MIPIM ASIA: Seen through British eyes, the Shard is spectacularly tall and golf a harmless game. But the Shard would only be the seventh tallest tower in Hong Kong and the 50th in China. As for golf, the Chinese government takes a distinctly un-British view of it. Golf is “green opium”, destroyer of farm and water resources and forum for pointless conversations in small groups.
So we shouldn’t see Asia MIPIM through little British lenses. Asia is a whole investment galaxy. Outward investment to the UK and the world is only one diversification option for its myriad property players.
Seen through Asian eyes, some of the key issues at this Asia MIPIM will be:
1. Will China have a hard landing?
Over the last 35 years, China has delivered the greatest economic miracle in human history. Between 1981 and 2004, 0.5bn Chinese people were lifted out of poverty. China’s economy has doubled in size every eight years since 1978. One China Construction Bank executive summed it up exquisitely: “The only way to realise the latest communist principles was to maximise shareholder return.”
China’s response to the GFC captures this communist controlled capitalism perfectly. In 2009, to fend off credit crunch contamination, China launched a vast 4tn yuan stimulus, crashed interest rates and ordered its banks to lend. They did. In H1 2009, Chinese banks lent 50% more than they had done in the whole of 2008. It worked. 10% growth was achieved in 2010. But there is now a legacy of over leverage, stock market fragility and debt fuelled over supply.
But China is not a conventional economy. Its government has infinitely more power than any western government to control lending, manage correction and stimulate supply. For example, in Shanghai 80% of GDP is generated by state enterprises. CCP ownership and control of all aspects of the economy potentially gives China the policy flexibility to avoid a downturn. I back China to have a more controlled and softer landing than a pure capitalist economy would get.
2. Will the Fed rate rise hit the market?
Investors are saying the chance of a Fed rate rise this month is 80%. But rates will only rise with baby steps and should be balanced in Asia by the persistent low rates of the Banks of China and Japan. The resulting capital flight from the emerging markets of the Philippines and Indonesia might reverberate through Asia though – if it causes a credit pinch.
3. Where can best value and return be found?
Assets in the West have been offering better risk adjusted returns than those in Asia. Will that continue? For the UK, it will be about ignoring the late phase market noise and concentrating on specific deals driven by income and tenant covenant strength. And, more importantly, following the politics, government incentives and the UK’s long-term needs into the northern powerhouse, infrastructure and residential.
All across the main Western and Asian markets, regional cities are becoming very interesting. In the UK, Japan, Australia, and the US, Asian investors are branching out to second and even third-tier cities in search of return and any remaining traces of capital growth.
Some areas are obvious. Logistics makes up 10% of all real estate deals done in the Asian market, “the hottest, most crowded trade in Asia”. Trouble is, every scrap of capital is chasing it and good logistics developers are as rare as snowflakes in lava.
It is not all about analysis though. One investor said about the Japanese market: “We are all drinking from the same Kool-Aid and you might as well get on the bandwagon with everyone else”. Hmm yes, there may be trouble ahead…
4. How can investors add value?
The time of easy yield compression plays is gone. In most Asian and Western markets we are moving to an asset management and consolidation phase. Property is uniquely suited to self-help value enhancement. You cannot refurbish a bond or tenant engineer an equity.
Every real estate market (in whatever phase) is peppered with money making opportunities. That’s what will make this a fascinating MIPIM.
More bulletins to come from Hong Kong’s polluted murk of mile high towers – hectic home of hyper-capitalism.
Bruce Dear, head of London real estate, Eversheds
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