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Asia-Pacific Residential Review

Knight Frank Research provides a special analysis of Asia Pacific’s cross-border residential land activity in May 2017.

By The iProperty.com News Team on Jul 05, 2017

Brand building, diversification and cooling measures have all helped drive a significant increase in cross-border residential development acquisitions over the last ten years. Despite a slowdown during the Global Financial Crisis and its aftermath, crossborder residential land buying activity in Asia Pacific has been on an upward trajectory over the past decade. When comparing 2016 to 2007, the number of acquisition of residential development sites from overseas investors more than doubled, with volumes hitting more than US$42 billion last year.

Although domestic buyers remain the majority group in all Asia Pacific countries, the increasingly cross-border nature of development activity has been one of the most striking trends of the last few years.

As many residential markets mature over time, the hunt for the next high-yielding property development opportunities may happen in selected developing countries such as Cambodia, the Philippines and Indonesia. Investors and developers will find these locations attractive given the consistently high economic growth, huge young population, rapid urbanisation rate combined with the rising need for different housing types.

Similarly, developers may also choose to invest in selected hot spots in mature economies such as Kyoto in Japan, suburbs near major cities in Australia and the city fringe in Singapore.

Regional Snapshot

In Australia, the market saw 1.5% price growth in Q4 2016 and 3.5% growth across 2016. Meantime, policy makers have encouraged tighter lending restrictions of the major banks across the board, including limiting interest-only loans to 30% of total new mortgage lending, down from 40% previously. This closer scrutiny has extended to include low-doc loans pushing beyond the 90% loan-to-value ratio (LVR), to include those also at 80% LVR. In China, national house price growth is slowing gradually – from 10.8% year-on-year to just 1.9% in Q4 2016. Strong interventions from the authorities to cool down the red-hot property markets in Tier-1 and Tier-2 cities are showing early results. In Beijing, some of the strictest restrictions were introduced, for example, down payments for second-time buyers of private sectordeveloped homes were raised to at least 80% of the purchase price, up from 70%, and the definition of “second-time buyer” was broadened to include those who have any mortgage history, regardless of where or whether they currently own a flat.

Hong Kong house prices continue to increase, with the upward trend expected to persist throughout 2017. From Q2 2016 to Q4 2016, house prices increased by 11.2% – the strongest growth of markets tracked. Rebalancing the dynamics in the property market and providing affordable housing for the low and middle classes will be vital for Hong Kong’s newly-elected Chief Executive. The highly controversial demonetisation initiative in India is believed to be softening price growth in the short term, as it poses an unpredictable disruption. In recent months, developers refrained from announcing any new launches and buyers turned extremely cautious before committing to purchases. In the long run, however, the reduction in the black money economy is projected to augur well for the industry, with positive impacts expected to start to be felt by the end of 2017.

Considering all factors such as global and domestic economic conditions, the Indonesian property market has entered a mature or consolidation phase. Quarter-on-quarter, house price in Indonesia slowed to a growth of 0.4% compared to the 2.4% increase year-onyear. The outlook for 2017 remains cautiously optimistic with opportunities and challenges. Despite the successful local election and tax amnesty program in early 2017, buyers are still adopting a wait-andsee approach. However, the new infrastructure under way and plans for its acceleration are expected to see increased consumer confidence and optimism in a few years to come. House prices in Japan stayed flat in the second half of 2016, recording a marginal drop of 0.2% for the whole of 2016. The government relaxed its immigration policy and now allows highly-skilled foreigners to apply for permanent residency after as little as a year. As an attempt to boost its declining young working population, this new point system may potentially propel more demand in housing, further strengthening the appeal of Japanese residential properties.

The general performance and outlook for Malaysia property market is still lacklustre as both economic conditions and public sentiments are down. Given the relatively solid economic fundamentals, and a weak Ringgit (it slid close to 4.5% against the US dollars in 2016) some investors, including overseas buyers, may opt to capitalize on this opportunity to purchase discounted properties that offers stability and long-term potential.

A lack of supply, rising demand and record low interest rates fuelled a 12.7% price growth in New Zealand, making it the second strongestperforming market worldwide last year. In recent months, however, market activity has seen some slowdown as the Reserve Bank of New Zealand continues to lobby the government to add debttoincome limits to its macroprudential cooling measures.

Taiwan’s housing market was the second weakestperforming globally in 2016, with a 6.5% year-onyear decline. The local property market has been affected by the integrated Housing and Land Tax and high holding tax at the beginning of 2016. As a result of the Government’s cooling measures, transaction volumes declined by 35% to 245,000 last year.

