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Targets for 2010
By Alex Frew McMillan
‘‘We still believe that properties in the luxury space (in Hong Kong) are overvalued but the HK$2 million to HK$5 million units are still attractive from a capital growth and yield standpoint.’’
Asia was the place to be when it came to residential real estate in 2009. While the West remains mired in the mess of bad debts and slumping prices, markets such as Hong Kong, mainland China and Singapore bounced back like the financial crisis never occurred.
Interest rates are expected to remain low for some time. That makes real estate an attractive investment option. But Hong Kong home prices are unlikely to sustain their break-neck pace, experts say – Savills predicts sedate growth of 5% to 10% in this city next year.
Prospects may be better elsewhere and some market watchers say that this downturn presents a once-in-a-lifetime opportunity to buy into some of the world’s top property markets at knock-down prices. But there’s plenty of froth in the water. Governments in Asia are worried about bubbles building, while Western economies are still trying to get growth back above water.
So where else should you put your money in the year ahead?
The Economist Intelligence Unit has just released a survey that it conducted for Barclays Wealth. It asked more than 2,000 wealthy individuals, with investment assets of between £500,000 and £30 million, which market other than their own they thought had the best investment potential for real estate over the next two years.
Just over one-third of the people surveyed (35%) say they’re looking to boost their property holdings, with 48% planning to maintain their current investments. The survey was global but the bulk of the respondents came from the United States, Hong Kong, India, Singapore, Canada, Spain, Switzerland, the United Arab Emirates, the United Kingdom and Monaco.
Their picks? The United States was the runaway winner, picked by 16% of the respondents, followed by China and the United Kingdom, both with 7%, India, with 6%, and France, Spain and Canada tied in fifth place with 4%.
Rounding out the top 10 were Brazil, Germany and Australia, all attracting 3% of the vote.
The strong prospects for the United States clearly show “that recent price falls, a weaker currency and the long-term prospects for the US economy offer significant opportunities.” the study says. “Similar reasons are likely to influence the selection of the UK as the joint second-most-promising market.”
There could be more turbulence in markets such as the United States, though, as the government stimulus measures wind down. The survey, which also involved interviews with economists and senior property executives, suggests that it’s best to stick with high-end property in the biggest cities.
“We have seen an increase in registered interest for prime and super-prime property, which is usually an indication of coming price increases.” Liam Bailey, the head of residential research at the brokerage Knight Frank, says.
Patrick O’Neill, the CEO of the Hong Kong-based O’Neill Group, agrees. In an interview with Square Foot, he picked the United States as his top market for 2010, for property buyers looking for capital appreciation.
“I’ve been in the real estate business for about 25 years, and this is the most interesting real estate cycle I have ever seen, from a US perspective.” he says. His company develops, manages and invests in property in places such as Southeast Asia, the United States and the Middle East.
The major US residential markets have been devastated, O’Neill notes, with prices down as much as 70% from their peak in 2006. But property prices appear to have steadied, according to the Case-Schiller House Price Index, and at least aren’t dropping, even if they haven’t turned.
O’Neill identifies five cities within the United States as his top picks: Washington, D.C.; New York; Las Vegas; Los Angeles; and Miami.
“The old adage is, ‘Buy property when there’s blood in the streets’. Unless you have the risk profile where you can bring yourself to buy in Baghdad, these markets might be the place to go.” he explains.
The blood is metaphoric on the streets of the United States, of course. But Washington is benefiting from the “big government” approach that the Obama administration is taking in response to the country’s economic woes. Like Manhattan, prices have corrected some 20% to 25%.
“These kinds of fundamentally strong markets, when they go down so low, you have this tremendous upside.” O’Neill says, comparing the state of US real estate now to Hong Kong after the 1997 bubble burst or after SARS.
Las Vegas and Miami have been devastated by the bursting of the real estate bubble. “You’re getting discounts of anywhere form 60% to 70% - it is a buyer’s market at the extreme.” O’Neill says. It’s now possible to buy property for less than the replacement value – less than it would cost to build the property again.
The window of opportunity to snap up property in Los Angeles may be closing. But O’Neill feels that buyers looking for distressed bargains can still find them, as long as they restrict themselves to the central city. “A lot of that severely discounted property has already been absorbed, but Los Angeles is always Los Angeles – there’s still demand.” he says.
For investors who are looking for immediate cash flow and strong rental yields instead of capital gains, O’Neill advises Australia. Its economy has seen little fallout from the crisis, and its strong mining industry offers an indirect play that takes advantage of the growing importance of India and China, which create most of the demand for Australian natural resources.
O’Neill favours second-cities. His top five picks: Hobart and Perth, followed by the more traditional centres of Adelaide, Sydney and Melbourne.
“The Australian residential rental market remains undersupplied especially in the secondary cities that are experiencing job growth fuelled by the mining industry.” he says. “Vacancy rates in cities like Hobart and Perth are less than 2% representing an undersupplied rental market providing strong rental yields over 6%.”
Tim Murphy, the managing director of IP Global, also likes the prospects in Australia, which he put at the top of his top five picks for next year. He notes that, over the next four decades, Australia is projected to have the strongest population growth in the industrialized world.
“This is definitely a property market to look out for, driven primarily by an economic recovery.” Murphy, whose company develops property overseas and advises clients on where to invest, says. “Other factors not to be overlooked include a chronic undersupply issue as well as extremely favourable population migration and growth trends for major cities such as Melbourne and Sydney.”
Murphy’s other picks? He still likes Hong Kong, selectively, although he admits 2009 was the year to get in. “We still believe that properties in the luxury space are overvalued but the HK$2 million to HK$5 million units are still attractive from a capital growth and yield standpoint.” he says.
Rounding up his “top five” are Japan’s ski resort destination of NIseko, set to draw increasing numbers of tourists from both Australia and greater China; Malaysia, the only market in Southeast Asia that allows foreigners to buy freehold land; and the United Kingdom.
Given the uncertainty that still remains around global growth, now is not the time to test untested waters. But capital cities should maintain their attraction.
“The UK as a whole may not be the most attractive investment opportunity but London will definitely be a market that investors would wish to include in their 2010 portfolio.” Murphy says.
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