A report from last week noting that private equity giant Blackstone (BX) was moving towards offering a pan-Asian property fund underscored the data that I've been collecting from around the region that suggests that bottoms are forming in certain markets. The stunning turnaround on the Hang Seng from the June low - which has it up 22.5% in less than 6 months -is strongly stating the power of global, coordinated quantitative easing. And since Hong Kong pegs their Dollar to the U.S. Dollar- similarly to Singapore - via manipulating interest rates, this is part of the reason why both the Hong Kong and Singapore REIT markets have done so well in the past 18 months. There is simply more money chasing the same amount of property.
It is the Federal Reserve's ZIR (zero-interest rate) policy that has made these two Asian tigers very attractive places to park investment funds in anticipation of the economic growth that will have Asia Pacific at its epicenter. Low carrying costs of properties in two of the world's most dynamic cities which will form two corners of the Asian financial triangle in the coming years - Shanghai being the third - has caused tremendous growth in prices and, by extension, occupancy rates. The result is the Hang Seng REIT Index is up 39.4% in 2012. The FTSE Straits Times REIT Index which covers Singapore REITs has climbed 33.4% this year.
Blackstone, along with a number of other regional REITs, like Singapore's Keppel REIT (KREIT), has begun acquiring distressed properties in Australia already where REITs there have returned 15.6% on average - versus 21.8% for Singapore - according to a recent report by Ernst & Young. I note, however, that neither company is buying Australian residential real estate which may have been blown into an even bigger bubble than the U.S. housing market was, by the looks of things. They have been looking strictly at commercial properties.
Blackstone has been acquiring commercial real estate aggressively since 2009 and its portfolio currently has more than $53 billion in real estate. And the company has been able to do so with little interference as the major NY banks are not in any position to compete with it, since their balance sheets are stuffed with worthless mortgages and mortgage-backed securities. In this scenario Blackstone, and other savvy REITs, can swoop in, buy good properties at stink-bid prices and resell them later.
The question for investors is whether or not the Hong Kong and Singapore real estate markets are approaching bubble territory. Singapore is close to slipping into recession with GDP growth of just 0.3% in the third quarter. The effects of a strong Singapore Dollar have brought the CPI back down to 4.0% in October, but attempts to cool the housing market has shifted investment capital into commercial and industrial properties. The demand for property in Singapore is so strong that it is spilling over into the southern Malaysian state of Johor and the Iskandar Special Economic Zone. Johor's GDP is growing at a 6.3% rate currently, ahead of the rest of Malaysia.
Hong Kong is experiencing similar issues due to their Dollar peg. Low interest rates are the underlying cause of nearly all property bubbles. Production which takes longer to complete is more interest rate sensitive and because of that it is disproportionately stimulated by low borrowing costs. Normally I would dismiss both of these markets as already being in bubbles because of the tremendous rise we have already seen, but these two cities are special cases due to their relative openness and rising importance in the global financial system. As such, the low interest rate environment they are operating in may have acted as an accelerant to a process that was happening anyway. It could easily continue for longer than conventional analysis would predict. The shifts occurring in the global financial system are so big that it is difficult to handicap one factor - low interest rates - versus the other - global capital shifts.
To get a clearer picture then, let's look around the region at equity prices. We see that the other Asian bourses have put in similar performance to the Hang Seng's rise I mentioned earlier. For most of these countries, they have not had to join in the global race reducing interest rates to stimulate or maintain growth - Malaysia has gone the fiscal policy route ahead of their elections in 2013 while holding interest rates at 3% - and as such have both policy wiggle room as well as improving fundamentals thanks to their relatively tight monetary policies. This speaks to the sustainability of the situations in Hong Kong and Singapore, especially Singapore as so much of its trade is regional. China and Vietnam have the worst real estate problems, and with them the most draconian monetary controls, which both are in the process of loosening. It is no surprise that their equity markets have suffered because of it. Vietnam, in particular, is not likely to fully recover for at least another 2 years as the problems are too systemic. But, in China, the measures taken by the PBoC have already begun unlocking that market. Blackstone has begun moving in China, apparently, but it has not made any moves in Vietnam.
The Guggenheim China Real Estate ETF (TAO) has performed very well since hitting a low near $16 per share in April. The fund has moved 10% in the past month and it has done so on exceptionally high volume. This has translated into Assets Under Management (AUM) rising from $48.4M to $65.7M since November 1st, a rise of 35.6%. Clearly the investment demand is following the rise in price. The same is true around the region. Investment demand in equities and relatively higher forecast GDP growth for the countries in the region will drive more real estate demand. The integration of the ASEAN nations with the Pacific Rim and Central Asia continues to grow. Free trade agreements and the coming Asian Economic Community will further improve this picture.