The slight tweaking of cooling measures in Singapore was a surprise move in March. The government reduced the holding periods for residential property purchase down to three years from four years while also lowering the Seller’s Stamp Duty by four percentage points. Additionally, the total-debt-servicing ratio framework for mortgage equity withdrawal loans with loan-tovalue ratios of 50% and below has been removed. On the other hand, regulators also imposed the Additional Conveyance Duties on residential property holding entities, which closed a tax loophole that allowed developers to offload apartments in bulk to institutional investors and wealthy Singaporeans.

2016 was another strong year for Thailand’s prime and super prime condominium market, particularly in Bangkok. Despite a slowing economy, demand stayed high, supporting price growth. With limited land and growing competition for capital from other real estate classes, the prime residential sector is expected to witness moderate price growth amidst potentially slower sales activities in 2017.

SPECIAL ANALYSIS

Asia-Pacific cross-border residential land acquisition activity.​

The main bulk of this cross-border capital originated from Hong Kong and mainland China, constituting 80.2% of the total money spent on acquiring overseas residential lands within AsiaPacific. On the surface, Hong Kong alone is the front-runner with 74.5% of the market share but in fact the most acquisitive companies have roots in the mainland. For instance, three out of the top five most aggressive overseas housing developers listed in Hong Kong are subsidiaries of Chinese state-owned enterprises. Thus, it is no surprise that Chinese money has been in the limelight recently. Notably, as an island-state, Singapore-based developers are trailing behind Hong Kong, snapping up 7.3% of the total cross-border volume as they actively pursue more overseas development opportunities. Other notable players include United States (3.2%), Japan (2.4%), Malaysia (1.7%) and United Arab Emirates (1.1%).

The growth in outbound activity by mainland Chinese developers has been one of the key trends over the past decade, with volumes going from practically zero in 2009 to more than US$2.5 billion in 2016. From 2012 to 2016, their favourite destination was Australia (36.5%) along with other key markets include Hong Kong (23.7%), Malaysia (19.7%) and Singapore (15.4%). Among a flurry of cooling measures introduced in major Chinese cities along with the capital controls imposed earlier this year, we expect Chinese developers to put more money into Hong Kong and smaller Tier-3 Chinese cities this year. In the first quarter of 2017 alone, Chinese developers invested over US$5.1 billion in the region, with more than US$4.9 billion or 95% concentrated in Hong Kong.

From 2012 to 2016, the top five overseas investment destinations for residential land in Asia-Pacific were ranked in the following order: mainland China, Australia, Singapore, Malaysia and Hong Kong. The biggest gainers during this period include Hong Kong, Australia and Malaysia. The first two countries saw investments into their countries increased by about nine times and 26 times respectively while Malaysia grew from zero foreign investment into residential development sites in 2012 to over US$1.4 billion in 2015. Meanwhile, the average investment into Singapore’s housing land from 2012 to 2015 was about US$1.6 billion but it declined to US$671 million in 2016.

15 of the developers on the top 20 list of most active developers are based in Hong Kong. However, as aforementioned, companies like China Resources, China Overseas Land & Investment and China Merchants Group are listed in Hong Kong but have origins in the mainland. As a result, most of their ‘overseas’ deals are done in mainland China. At the same time, the average number and percentage of deals done in joint venture was 13.6%, as both local and foreign developers recognise the importance of local knowledge and foreign capital as well as expertise.

Analysing the deals done over the last ten years, we see that developers have been acquiring more expensive, less prime and smaller sites. Both the average quantum price and price per sq ft have grown gradually on a CAGR basis – increasing 4.7% per year from US$154 million to US$242 million and 15.9% per year from US$47 to US$208 per sq ft. For land size, the acquired sites now have much smaller land area – averaging 32 acres today compared to 65 acres 10 years ago. Likewise, the percentage of acquired sites that are in a CBD area has dropped tremendously – from about a fifth in 2007 to just 6.0% in 2016. This trend can be attributed to a couple of factors: limited supply of big, prime sites and the increasing understanding of the local residential market. Usually, firsttime entrants prefer to build a bespoke development as a statementmaking landmark in a central location. As they obtain deeper foothold in the market, it is not unusual for them to build houses in secondary locations.

In Q1 2017, we continue to see more crossborder investment activities in Asia-Pacific – with close to US$10 billion representing 15.2% of the total sales volume. In addition, this is also the highest Q1 figure ever recorded since at least 2007. Three of the top five deals transacted in Hong Kong and were all purchased by Chinese developers; the rest of the top ten deals were in mainland China. In addition to increasingly tightly controlled Chinese outbound activity, the residential development sector may have to compete for funds with other alternative investment-grade real estate classes such as logistics and hospitality. Given the growing uncertainties in the world, AsiaPacific developers may also choose to invest in selected hot spots in mature economies such as Kyoto in Japan, suburbs near major cities in Australia and city fringe in Singapore.

