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November 26, 2014

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Asian real estate markets taking global center stage

The rise of the Asia-Pacific region is becoming a major influence on the world’s real estate markets, with outside investors eager to come in while Asian money increasingly steps onto the global stage, according to a Global Cities 2015 Report issued earlier this month by Knight Frank.

“Asia’s real estate markets face significant changes over the next five years, on top of the transformation already seen,” said Nicholas Holt, head of research at Knight Frank Asia-Pacific. “Economic growth, greater cross-border activity and changing consumer patterns are set to change the property landscape.”

As a large part of Asia transforms itself from a cheap production base to a trading block, intra-Asian trade is on an upward trajectory. China has become the dominant trading partner of most Asian countries, and again led the increase of cross-border capital flows.

Over the next five years, the increasing internationalization of the yuan, which will be soon traded and cleared in London, is expected to extend China’s economic reach even further.

In the Chinese mainland, it is not an unusual sight to see large corporations own and occupy their own office premises. However, the flurry of real estate investment activity by mainland financial institutions in Hong Kong and other overseas property markets is becoming an interesting trend. Notable deals include the Agricultural Bank of China’s purchase of a prime office tower for US$629 million in central Hong Kong and the recent purchase by China Construction Bank of 111 Old Broad Street, a central London office building for US$187 million.

“These acquisitions help brand building, which allows the institutions to manage their future occupation costs,” said Paul Hart, executive director of Knight Frank China. “They already have extensive domestic real estate exposure, and offshore investment allows them to diversify their risks.

The Chinese investment landscape has also become very competitive, and a desire to expand in overseas markets for better returns is also a driver.”

Knight Frank expects Chinese financial institutions’ expansion into offshore markets to continue, with the relaxation of regulations and the freeing up of yuan providing huge opportunities overseas.

Private wealth has been an extremely important source of capital in real estate markets. Rich Asians have traditionally viewed property as a core investment, heavily weighting their portfolios towards bricks-and-mortar. Following the numerous rounds of cooling measures in the residential markets, an increasing number of private investors have been looking at commercial real estate markets. Property either at home or overseas will continue to be high on their agenda.

Over the next five years and beyond, Asian insurance companies and pension funds are set to play an increasingly important role in the real estate landscape. With changing regulations and improved knowledge of the sector allowing these investors more access to alternative investment classes, it is likely that these groups will significantly increase property investments. Besides, funds across the region are looking at increasing allocations and diversifying into offshore property markets.

The Knight Frank Global Cities Index, which tracks prime office rents in 15 global cities, sees an average growth of 19.9 percent over the next five years. The Index is forecast to rise above its pre global financial crisis peak sometime in mid-2015.

Over the five years ending in 2013, eight out of the 15 global cities saw negative growth in office rents. Five were in Asia, including Shanghai.




 

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