Growing In Uncertainty: Economic and Real Estate Trends in Asia Wrap-Up Keynote Lecture MIPIM Asia 11 Nov 2010
Nick Axford Executive Director Head of Asia Research
François Ortalo-Magné, Director, Global Real Estate Master Wisconsin School of Business Partner with HKUST Business School
1
The Economy
The Global Economy is Recovering Real GDP % change per annum 6% 5% 4% 3% 2% 1% 0% -1%
World
-2% -3%
Source: IHS Global Insight CB Richard Ellis | Page 3
2012 Q1
2011 Q1
2010 Q1
2009 Q1
2008 Q1
2007 Q1
2006 Q1
2005 Q1
2004 Q1
2003 Q1
2002 Q1
2001 Q1
2000 Q1
-4%
Driven by the Emerging Markets Real GDP % change per annum 10% 8% 6% 4% 2% 0% World
-2%
Emerging Markets
-4%
Advanced economies
Source: IHS Global Insight CB Richard Ellis | Page 4
2012 Q1
2011 Q1
2010 Q1
2009 Q1
2008 Q1
2007 Q1
2006 Q1
2005 Q1
2004 Q1
2003 Q1
2002 Q1
2001 Q1
2000 Q1
-6%
AsiaPac Leads, Europe Lags Real GDP % change per annum 10% 8% 6% 4% 2% 0% World Western Europe Asia-Pacific United States
-2% -4%
Source: IHS Global Insight CB Richard Ellis | Page 5
2012 Q1
2011 Q1
2010 Q1
2009 Q1
2008 Q1
2007 Q1
2006 Q1
2005 Q1
2004 Q1
2003 Q1
2002 Q1
2001 Q1
2000 Q1
-6%
China is What Makes Asia Different Real GDP % change per annum World Asia-Pacific Excluding China Asia-Pacific China
15%
10%
5%
0%
Source: IHS Global Insight CB Richard Ellis | Page 6
2012 Q1
2011 Q1
2010 Q1
2009 Q1
2008 Q1
2007 Q1
2006 Q1
2005 Q1
2004 Q1
2003 Q1
2002 Q1
2001 Q1
2000 Q1
-5%
So where’s the problem? Risk and uncertainty are dominant Western recovery faltering? Global imbalances: trade surplus vs. deficit Exchange rates … a trade/currency war? Government deficits and austerity packages Walking a tightrope with future inflation - and emerging market asset bubbles All of which is creating a climate of uncertainty
CB Richard Ellis | Page 7
Source: IHS Global Insight
CB Richard Ellis | Page 8
ni te
d
ce
an a
da
n
Sw en itz er la nd D en m ar k N or w ay Fi nl an d
Sw ed
C
Sp ai
St at es Po rt ug al G er m an y U A ni us te tr d ia K in gd N om et he r la nd s
U
Fr an
d
iu m
ly
la n
el g
Ir e
B
ec e
It a
G re
Government Debt Burden Has Risen
140%
Debt as % GDP, 2010
120%
100%
80%
60%
40%
20%
0%
Ouch! This Is Going To Hurt ‌ Government Deficit as % GDP 12% China 10%
Germany Spain United Kingdom
8%
United States 6%
4%
2%
0%
-2%
-4% 2000
Source: IHS Global Insight CB Richard Ellis | Page 9
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Risk-free rates have fallen sharply Benchmark 10-year bond yield (%) – Daily close 5.50
5.00
Germany
UK
USA
4.50
4.00
3.50
3.00
2.50
2.00 1 January 2008
1 April 2008
1 July 2008 1 October 1 January 2008 2009
Source: Ecowin (September 2010) CB Richard Ellis | Page 10
1 April 2009
1 July 2009 1 October 1 January 2009 2010
1 April 2010
1 July 2010
2
Real estate investment
