Friday Digest Special – Asia Real-Estate in 2012 (2) – Emerging Markets

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If the last five years have taught us anything as investors, it would be that “stable” should more accurately read “stable thus far”. No country or real-estate market in the world was considered more “stable and established” than the great US of A in this century. Try telling that to the vast majority of folk who’ve leveraged into that property market between 2004-2007, however, (or similarly, into Japan’s booming property market between 1985-1991) and they might tell you a different story altogether. Empires DO fall. Markets DO come crashing down. Diversity and hedging, in property investing as in any other type of investment, is the prime requisite of savvy investors – and it is in this spirit exactly that we would do well to consider not only “established” and “stable” markets as we’ve done last week (which has now become last year), in the first part of our annual summary. We’ve covered Asia-Pacific’s more significant and established markets in detail, trying to pinpoint trends, as expressed in major news items collated throughout 2012, and attempted to view the major economies and property scenes of the bigger and more tightly regulated markets – China, Hong-Kong, Singapore, Japan and Australia – in the light of the great “West-East Shift” of money and influence that’s been the trademark of the past year.

In the spirit of diversity, however, it is now high time for us to consider events and trends in smaller property markets around the region, or, as they’re fondly called by media outlets world-wide –

Emerging Markets

The term “emerging markets”, in similar fashion to “established markets”, is quite misleading. Thailand and Indonesia, to name a couple of the Asian ones, for instance, have been around for years – as hordes of Western property owners in Bali and Phuket, two of the world’s favourite holiday island destinations, will be happy to testify. The term “emerging” in this context, however, refers not merely to the ability of foreigners to be active in those markets, whether directly or through local partnerships, but more accurately to their ability to do so in relative safety, operating in a regulated environment, with reasonable recourse options in case things go south. And while no one can protect a property owner from falling prices, rising vacancies and/or fiscal cliffs, as the events still unfolding in North-America and Europe, and most likely soon in Hong-Kong as well, all too painfully demonstrate – operating in established markets can and does shield investors, however, in the vast majority of cases, from rogue operators, blatant and outright corruption, and/or severe illegal practices – or at the very least, provides them with options to pursue in case these do occur.

Emerging markets, however, are quite different. And while, as mentioned, foreigners have been active in many of them for years, if not decades, these are first and foremost very “local” foreigners, who have lived or visited those places for extensive periods of time, have well-established local connections and know-how, are familiar with local customs and lingo, and feel at home in them to a substantial degree. “True” foreigners, in these parts of the world, such as the first time visitor to Thailand who falls in love with local island culture and runs into someone who promises them that perfect holiday home, or the company employee who, while visiting a factory in the Philippines, is promised an alluring investment property in Manila, “just across the street from where the next big casino is about to be built next year”, will quite often fall prey to local conmen, rotten government officials or police chiefs, or even plain old muggers in dark alleys, on their way to view a potential deal site.

The reasons so many of those foreigners still flock to these countries, however, lie in the promise of those successful cases which DO end up eventuating – emerging economies, which are often not “encumbered” by strict laws, regulations, safety and environmental standards more common in established markets (not to mention the common higher cost of labour, taxes and other such trivialities), can offer substantially higher returns and opportunity – and there are a great many foreigners who, similar to buccaneers and mercenaries who still operate on the high seas in many parts of the world, specialise in exploiting these loopholes and opportunities to their highest potential. Additionally, being less dependant on global events and turmoil, and with far more room to grow – well-positioned individuals and corporations who have entered these markets just prior to their “breaking out” are often rewarded with stellar and exponential growth on their capital investments, far greater than that available to be had in any of the more level-headed established markets.

