News: China and India eclipsing Japan for property funds

(RTR 28/06/2006) Singapore - Booming China and India appear to be eclipsing an increasingly expensive Japan as the favoured Asian property markets for global funds, but some money managers worry big inflows of capital will underprice risk.

Four property industry executives speaking at a conference in Singapore on Wednesday pinpointed either China, India or both as the "most exciting" markets, whereas Japan had generally been preferred by fund managers at the same event last year.

While fast climbing prices for buildings in Tokyo and rising borrowing costs are making Japanese deals more difficult, building housing in two of Asia's fastest growing economies promises internal rates of return of 20 percent.

"If you're not in those markets you'll miss some of the best opportunities," said Jack Foster, head of property investment at New York-based Franklin Templeton Investments.

"But clearly it's a moving target, and our exposure to India and China is still pretty minor. It's still early days."

Foster said he would like the proportion of Franklin Templeton's property funds allocated to Asia to double to 50 percent from 25 percent over the next 10 years.

India eased rules on foreign investment in property last year to help local developers finance the building of an estimated shortfall of 20 million homes, as well as new shopping malls and offices worthy of an economy growing at 8 percent a year.

Overseas developers have been active in China for a decade, but Western funds are arriving en masse this year, to buy existing commercial buildings as well as to build housing at a time when some 8 million people are flocking to cities each year.

Fearing a bubble, China's government has introduced several measures to promote affordable mass housing at the expense of luxury apartments.

"China mass residential housing has the best risk adjusted returns," said Timothy Bellman, strategist at ING Real Estate, which is closing a fund next week to build apartments in many of China's 23 cities with a population of more than 2.5 million.

FROTH?

Ben Sanderson, director of property research at Britain's Prudential Property Investment Managers (Prupim), said he was generally on the lookout for low-risk "core" investment opportunities in Asia's more mature markets -- Japan, Hong Kong, Singapore and South Korea.

He said China and India were both attractive for anyone willing to take on development risk, but believed the massive inflows of foreign funds might misjudge how fast the societies were changing.

Some $5 billion has been pledged for immediate investment in Indian property, for example.

"I'd say that China and India excite me, people are going to make a lot of money in those countries," Sanderson said. "But many people might not be pricing risk appropriately," he said.

"When the dust settles after this period of strong liquidity, it'll be interesting to see how much change was structural and how much was just froth."

Prupim, which manages 17 billion pounds (US$31 billion) of assets in Britain, has allocated around 1.5 billion pounds to investment abroad, of which a quarter is in Asia.

David Schaefer, Asia head of Citigroup Property Investors, picked India as his most exciting market, Thailand as his favoured "minnow" Asian market, and the Philippines as the market he feared most.

ING's Bellman said Japan would still be attractive for long-term "core" investors, if private equity firms that borrowed heavily for property purchases decided to sell because of rising interest rates.