Sentiment is fragile: Investors are risk-aware VIX (Daily Close) and CBRE EU-15 Office Yield Index 100
VIX
Prime Office Yield (%)
6.5
Sept/Oct 08 Lehmans & Banking Crisis
6
75
Autumn 98 Russian Bonds
50
Sept 01 9/11
Mid 07 Sub-Prime
Aug 02 Enron º
5.5
Oct 97 Asian Debt
5
25 2000/1 Dot Coms
Sovereign Debt
The “Perfect Calm”
4.5
0 96 97 98 99 10/21/99 00 01/29/01 01 02 0308/19/03 0411/22/2004 05 February06 07Nove089/16/2008 09 12/22/2009 10 11 12/29/95August-97 07/16/98 05/13/02 06 mber-07 Source: CBOE VIX (18 October 2010), CB Richard Ellis CB Richard Ellis | Page 12
Sentiment is fragile: investors are risk-aware VIX (Daily Close) and CBRE EU-15/Developed Asia Office Yield Index 100
VIX
Prime Office Yield (%)
Sept/Oct 08 Lehmans & Banking Crisis
6.5
6
75
5.5 Autumn 98 Russian Bonds
50
Sept 01 9/11
Sovereign Debt
Aug 02 Enron º
5
Oct 97 Asian Debt
4.5 25
4 2000/1 Dot Coms
The “Perfect Calm”
Mid 07 Sub-Prime
3.5
0 96 97 98 99 10/21/99 00 01/29/01 01 02 0308/19/03 0411/22/2004 05 February06 07Nove089/16/2008 09 12/22/2009 10 11 12/29/95August-97 07/16/98 05/13/02 06 mber-07 Source: CBOE VIX (18 October 2010), CB Richard Ellis CB Richard Ellis | Page 13
Global Office Capital Value Trends % change per annum
50% 40% 30% 20% Asia
10%
Pacific EMEA
0%
USA Global
-10% -20% -30%
Source: CB Richard Ellis, NCREIF CB Richard Ellis | Page 14
2010 Q3
2010 Q1
2009 Q3
2009 Q1
2008 Q3
2008 Q1
2007 Q3
2007 Q1
2006 Q3
2006 Q1
2005 Q3
2005 Q1
2004 Q3
2004 Q1
2003 Q3
2003 Q1
2002 Q3
2002 Q1
-40%
Global investment turnover remains low US$ Billions $350 $300 $250 $200 $150
$100 $50 $0 07Q1 07Q2 07Q3 07Q4 08Q1 08Q2 08Q3 08Q4 09Q1 09Q2 09Q3 Q409 10Q1 10Q2 10Q3
Source: Real Capital Analytics, CB Richard Ellis CB Richard Ellis | Page 15
Global investment turnover remains low US$ Billions $160
Americas
EMEA
AsiaPac
$140 $120 $100 $80 $60 $40 $20 $0 07Q1 07Q2 07Q3 07Q4 08Q1 08Q2 08Q3 08Q4 09Q1 09Q2 09Q3 09Q4 10Q1 10Q2 10Q3 Source: Real Capital Analytics, CB Richard Ellis. *Excludes development sites. CB Richard Ellis | Page 16
Investors are wary … Prime property looks attractive relative to bonds Focus on quality of covenant and income stream Good locations, large liquid markets Not much good stock available, few sellers … .. Unlike in the secondary market! Hence growing divergence between best & rest Key issue: when to get into value add …
CB Richard Ellis | Page 17
Asian office market continues to improve All the markets recorded positive take up in Q3; Asian overall vacancy fell 67 bps q-o-q 14,000
Net absorption Vacancy rate
12%
10,000
10%
8,000
8%
6,000
6%
4,000
4%
2,000
2%
0
0% 2004 Q1 2004 Q2 2004 Q3 2004 Q4 2005 Q1 2005 Q2 2005 Q3 2005 Q4 2006 Q1 2006 Q2 2006 Q3 2006 Q4 2007 Q1 2007 Q2 2007 Q3 2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3
('000 sq.ft.)