And with that in mind, its time to dive right into the fray, starting with –

1. Thailand – Outlook : Almost There, but Not Quite

Thailand, which in recent years has catapulted to the status of one of the world’s most expensive luxury property markets, has for years promised – and mostly delivered on – great opportunity for those seeking a home away from home. The capital, Bangkok, has a very impressive set of fancy suburbs that cater specifically to millionaires and billionaires, and the country’s ever increasing reputation as one of Asia’s most rapidly expanding property markets, have seen prices rapidly rising in Bangkok – with close to 30% annual rise in prices reported last August – as well as similar trends in Phuket, the country’s most famous resort island. The best place to purchase, however, seems to be Pattaya, a secondary town further south of Bangkok, which has only recently become internationally known on a significant scale, and where properties as cheap as $30,000 could still be found late in 2012. With Bangkok already far too crowded and expensive to purchase in, Pattaya is swiftly becoming the country’s second capital, and prices are all but destined to reflect that status and rise steeply in the next few years. Thailand is also probably the closest thing to an established market that Asia’s emerging economies have to offer – which is certainly the line that the country’s government has been touting, in similar fashion to the rest of the markets covered below.

The main issues stopping Thailand from reaching this coveted goalpost, however, are several – firstly, it’s monarchy. The country’s government, which its king officially refuses to take any part in running or backing up – suffers from frequent coups, both military and civil, often involving minor bloodshed and armed conflict, and even a terror attack or two – all of which are unfortunately almost an annual occurrence in the capital, and religious war between Buddhist and Muslim groups continuously simmers in the south of the country. One government after another is ousted, often escaping to the West to avoid prosecution or worse, and it seems as if the people cannot make up their minds as to who it is that should govern them, and in what manner. Furthermore, the country’s laws, which prohibit foreign ownership of any asset in whole, save for equal partnership with a local Thai resident, also hamper foreign investment greatly, and the lack of clear governmental policy and regulations in this regard has led to countless cases of scams, corruption scandals and accusations of protectionism against local and national officials – in recent months involving even the king’s own monetary fund, which is now attempting to “clean up” Bangkok in preparation for vast and expansive new developments – often destroying the lives and livelihoods of inhabitants in the process. Add to that the country’s notorious reputation for child prostitution, which has been plaguing it for decades and show no sign of abating – and you’ll begin to see why Thailand – although closer to maturity compared to the rest of the markets covered herein – is “not quite there yet”.

2. India – Outlook : Murky Waters all Around

2India, the world’s second largest country by population, which until 2012 has enjoyed the status of one of the world’s most rapidly expanding economies and property markets, has unfortunately proven throughout the year that “old habits die hard”. While government officials have promised time and time again to act on rampant corruption and the rife use of “black money” (undocumented payments) in its bustling property market, and have been genuinely supported by industry professionals and academics who are doing their darned best to educate the country’s deal makers in the advantages of incoming foreign investment and how to “play by the rules” to attract more of it – it just doesn’t seem to eventuate, and India’s main cities of Mumbai, Bangalore and Delhi, once occupying highly respected places in the list of Asian foreign investment destinations, have all slipped to the very bottom of those same lists, with properties and land going unsold for as long as 40 months in some cases, lack of confidence in government policies and their enforcement cited as the main reasons for foreign investors’ “cold feet”.

And, although the hotel and serviced apartments industry is still highly active in India, with new budget, luxury and ultra-luxury branded suites being built left, right and centre in the vast sub-continent, it still remains to be seen if and when India can replicate its huge success in the global call-centre and outsourcing arenas to its property market and general economy as a whole.

3. Indonesia – Outlook : Doing Well, but We’ve Been There Before

Indonesia, and particularly its capital of Jakarta, has been hailed by all and sundry as “the most happening place in South-East Asia”, if not the entire continent, and developers have been quick to respond to the inflow of funds into the country, kicking off the biggest building spree the country has seen in a good few years, and doubling the amount of new developments kicked off in 2009. And while prices and rents have responded accordingly, there are many who are warning that the same scenario has been visited upon Indonesia approximately a decade ago – and that the country is now, as it was then, unprepared for this sort of boom culturally and mentality-wise, lacking in financial infrastructures and reliable, enforceable regulatory forces.

