Growing Institutional Interests in Tapping into Greater China Real Estate Capital Market

The rate of competition for quality yield accretive real estate remained intense in Asia during 2005 with strong institutional investor activity observed across-the-board.

The Research recorded major real estate transactions in Asia totalling US$ 31.9 billion, with Tokyo (accounting for 28% of transaction volume), Hong Kong (22%), Singapore, Mainland China and Seoul emerging as the region's major centers of large-lot real estate transactions.

With respect to the countries of origin of the real estate capital flooding into Asia to engage in cross border investment, US was the leader in this type of activity, with US funds, investment banks or investment companies in the number one position, accounting for 27% of all cross border activity; and with Singapore and Hong Kong also figuring significantly in cross border investment activity, accounting for 17% and 14% of cross border investment flows and Australia taking up the rear, amongst countries significantly involved in cross border investment in Asia, accounting for 12% of major investment activity.

Real estate investment activity has been especially strong in the Greater China region during the past two years. With robust economies fuelling significant rise in rentals and falling vacancies, continued capital flow is evidenced as channelling into quality incomeproducing commercial properties and also the high-yielding individual properties in the region, which bodes well with respect to the formation solid and improving property fundamentals.

Despite a slow start, real estate investment market in Hong Kong picked up strongly towards the end of the first quarter of 2006, the continued upbeat mood, the presence of a high level of global liquidity and positive spillover effects from the stock market rally.

The emergence of REITs greatly expands the horizon of real estate capital market for local and PRC developers, while institutional investors, should benefit from improved property market liquidity, wider investment options to tap into the positive property cycle, as well as acting as arrangers in the IPO for the listing of REITs.
Hong Kong Investment Market

To harness the strong corporate tenant expansion demand and the current rental reversionary cycle, foreign institutional investors remain to have a visible presence in the Hong Kong property market, with the office sector recently emerged as the focus of the market.

Meanwhile, institutional interest in the warehouse/ logistics sector has continued unabated, attracted by the sustained buoyancy of Hong Kong's re-export trade. At the same time, the impact of the current Grade A office supply shortage has also fed into the industrial/office (I/O) property market.

The I/O market are benefiting from the rising pressure of CBD office rentals as office tenants relocate to such facilities for cost savings, which acted to exert upward pressure on both rental and capital values.

The recent high level of activity in the Hong Kong property investment market is indeed part of a broader trend of growing overseas institutional investment in the Greater China real estate market. In particular, overseas investors have been scrambling to increase their exposure to the booming Mainland China property market over the past several years.

However, most notably, in 2005, a number of major investors and regional developers were evidenced as having made a tactical shift into investment yield-accretive, income producing properties, partially in reaction to the austerity measures imposed on speculative investment in the residential sector.

Moreover, bullish expectations on the prospects for upwards re-evaluation of the Chinese currency have also provided an added impetus for this shift in investment focus.

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