12,000
14%
Source: CBRE Research CB Richard Ellis | Page 18
Global Rental Trends Index (Q1 2001 = 100) 160
Index
150
Asia Pacific EMEA Americas Global
140 130 120 110 100 90 80 70
Source: CB Richard Ellis CB Richard Ellis | Page 19
2010 Q3
2010 Q1
2009 Q3
2009 Q1
2008 Q3
2008 Q1
2007 Q3
2007 Q1
2006 Q3
2006 Q1
2005 Q3
2005 Q1
2004 Q3
2004 Q1
2003 Q3
2003 Q1
2002 Q3
2002 Q1
2001 Q3
2001 Q1
60
Grade A / Prime office rental movement in Asia Hong Kong Guangzhou Singapore Bangalore Beijing Shanghai Kuala Lumpur New Delhi Tokyo Mumbai Taipei Manila Bangkok Seoul
Q2 10 (q-o-q % change)
Ho Chi Minh City
Q3 10 (q-o-q % change)
Hanoi
-8%
Source: CBRE Research CB Richard Ellis | Page 20
-6%
-4%
-2%
0% 2% 4% q-o-q % change
6%
8%
10%
12%
Asian real estate investment turnover The really interesting issue is how quickly will international capital flows rise – and how much of it will be intra-regional! US$ Billions 25
US$ Billions 80
Inter-regional
Cross border Dom estic (local purchaser)
Intra-regional
70
20
Domestic (local purchaser) 60
50
15
40
10 30
20
5 10
0
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2008 2008 2008 2008 2009 2009 2009 2009 2010 2010 2010
Source: CBRE Research CB Richard Ellis | Page 21
2005
2006
2007
2008
2009
2010 (Q1 - Q3)
Heard on the Floor MIPIM Asia 2010
Remembering 2009
An overwhelming sense of optimism Asia weathered the storm Capital flowing in Worries focused on: • US double dip recession • Bubble in China
CB Richard Ellis | Page 23
2009: Optimism justified How is your business activity this quarter compared to same quarter last year? 80% 70% 60% 50% 40% 30% 20% 10% 0% Better
CB Richard Ellis | Page 24
Same
Worse
2010: Optimism persists What is your perspective on your real estate market compared to last year? 80% 70% 60% 50% 40% 30% 20% 10% 0% More optimistic
CB Richard Ellis | Page 25
Same
Less optimistic
2010: Self-confidence
Two main themes ƒ China is leading the way forward ƒ Richness in the diversity of the region
CB Richard Ellis | Page 26
China: Strong fundamentals
Growth factors Continuing urbanization Growing middle class Government management of the economy Insurers allowed to invest in property Strong trend protects against short cycles
CB Richard Ellis | Page 27
China: Maturing market
Features of a maturing market More experience on all sides – track record Capital flowing to Tier 2/Tier 3 cities Green/sustainability Urban renewal Livability Affordability Golf courses
CB Richard Ellis | Page 28
China: Not there yet
Still a growing market A growth-development story Limited availability of institutional quality assets Current taxation system not sustainable
CB Richard Ellis | Page 29
China: Risks remain
Tier 1 cities Speculative activity Bubble in luxury residential Fickle (non-local) population
Tier 2/Tier 3 cities Partners risk Mobile central business districts
CB Richard Ellis | Page 30
Region: Self-confidence
Growth of domestic demand Growth of cross-border capital flows Taking advantage of our diversity • • • •
Japan Taiwan, Korea Vietnam, Philippines, Thailand, Malaysia Cambodia, Mongolia
CB Richard Ellis | Page 31
Region: Key concerns
Macroeconomic stability ƒ Exchange rate and inflation uncertainty ƒ International capital flows
But not about political instability (?)
CB Richard Ellis | Page 32
Global disconnect
International media vs. political reality International view of economic diversity Media headlines and research reports Western-located HQ vs. local managers • HQ enthusiasm for China but scarcity of institutional grade opportunities • HQ bored on Japan but availability of opportunities
CB Richard Ellis | Page 33
Joseph Stiglitz
A+ to Asia for lessons learned from the West after 1997-98 crisis ƒ Financial regulation ƒ Management of capital flows
CB Richard Ellis | Page 34
How has MIPIM Asia changed your outlook? 60% 50% 40% 30% 20% 10% 0% More optimistic
CB Richard Ellis | Page 35
Same
Less optimistic
Lessons from US crisis: Geographic diversity
Consensus: Diversity in housing price growth across the US is indicative of diversity in underlying fundamentals If one market crashes, others will save the day
BUT Housing = Land + Structure Regional diversity in relative proportions Boom was national Ö Downturn was national
CB Richard Ellis | Page 36
Lessons from US/UK crisis: No smooth landing
Housing market: flow of households through stock of structures Prices: high enough to keep enough people out Credit boom Ö housing price boom Capital gains used to move and consume Slow-down of economy Ö Less capital gains Ö Crash
CB Richard Ellis | Page 37
Lessons from US/UK crisis: No smooth landing
Key Question: What determines the willingness to pay of next buyers? Family savings converted into housing Capital gains then re-invested in housing
Warning Becoming like US in 2000s, UK 1980s A slow-down Ö a crash Maybe you can teach the West!
CB Richard Ellis | Page 38
Growing In Uncertainty or Growing Self-Confidence? Wrap-Up Keynote Lecture MIPIM Asia 11 Nov 2010 Nick Axford Executive Director Head of Asia Research
François Ortalo-Magné, Director, Global Real Estate Master Wisconsin School of Business Partner with HKUST Business School