The last boom led to billions of dollars in developments left unfinished, a drop in occupancies around the capital to around 70%, with huge amounts of commercial and residential properties left empty and deteriorating, and a general “emerging market economy meltdown”, which plagued not only Indonesia, but many of its neighbours as well. Property analyst reports do tend to paint a brighter picture, but even these warn against the perils of occasional corruption, lack of finance vehicles and a short supply of reliable business partners. Whether this particular boom will turn to a bust or not remains to be seen, but if the amount of representation in investment funds are anything to go by, there are more of those who are backing up the trend this time around. Singapore moguls, in particular, have been flocking to Indonesia like bees to honey, with many of them indicating the country is where they see their brightest prospects for the next few years. Occupancies in office buildings, in particular, are the highest in Asia at the moment – over 98%

4. Malaysia – Outlook : Cooling Down

Malaysia was Europe’s, and in particular Germany’s, favourite destination earlier in 2012, with hundreds of millions in Euro funds being established with the sole purpose of investing in the country’s lucrative property market – this in spite of occupancies and rents yet to catch up. The end of the year has seen a sharp drop in sales, however, and the market now seems to have slowed significantly. A speculative gap between asking prices and official valuations has led to a severe lack of funding and finance options in the market, and it would seem as if 2013 won’t be much different – a fact which hailed as a boon by local industry figures, who were fearing the forming of a severe property bubble.

5. The Philippines – Outlook : Growth Hampered by Severe Social Issues

Legislation allowing the construction of up to ten new casinos in Manila, the capital, the first of which is already being built, has caused vast amounts of money to flow into the country throughout the year, this in spite of the fact that the country is suffering from an ever-widening social and financial gap, as its poor get poorer and its rich richer – the country is, in fact, the only place in Asia where this gap is widening, as opposed to narrowing, according to one report. Legislation currently being raised in parliament is suggesting to address some of these issues by introducing birth control options and sexual education to the masses – something which the country’s super-prominent Catholic Church has been firmly opposing for the last few decades – but whether this is an indication of a possible social reform still remains to be seen. As things stand, and until further notice, however, it would seem that the money finding its way to the Philippines is not being directed to where its needed most – the country’s common people – many of whom, in similar fashion to Hong-Kong, covered last week, are dangerously close to starvation.

Summary

Asia has, of course, a far greater selection of markets than those mentioned here. Other emerging markets discussed in various media forums and publications this year, such as Vietnam, Myanmar, Taiwan and even Turkey, all of which show some measure of potential growth and promise, as well as a few smaller, established markets such as South Korea and New-Zealand, have not been discussed in this summary due to their fairly limited size and lack of substantial international attention from foreign investors – this is not to say that these places have no merit or have shown no promise – Taiwan, New-Zealand and Turkey, in particular, are probably safer and more promising than those discussed herein – there’s a limit, however, to how much can be covered in the space of these digests, and the volumes of investment in these countries simply did not merit lengthy discussion this time around.

In the next and final chapter of this annual round-up, as promised, we’ll try to focus on what 2013 may hold in store for Asia as a whole, with a bit of a drill-down into particular countries and property markets – stay tuned, and please feel free to comment, discuss and speculate with me here –

What’s your take on the “Asian Century”, as Australia’s government has recently defined the coming few decades? Is it really where “it’s all happening” next year too, or will the great West-East shift fizzle out? Will the US and Europe rise again to their previous, glorious pedestals? Or will the great tsunami of the global financial crisis sweep us all off our feet and into another global depression? As always, would love to hear your thoughts!

(The information presented herein is taken from the author’s previous publications on this platform, many of which are linked to in the body of this article. View the complete list here)

(Pic 1 – New Jungle Growth / “RedFish“, Pic 2 – Ganges River, India / “Joseph A Ferris III“)

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About Author

Ziv Magen (G+) is an Australian, and has been living alternately in Japan and Australia for the past decade. "Born and bred" an IT project manager, he has made the transition to full-time real-estate investing several years ago, and subsequently opened a buyers' and proxy agency - assisting others in remotely capitalising on Asia's booming property market.

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