Rich Asians are lagging their counterparts in Europe when it comes to investing in real estate despite the fondness of owning land that exists in Asian cultures.
Asians have about 27% of their wealth in real-estate against 31% for their European counterparts and 26% for wealthy investors in the Middle East, according to a report titled “Around the World in Dollars and Cents” by the international real estate adviser Savills.
The world’s wealthiest 0.003% are acquiring residences, vacation homes and commercial properties as “safe havens” for capital growth and wealth creation, and as status symbols, the report said.
“Global real estate is mostly residential and held by occupiers, but private owners are becoming more important in the world of traded investible property,” said Yolande Barnes, head of world research for Savills.
The top cities where ultra-high net worth individuals (UHNWIs) are buying real estate include Moscow, Mumbai and Hong Kong. The top locations for “retreat” purchases include the Caribbean and the Hamptons on Long Island, east of New York City. The top locations for “destination” purchases are Scotland and Monaco.
The term UHNWI refers to people with net assets of US$30 million and above. The combined wealth of the 200,000 people in this category worldwide is $27.8 trillion.
According to Savills, Asians in this select group hold just over a quarter of their total wealth in real estate, compared with nearly one third for Europeans and less than one-tenth for North Americans.
Sorachon Boonsong, head of real estate with the Bangkok office of the international law firm Baker and McKenzie, says wealthy Asians invest in real estate for three reasons: love of property, general return on investment, and high capital gains.
“I think Thais and Chinese are quite similar. We love land so therefore we see occupying land as a signature of success and wealth,” said Mr Sorachon.
In terms of annual returns, Asian investors tend to see “a fair amount of return” across the region, he said.
Property funds traded on the Stock Exchange of Thailand produce annual yields of 6% to 8%, depending on the type, he said. Owners of hotels or serviced apartments in Thailand would likely see an annual yield of 7%, but some properties can produce as much as 12%.
Additionally, real estate offers high potential for capital gains.
“Compared to other assets, such as gold stocks that are traded on the stock exchange, at least real estate can guarantee a fair amount of increase in capital gains every year,” , said Mr Sorachon.
“Take the example of Singapore. During the Lehman crisis (in 2008-09) property prices in Singapore dropped significantly. But those who purchased property in Singapore at that time can now realise huge capital gains because prices in Singapore have increased significantly since then.”
In Asia, the total combined private wealth of UHNWIs is $6.5 trillion. Their average age is 55 and their average holdings are $610 million each.
For Asian investors looking for good opportunities close to home, Mr Sorachon predicts the Philippines, Indonesia, Vietnam, and especially the “hot” market of Myanmar will offer good options.
“Everyone foresees that a big number of tourists, a big number of businesspeople will travel to Myanmar,” he said. “So of course investment in hotels and serviced apartments will be the prime target for commercial purposes.”
In Indonesia, condominiums are likely to be an attractive investment, he said. With the increased income of the middle class and with bad traffic making the commute to work more challenging, more people are likely to purchase condominiums in central Jakarta as second residences, he said. “We see Indonesia as the big opportunity in terms of developing commercial properties, which include condominiums and housing projects.”
In the Philippines, unspoiled islands offer attractive options for destination properties, he said.
Looking at UHNWI real estate investment trends from a broader perspective, investors may also be looking to diversify their assets, said Milan Khatri, head of property research with Aberdeen Asset Management Asia Ltd. Residential and commercial properties move differently in terms of volatility, compared with other asset classes such as equities and bonds, he said.
Asian investors are also seeking to further diversify by snapping up real estate overseas. Asian home markets can be volatile, said Mr Khatri, and cross-border diversification can be important for managing risk.
“By having exposure to more mature markets like, let’s say, Australia, the UK and the US, you’re diversifying your way into markets that are viewed as not as volatile, and maybe have different economic cycles as well,” he said.
In the past 12 to 18 months investors have focused on low-risk assets available in large, mature markets such as Japan and Australia.
In Tokyo, there is demand for office and residential assets, as the population is still growing in the city. However, with the market starting to look expensive, investor demand is broadening to outlying cities such as Osaka, he said.
In Australia, the investor appetite is for office buildings in Sydney and Melbourne. Commercial property yields are attractive — around 7% to 8% — although they are starting to come down, he said.
Sydney and Melbourne also offer attractive residential real estate options and Mr Khatri said investors should consider buying now.
“I can see values going up even further in the next 12 to 18 months,” he said, adding that the Australian economy was growing well compared to other mature markets. Interest rates are also historically low and could drop even further, and with an expanding population, the need for long-term housing is strong. “From a medium- to long-term perspective it looks quite attractive.”
Looking at China, cross-border real estate investment has risen rapidly since the 2008 crisis, according to the Savills report. When combined with Hong Kong, China is the second largest source of global cross-border real estate investment and in 2013, around $23 billion in deals flowed from China and Hong Kong, it said.
Chinese buyers have tended to purchase real estate in established, international markets with large Chinese populations such as Hong Kong, Macau, Singapore, Vancouver, London and Los Angeles. The biggest deals in commercial projects, development sites and “trophy buildings” have been in the US and UK, followed by Singapore, Japan and Australia.
However, potential investors in real estate must consider at what point in the market cycle they are buying, Mr Khatri said.
Many Asian residential markets have been overheated, with values going up in the past three to four years and low yields of only 2% or 3% in some places, he said.
Tightening measures in certain countries are also not likely to be unwound anytime soon, and if interest rates rise in US, this might put additional pressure on capital values, said Mr Khatri.
“Today might not necessarily be the right point in the cycle to be investing in residential property for certain markets in Asia,” he said. “In places like Singapore and Hong Kong, the markets have already peaked and values may even start to come down”
Additionally, he said, international investors should be aware of currency risk in cross-border deals.
“What might be a return on property in sterling terms might be very different once it’s converted back into local currency,” he said, adding that the UK market has been attractive in recent years because the pound has been weak.
Mr Khatri said that where investors choose to put their money depends on what they want out of the investment.
“Are you looking for income to be generated? Are you looking for capital appreciation? In major cities, which are supply-constrained, the capital appreciation element might be quite large; conversely the income component might be quite small.”
Mr Khatri says most investors are looking for long-term investments, lasting at least five years. With typically high transaction costs and taxes, it is unusual to invest short-term in residential or commercial property, he said.