COUNTRY ANALYSIS

Five-year breakdown of market share between domestic and foreign developers, notable deals and localised analysis over the period of 2012 to 2016.​

Australia​

From 2012 to 2016, domestic developers and investors purchased 58.4% of residential development land in Australia, while the largest foreign developer group hailed from China (23.4%). Last year, Chinese developers and investors purchased $2.4 billion worth of residential development sites in Australia – a 9.4% increase from 2015. Boasting an economy record without recession for over 25 years, Australia has also seen a steady population growth partially fulfilled by a healthy immigration rate especially the highnet-worth individuals.

Cambodia

Real estate developers from across Asia, particularly from China, Singapore, Taiwan and Korea have gone into Phnom Penh, seeking a share in one of the last frontier markets in Asia. Additionally, legislation in 2010 that allowed foreigners to buy high-rise property paved the way for more inbound investments. The country’s economy has been growing around seven percent on average since 2010, attracting investors to buy up residential lands and units to tap on the growth opportunity in this fast-urbanizing nation.

Mainland China

The acquisition of residential development sites had been dominated by local buyers; the only major foreign group of buyers came from Hong Kong. In first-tier Chinese cities, domestic developers accounted for 86.6% of the total sales value while Hong Kong took up 12.9% of the share for 2012 - 2016. As the market matures, to some, the incentive to expand domestically is thinning as competition toughens and profit margin returns to a normal level; to others, aggressive moves on land-banking is necessary given a persistently strong demand and undersupply in certain cities.

Hong Kong SAR, China

The land-buying activities in Hong Kong by mainland Chinese developers is widely reported in the press. In the past two quarters (Q4 2016 to Q1 2017), mainly driven away by harsh cooling measures and the need to hedge against the declining Renminbi, mainland Chinese developers have outspent Hong Kong developers and accounted for 62.1% of the total sales volume. Even though on the surface, from 2012 to 2016, developers based in Hong Kong had stayed as the dominant buyers (92.0%), many of the developers listed in Hong Kong have roots in the mainland.

India

Recent property-related reforms such as the Real Estate Regulation Act, REITs, foreign direct investment (FDI) and goods and services tax are encouraging to investors in the long term. For foreign developers, this is especially true as the Indian government now allows 100% FDI into the real estate industry. As such, increasingly, foreign investors are partnering with local Indian developers to expand their footprints in India. For 2017, the Indian economy is expected to grow by 7.4% which will help put its real estate market on the radar of many investors.

Indonesia

With about 29 million Indonesians in their productive age, the fourthmost populous country in the world presents huge market potential for residential developers and investors. Through joint ventures and outright purchases, many overseas investors are partnering with Indonesian developers to share risks and increase funding. Also, local developersa will be able to speed up the development of their large land banks and leverage on international brand names and technical expertise from foreign investors to boost the marketability of their projects.

Malaysia

Favourable foreign residency scheme, low cost of living and strong economic potential make Malaysia appealing to international investors. In the past five years, about 35.0% of residential lands were purchased by foreign buyers, of which the majority was from mainland China. Johor state, which is just across the border from Singapore, has emerged among the top destinations for Chinese developers. Barren ground and reclaimed lands are being turned into high-rise luxury flats, targeting buyers from China as well as overseas buyers like Singaporeans. As its closest neighbour, the investment into Malaysian residential land by Singaporean investors has been healthy – but significantly lower than the Chinese from 2012 to 2016 ($964 million versus $2.4 billion).

Singapore

From 2012 to 2016, domestic developers constituted most of the market share at 79.0%; the rest of the share was split among different countries with none of them having shares of more than 10.0%. In Singapore, developers face some of the most stringent regulations such as Qualifying Certificate rules and Additional Buyers’ Stamp Duty, as the government aim to prevent land hoarding and encourage reasonable pricing.

Thailand

The Thai residential sector is often favoured by foreign investors as a gateway to other ASEAN countries. While residential land investment activity by overseas developers to date seemed limited on the surface, some of the transactions were done in joint ventures with local Thai developers or acquisitions of stakes in Thai property companies, due to government’s restrictions on foreign ownership. Such strategic joint ventures are symbiotic as local developers may tap on the networks their foreign partners have in their home countries.

 

DISCLAIMER: The data above represents the findings of Knight Frank Residential Research and is not in any form and endorsement or recommendation by iProperty.com. Readers are encouraged to seek independent advice prior to making any investments