Asian real estate has been such a hot sector that equity offerings from developers and Reits have been eagerly swallowed up by investors. Adam Harper looks at an area of rapid growth for Asian equity capital markets.
Across Asia, property accounts for untold billions of wealth, yet it is only in the last two or three years this exciting asset class has really started to open up to public equity investors.
With the collapse in property prices around the Asian financial crisis of 1997-1998, and the Sars virus in 2003 a distant memory, Asian rents and property prices are soaring as the region's economies maintain strong gross domestic product growth.
Not surprisingly, Asia's fastest growing large economy leads the way in this real estate boom. According to economists, China's real estate market makes up one-third of its GDP and, in Shanghai, property prices have risen 300% in the last three years.
"The public equity markets for real estate are developing quickly, resulting from an overall growth in the supply of real estate in the region and, more importantly, the desire of institutional and private capital to gain exposure to the regional real estate story," says Rick Abrams, head of real estate capital markets at Wachovia Securities in Hong Kong.
And the performance of Asian, especially Chinese, real estate-linked stocks has not disappointed. Data sourced from the Asian Public Real Estate Association indicates that the index of all Asia Pacific real estate stocks has risen 92% between January 1998 and September this year.
Investor confidence remains buoyant, says Mark Pawley, head of real estate investment banking at Credit Suisse in Singapore, who points out that Chinese developers that have completed initial public offerings in Hong Kong are now trading at multiples of between nine and 14 times projected 2006 earnings.
With some developers projecting a 50% increase in compounded earnings in 2006-2007, according to Pawley, it is easy to see why investors are so bullish in the short to medium term. "It is maybe not sustainable in the long term, but with the continuing pace of urbanisation in China, there is still tremendous demand," he says.
In the last two months, weaker markets meant that some potential property issuers delayed deals, but other Chinese developers were able to make spectacular debuts.
The HK$3.72bn ($479m) IPO of Shimao Property Holdings, a Shanghai-based developer of residential and leisure properties, became the biggest ever IPO for a Chinese developer when it raised gross proceeds of HK$4.28bn ($551m) in July, beating the $470m Agile Properties flotation in December 2005. Goldman Sachs and Morgan Stanley led the transaction.
Shortly afterwards, China-wide developer Greentown China Holdings completed a HK$2.67bn ($344m) offering via JP Morgan and UBS. Hong Kong developer Shui On Land is expected to be next with a $735m-$985m IPO initially planned for May.
Volumes in the property development and construction market are booming, too. According to Dealogic, in 2005 non-real estate investment trust property-connected issuers from Asia outside Japan and Australia accounted for $880m worth of deals. In 2006 until September, this was already up to $1.47bn.
"There is no doubt of their need for capital," says Ronald Tham, a managing director in the corporate finance group at Macquarie in Hong Kong. "The speed at which mainland developers are moving is tremendous, despite government efforts to dampen the market."
China is not alone in having gone through an explosion of interest in real estate and corresponding frenzy around real estate listings.
One of India's biggest property developers, DLF Universal, had been planning a $3bn domestic flotation in May with Kotak Mahindra Capital and DSP Merrill Lynch as global co-ordinators.
The listing would have been India's biggest ever, but a fall in stock prices and a dispute between the controlling Singh family and minority shareholders have delayed the issue for now. However, Parsvnath Developers is planning to raise more than Rp10bn ($216m) in the capital markets this year, and developers such as K Raheja Corp and Emaar-MGF Land are said by bankers to be candidates for IPOs.
The IPO market for property developers, however, pales into insignificance beside the burgeoning real estate investment trust (Reit) sector in the region.
New equity issues from Reits climbed from $506m through one issue in 2004 to $4.96bn from 13 issues last year. By September this year, there had already been 14 deals worth $3.25bn (see table).
"Reits are a young product in the capital markets in Asia with the first Asian Reit listed in 2002," says George Pavey, co-head of global capital markets for Asia Pacific at HSBC in Hong Kong. "But in 2005, the market really came of age with the listing of the first Hong Kong, China, and Malaysian Reits as well as the proliferation of Reits in Singapore."
In November last year, the Hong Kong Reit market began with a bang as the government's Housing Authority floated Link for HK$19.4bn ($2.5bn) in the world's biggest Reit listing.
But bankers say that Reits have also reached a crossroad in Hong Kong in particular, where investors demand a conventional equity-like yield of 6%-7%, but only receive 2%-3% from Reit stocks.
Bankers say investors should concentrate on the total return — including increases to the value of the Reit and its shares — but add that rising rents should boost Reits' incomes anyway.
Some Reits can be used to increase capital efficiency. "CapitaLand puts its assets into listed Reits, recycles the capital and deploys it into growth opportunities such as China, India and Vietnam," says Anthony Ryan, head of real estate investment banking for Asia at JP Morgan in Hong Kong. "They have gone from being very asset-heavy and Singapore-focused to faster growth, international focus and higher returns."
|Asia (ex Japan) IPO volume — REITs 2002-2006 YTD|
|Pricing date by year||Deal value ($m)||No.|
|Asia (ex Japan) IPO volume — Property Sector 2002-2006 YTD|
|Pricing date by year||Deal value ($m)||No.|