director for Knight Frank. Here he talks government intervention, price performance, development finance and the differences between the way domestic and international buyers view property in the region.
What will be your main responsibilities in this new role?
My new role is to continue to develop and join up Knight Frank's strong research capabilities across the region. Knight Frank is a trusted authority in the research arena, and we are looking to build on this by producing insightful, concise and forward-looking analysis and commentary that will serve our clients in the Asia-Pacific region.
Having just moved to Singapore, what's your view of the city? Which areas are considered prime and which would you tip as upcoming districts?
Singapore is a very interesting city, which I am learning more about each day. Some of the most impressive developments of recent years surround Marina Bay, including the iconic Marina Bay Sands Hotel development. An interesting fact is that 25% of Singapore's land area has been reclaimed since the 1960s - the government has a long-term strategy about the development of the city and it is a fascinating case study of urban planning.
In terms of prime residential areas, we normally consider the established Districts 9, 10 and 11 where luxury condominiums and good class bungalows (GCB) are prevalent. Sentosa Cove, the only location where foreigners can buy landed property (i.e. houses and villas) is a very interesting upcoming prime market, where we have seen some record-breaking deals recently.
Much has been made of whether China's property market is in for a hard or soft landing. What's your view?
In my opinion, it is a bit of a false dichotomy when speaking of a hard or soft landing in the property sector, especially when considering a market as large and diverse as China. There is no doubt that the huge price growth over the last few years has been fuelled to a large extent by speculators in the market, and as many commentators note, some prices seem disconnected from underlying fundamentals.
But it is very difficult to talk about China in aggregates. There is essentially a huge demand in China for housing, and the existing stock is largely substandard. The problem is that developers have sometimes been building the wrong product, often pushing for higher returns, in the wrong place. This was coupled with a speculative tendency which pushed prices in some areas to unsustainable heights. Some of these problems are being addressed by the central government who are pushing through affordable house building, lending restrictions, (especially on multiple home ownership) and are testing a land holding tax - which in my view is the key in trying to reduce speculation.
Essentially, I think that in cities with good liquidity and areas of strong end-user demand, prices will continue to correct, but not dramatically. The ghost cities of Inner Mongolia and on the island of Hainan however, will be more interesting to monitor over the coming months and years.
Generally speaking, the Chinese property market is obviously a hugely significant sector of the economy, and the central government has been monitoring the market very carefully to avoid a sharp drop in asset prices.
Although the central government has signalled a determination to maintain the cooling measures through 2012, if the economy and housing market cools too much, they have the loosening of these policy levers 'up their sleeve' to increase activity.
Which cities in the region are most influenced by foreign demand and which are least affected?
In the residential market, Australia, Singapore, Hong Kong and Malaysia have traditionally been favoured in terms of foreign demand. In other countries, short tenure, and legal and administrative barriers make purchasing property difficult or risky. Lifestyle and economic and political risk are big factors, which have favoured Singapore, Hong Kong and Australasia. However, recent cooling measures in Singapore and Hong Kong, including additional buyer and seller stamp duties, have cooled off some of the interest in these markets. Australasia, London and the US have probably seen an uptick in interest from Asian buyers in recent months.
On the commercial side, stable core markets of Australia, Japan and Korea have typically attracted most institutional investment, with developing Asia proving difficult to enter due to legal risks and crowding out by domestic players. In general, the investment we see is largely intra-regional and increasingly private players.
How important are overseas buyers to the prime market and which nationalities are most evident?
Overseas buyers are important in Singapore, Hong Kong, parts of Malaysia, Bali, and Australia. In total, mainland Chinese buyers have been the largest buyers across the region, and are the most important foreign buyers in Singapore, Hong Kong and Malaysia.
What is the highest price per sq m achieved in the Asia-Pacific region?
I believe that the highest prices would probably be in an area called The Peak in Hong Kong, where we are currently seeing a deal go through for HK$96,362 per sq ft of gross floor area (GFA).
As a UK-born ex-pat, what would you say is a typical misconception westerners have of Asia and its property markets?
I think the biggest misconception (or at least the one that I had) is that land in developing Asia should necessarily be cheaper than in Western developed countries. This is often not the case, as land values are powered by urbanisation rates, densities and GDP growth, all of which are high across developing Asian markets.
In many developing markets there is very limited transparency and information in relation to transactions is scarce. Hence, market participants lack knowledge when it comes to value. Additionally, "time in the game" is key - offshore investment into most developing markets in many cases only stretches back five years, so many lack the knowledge of value through cycles.
The way domestic owners and buyers value or price property differs significantly from the way foreign participants do. Foreigners often look at development sites in terms of required Internal Rates of Return (IRR), Return on Equity (ROE), breakeven points and profitability versus risk. In some developing Asian countries, domestic participants are more likely to simply consider $ per sq m of land area or $ per sq m of approved GFA. Domestic owners often have a long-term view of holding land and may have higher expectations of future capital growth and limited considerations as to yield. Foreign participants often have a window of investment of five to 10 years. Also, foreign buyers must consider country risk and currency risk in their decisions, whereas domestic buyers do not.
These different views and approaches can, in some cases, mean local buyers are willing to pay much higher prices than offshore buyers, sometimes resulting in a 'two tier' market for land.
What impact has the credit crunch had on new developments? Are there many new prime developments under construction or planned?
The state of banks' balance sheets here in Asia is difficult to fully assess. In countries where 'state capitalism' is financing growth, state-owned banks have often misallocated funds to state-owned developers, and this misallocation of capital (i.e. not efficient) makes me think that banks are in worse shape than is maybe thought.
Otherwise, general cooling measures are affecting finance for developers, who are now looking to alternative methods of financing through debt or equity markets, including corporate bonds, IPOs, joint ventures, and are looking increasingly overseas for capital.
It is important to note that it depends on the type of development. In the residential market, a country's restrictions on off-plan sales can have a significant impact. Developers in certain countries can help self-finance through a successful pre-sales campaign, whereas in others this avenue is restricted.
What's going to be the next big thing with residential development in the Asia-Pacific region?
With Asia's beautiful and bountiful waterfronts, including tropical islands, we are seeing a large amount of resort-style properties being developed, particularly in Indonesia, Thailand and Vietnam.
Another trend we are starting to see is luxury inner-city living in some of the Australian cities, where we are seeing a move back into the Central Business District (CBD) areas, pushed to a certain extent by foreign buyers who have shown appetite for central apartments near education hubs and transport nodes.
According to our latest Prime Global Cities Index results, luxury house prices in the Asia-Pacific region are dipping - in Q2 2010 prices were rising at an average rate of 24% each year, and the comparable figure now stands at -1%. What's your view on this?
There is a different narrative for each country, but one common theme is the cooling measures introduced by governments, especially in China, Singapore, Malaysia and Hong Kong.
In general, 2011 was also a difficult year worldwide, and Asia Pacific was not insulated from this, with exports hit and increasing concerns about domestic economies. Political risk and tough economic environments, notably rising inflation and low interest rates, have also pushed some HNWIs into safe havens outside of Asia Pacific.
The long-term trend however is undoubtedly upwards, as the region grows, and collective and individual wealth is generated on a massive scale.
If you would like to contact Nick you can do so on Nicholas.Holt@asia.knightfrank.com
Related articles:
Fiscal interventions - Asian style
Shanghai luxury residential: contrasting performance in sales and rental markets
Sales of Chinese new homes fall dramatically as fiscal policy tightens
Asian property markets: where next in 2012?