By Charlie Henneman, CFA
According to J.E. Hoke Slaughter, head of real estate investments in Asia for Morgan Stanley Investment Management, the 2008 financial crisis was transformative for the global real estate market. Not only did the crisis introduce unprecedented levels of market volatility and severe disruptions in transaction activity, it also resulted in a dramatic bifurcation of pricing based on asset quality and location, and left an unresolved debt overhang in developed markets.
“The music stopped in 2007,” Slaughter told delegates at the CFA Institute Asia Pacific Investment Conference in Hong Kong earlier this week.
While overall transaction volumes plunged, the market saw a de-linkage in China real estate in 2009-2010, and the global market has seen a split between developed and emerging markets in which developed market real-estate opportunities are likely to be distressed and deep value plays, while emerging market strategies center on growth.
Despite increasing sentiment that China’s investment-driven boom may have developed into a speculative bubble, Slaughter made a case that China — along with India — still represent “the best long-term, sustained growth opportunities in the world,” he said.
While noting that all Asian emerging markets have downside risk with respect to periodic oversupply, price volatility, and liquidity risk, several strong trends drive the real opportunity in these countries, including continued long-term urbanization trends, growth in gross domestic product per capita, and increases in the middle and affluent classes. In China in particular, a rapidly growing senior population may offer unique opportunities.
Slaughter suggested that long-term urbanization trends remain intact in China and that, despite the building boom, there remains an under-supply of institutional quality commercial assets in the country. In particular, he noted that Shanghai remains significantly “under-officed,” suggesting that development opportunities remain.
In addition, Slaughter contended that transportation and infrastructure development offer a “once in a lifetime play to buy land connected to them.” As has historically been the case in real estate investment, strategic location will be the key to long-term returns.
With regard to the “China property bubble” thesis, Slaughter said that a lack of transparency contributed to risk, but he also observed that cash transactions are a big part of the China market, and suggest that there may be less leverage in the system than in some of the developed markets that have run into difficulties. China’s one-child policy, he said, was concentrating intergenerational wealth with couples entering the housing market, perhaps providing a more reliable buying base than in more highly leveraged markets.
Outside of China, Slaughter said that strong demographic trends in India suggest the country will overtake China in terms of the size of its working population by 2030, and its own urbanization trends will create opportunity for strategic real estate investors.
Europe, on the other hand, faces a significant “equity gap” and is more of a “grinding five-year opportunity” for distressed investors, Slaughter said.