With general global equities markets posting a strong rally in the last six months, investors are now starting to come out of the woodwork in search for the next great potential.
Mostly general equities both domestic and international seem to be the choice, but what about property? Over the last 18 months, we have seen a continuous process of deleveraging, lock ups and lack of liquidity which has kept investors away, but is there potential outside of the square we usually see as property? I believe Asia has opportunities not offered elsewhere in the world.
As mainstream media has discussed at length, Asia is the first region to come out of the financial crisis, with China being the driving force behind it. The question that needs to be asked is what investors are looking for now, and whether Asia offers this?
Post-global financial crisis, my observations have seen clients looking for property investments that provide true daily liquidity, little to no gearing, defensive capabilities and growth potential. Simple characteristics, yet now harder to find post-GFC.
When looking around the world, we see that Europe seems to still be struggling in many ways from yield stability to gearing issues. It is without doubt that banks globally have become incredibly conservative and calling in loans when they see the first signs of stress on a fund or property. The US is still trying to find its feet so they are still a fair way off.
The key point also is that between the US and Europe, it is still showing negative GDP growth for the foreseeable future. What is different about Asia is that growth has been and is continuing to be solid and especially in China where commentators are looking at 9 per cent, plus looking into 2010.
In Asia, corporations have far lower levels of gearing. At the end of 2008, the average look through gearing in Asia was less than 40 per cent, compared to Australia being approximately 50 per cent. This provides them with a better base to expand business and take advantage of the lower interest rate environment.
The simple reason why Asia has lower levels of gearing is because of the Asian Financial Crisis in 1997-1998 where they did learn their lesson to not gear their balance sheets to well over 70 per cent. This was a harsh lesson, but one that they have certainly learnt from.
Development potential across Asia is also focusing on second and third-tier cities, not first-tier cities which have already undergone extensive development. real estate investment trusts are also a relatively new concept in China and Hong Kong and this market is set to expand in the medium-term future where yield will play a bigger part in property investment. But refocusing on development profits, one characteristic Asia has in contrast to the Western world is that pre-selling a majority of properties and then having a progressive payment structure allow developers to recoup their costs faster and hence can turn over their projects more efficiently. This creates a more attractive environment to invest in with a reduction in development related risks.
Another issue has been the inability of funds to offer defensive capabilities in times of stress as seen during the GFC. Clients are after some form of downside protection where possible that can be employed by managers to preserve clients’ capital. I think this is one lesson that should be learnt post-GFC, that proves property is still vulnerable, given bad economic conditions.
If funds could offer true daily liquidity by reducing gearing on funds and/or on underlying investments, as well as the ability to employ defensive mechanisms on the funds, market confidence and appetite should return for Australian investors seeking that diversified portfolio with property exposure, and right now it seems Asia seems to be in a prime position to offer this opportunity.
Jonathan Wu is head of distribution and operations at Premium China Funds Management and a financial adviser at Premium Wealth Management.
