Property Markets in Asian Emerging Economies

Real estate in Asian emerging markets - the first thing that would come to the mind of an average investor is high returns and investment opportunities both in equity and bond markets. Don't these markets have large population and low availability of housing? No doubt, fundamentally the demand drivers are strong with increasing per capita income poised to increase house ownership. But investors have to be aware of few aspects before venturing to look at the sector - corporate governance, short track record, data availability, data integrity, complex accounting standards and regulatory framework, to name a few.

It is well known that land acquisition and approvals involve bribery in these markets. The companies have high controlling stake of promoters and the access to funding has historically been shady.

In India, bond markets are not well developed, while in China the bond markets have started developing rapidly since 2007. Many companies have accessed offshore financing through USD bonds, with the sector taking the largest share in China's high yield USD bonds outstanding. In Asian bond markets, investment grade bonds are few in number, predominantly property investment companies in Hong Kong and Singapore. Most are high yield issuance, offering high yields. Indonesia, Philippines have few offerings while there is no USD bond by Indian property space. The fixed income research houses don't have extensive coverage, for smaller junk names. The credit opinions of rating agencies do not reflect much on the operational side- no depth as demanded by the sector's complexity.

The sector is micro market driven and involves complex analysis of various projects of the companies. The disclosure by companies is minimal even for the larger listed companies, making one wonder what kind of data can we expect out of the smaller ones.

There are few established agencies collecting data and providing it to investors. Even the data maintained by most governments is insignificant and of less value to understanding the markets. In China, the sector is monitored by government but in India, it is mostly untracked with no statistics by the government. Seriously, where do we look for data? Say, a company discloses data, the veracity itself remains questionable.

The regulations are diverse. Within a country, regulations are different within provinces and cities. The approval process is lengthy, with hardly any data disclosed as to the stage of approvals. The pre-conditions for launching project sales and recognition standards are very different as well as complex. Homes can be sold before approvals are obtained, in some, after approvals but no construction; in some after a certain specified percentage is built, and else after the construction is complete. Revenue recognition can be percentage completion based or after project is handed over.

The sector is cyclical and important part of the economy, a real estate downturn is generally followed by severe economic distress. Hence, the sector tends to attract high involvement by the government.

In a nutshell, this space is more suitable for the institutional investors, who can get some data out of the management and are willing to take the additional risk. A retail investor would be better off sticking to the blue chip names in the property investment space. In corporate bond trading, private clients would very much require the advice and services of good Wealth Management Solutions company, one which has extensive experience in the local markets.

Deepti Marijogaiah is Successful senior investment stratagiest in SJ Seymour group in Hong Kong. He provides research, advisory, execution services and private wealth management solutions.

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