Real Estate: Global Views in 2011

Looking at real estate markets across the regions is, although interesting, very challenging because every market is different from the other. But here, I would like to take this challenge and throw out a little thoughts on global real estate market.

Asia

In Asia, policy headwind is still around. The Extra Stamp Duty has heightened the perceived policy risk in Hong Kong, while China’s concern over inflation will mean more tightening, which will undoubtedly hurt the real estate market and developers. The same kind of stories will probably be true for other markets in Asia, where the in-flow of liquidity from the developed world has driven prices up. Liquidity can be a boon to the market, but the lack of it will make a disaster. As liquidity is still around, I don’t think the real estate market in Hong Kong will suffer too much despite higher policy risk. The key thing people should be thinking about remains to be whether there can be a sudden reversal of money flow in the region.

Outside Asia

The Bank of England’s financial stability report suggested that UK banks are lending one-third of the corporate lending to commercial real estate worldwide, and commercial real estate recovery has been extremely uneven in different parts of the world. The recovery in commercial real estate has been very uneven not only across countries, but also between prime and secondary locations. West-end and the City of London have been leading the recovery in the UK, but those less core areas have been struggling, and recovery is losing steam (same goes for New York). The losses from commercial real estate loans both in the Europe and the US have been small relative to the residential mortgages, in part because banks have been extending maturities of loans for another 3-4 years, such that any potential losses will not show up in their accounts until 2014. If so, there will be a funding problem 3-4 years down the road when these loans expire. DTZ said there will be a funding gap of $54bn in the United Kingdom, and similar situation might arise in the United States.

In the residential market, recovery is definitely losing steam. It is not surprising to me, given research has found that on average, a housing bubble which ends with banking crisis often led to decline in home prices for 6 years or so.

Physical Market vs. Equities

Oddly enough though, some of the best performing REITs in the United States in 2010 have been those letting apartments (e.g. AIV.N). And despite strong performance in the physical market, Hong Kong Real Estate Developers stocks have underperformed some of their peers in the United States. There is a saying among real estate stock analysts that stock performances often precede real estate prices performances. Although it is hard to say that this is always going to be true, the underperformance of Hong Kong/China stocks where the real estate markets did the best is an interesting thing to note.

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About Zarathustra

Zarathustra: Founder and Managing Editor of Also sprach Analyst. Once an analyst, now an investor and entrepreneur. Based in Hong Kong, but Londoner at heart.