Asia’s property stocks: set for another run?
Posted on | March 24, 2007
By THE EDGE
With Asian real estate equities set to ride an upturn in the property cycle for another couple of years, lofty valuations in markets such as Singapore and Japan should not deter long-term investors.
But picking the right stocks is key, fund managers say, following strong property share rallies across the region.
Healthy demand for commercial and residential space, amid Asia’s rising affluence and industrialisation, is seen driving up property prices and rental rates through to the decade’s end.
Even though Asia as a whole — excluding Japan — could see growth slow to a consensus estimate of 7.5% from 8% last year, many fund managers remain bullish about the sector’s outlook in the world’s fastest-growing region.
“As long as GDP growth continues to expand in Asia, I think the fundamentals are looking pretty good,” said John Snowden, who oversees Colonial First State Global Asset Management’s 14 property funds whose assets total A$7.5 billion (RM20.98 billion).
Among Snowden’s top picks in the region are Japanese developer Mitsubishi Estate Co Ltd, Tokyu REIT, Inc, Hong Kong-listed Hang Lung Properties, Singapore’s CapitaLand and Australia’s Centro Properties Group and Macquarie Goodman Group.
Other factors should also fuel the market, such as the growing real estate investment trust (REIT) market and rising direct investments by global investors in Asia-Pacific properties, which totalled US$94 billion (RM326 billion) in 2006, up 43% from a year earlier, according to Jones Lang LaSalle.
Asia’s growing number of REITs — vehicles that produce stable income by purchasing and managing income properties with the pooled capital of many investors — could stimulate the area’s property prices because their disclosure requirements will lead to greater transparencies in property transactions.
“What tends to happen when you do not have enough information is that buyers tend to pay a lower price,” said Polly Kwan, who oversees Fidelity’s Asia Pacific property fund launched February.
“With transparencies increasing, a lot of the hidden value will increase.”
Singapore last year claimed the world’s best-performing property plays, returning 65%.
Japan’s land reflation story has led its real estate shares up 18% since Jan 1 to the second spot in the sector so far this year, just behind Singapore’s 18.3%.
Both have outperformed their global peers, which are up 6% in the year — and the 2% gain in the broad equity market.
Japan’s land prices rose for the first time in 16 years in 2006, data on March 22 showed, led by strong growth in desirable parts of Tokyo and other big cities.
Tokyo’s tight office market could see prime rents rise another 60% to 70% to a cyclical peak in around three years’ time, property consultants say.
Japanese and Singapore real estate shares, among the world’s most expensive, on average trade at premiums of 20% and 30%, respectively, to their net asset value (NAV) — a key industry metric that calculates the total value of a firm’s assets less its debt.
“Supply and demand dynamics are still very supportive in Japan and Singapore. However, selection has become much more important, post the strong rally in the sector,” said Joshua Crabb, investment director at Prudential Asset Management.
Meanwhile in Hong Kong, real estate plays still lag regional peers, trading at a roughly 10% average discount to their NAV. They are down nearly 1 percent so far this year, though some hit records or multi-year highs earlier in the year.
But sceptics say this could be as far as they will go this year, as transaction volume and appreciation of residential properties are slowing following several good years.
“Share prices already reflect the recovery story,” said Alan Shum, fund manager at China Insurance Group Asset Management. “The margins of property developers have already peaked.”
Asian property bulls say NAV is not always the best metric for judging stocks, since in a rising market many property stocks will trade above their NAVs. Other factors, such as management smarts, will come into play.
“It’s the way the company manages boom and bust. Do they buy when there’s a crisis like SARS? If the land was bought many years ago, the margins will be better,” said Nicholas Yeo, fund manager at Aberdeen Asset Management.
Even though some Asian property equities may seem pricey, given their steady growth in the coming years, they should reap more of their value from cash flows and appreciation projected out further into the future.
“People who say valuations are getting ahead of fundamentals are thinking of a six- to 12-month horizon,” said Fidelity’s Kwan. “Property cycles tend to be longer than that.” – Reuters
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