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Is Asian Real Estate Overpriced Compared to Europe?

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European Property Investment  Long Term Property Investment  Asia Pacific Real Estate 

By - Friday 06 August 2010

Recent analysis suggests that current rental yield levels in the Asia Pacific commercial real estate market are at their lowest levels for quite some time.

Indeed, while the long-term outlook for the region's property market remains broadly positive it no longer remains the best place for investors to place their cash, research conducted by Fidelity Real Estate Investment Management claims. In fact, the report suggests that the recently battered European property sector is now offering significant real estate investment opportunities which should not be ignored.

Increasing interest in the Asia Pacific sector in recent years has contributed to a lowering of yields and has meant that some markets are now trading at a much lower level than their US and European counterparts. "While the long-term fundamentals of Asian property are compelling, from a short term point of view, the market looks expensive relative to other regions," Matthew Richardson, head of research at Fidelity, explains. "Given the extra volatility traditionally associated with Asia Pacific property and the extra risk implied by the high degree of speculative development, investors may want to consider whether they are prepared to pay a historic premium for the right to invest in the property at present."

Mr Richardson goes on to say that it is important for investors to properly balance their risk and reward expectations for global markets at present.

Asian Long-Term Growth Prospects

However, not everyone shares the same view about the Asian markets.

Bloomberg reported last month that Aberdeen Property Investors, a subsidiary of Aberdeen Asset Management, is currently holding talks surrounding the possibility of investing in real estate funds in the Asia Pacific region.

The news provider claimed that the body was looking to capitalise on the long-term growth prospects which the region offers, as well as the relative stability of its financial systems. Indeed, the standard and Poor Asia Pacific Property Index has almost recovered to its level before the start of the global financial crisis.

Opportunities in North and West Europe

On the other hand, Mr Richardson remains confident that there are better entry points to the market to be found in Europe. The expert is complementary about the opportunities which currently exist, with a number of deals likely to tempt investors. "As a result of the weight of money flowing into Asian property, the short-to-medium-term outlook is challenging as lower initial yields now discount very aggressive rental growth assumptions," Mr Richardson says. "In terms of relative value per unit of risk, we believe there are better opportunities to be found in parts of Europe, especially in the north and west." Indeed, the western market also offers a number of benefits for investors.

Greater transparency and liquidity as well as political stability in the majority of countries is likely to be a big draw to potential purchasers as it is generally associated with strong and secure economies.

Added to this, PRUPIM's recent Real Estate Perspective report highlights the fact that, despite recent turbulence surrounding the euro and various sovereign debt crises, investors are being drawn to the discounted properties on offer in Europe. "As the sovereign debt crisis sparked a flight to safety, some bond yields have come down, making property yields in Europe look relatively more attractive against the risk-free rate," Anne Koeman, research analyst at the real estate fund manager, said.

Global Picture

Most commentators agree that interest in the North American market has also grown as of late, with the US in particular offering attractive prices which currently represent significant discounts when compared to its long-term average.

Meanwhile, commercial property located in South American, Asian and Eastern European destinations has been found to be outperforming its European equivalents, according to the latest RICS Global Commercial Property Survey. The property and construction body claims that the need for certain countries to reduce national debt is having a profound impact on the appetite of businesses to take up new space.

"Overall, there seems to be a steady but tentative recovery across global property markets," Ms Koeman says. "However, there are still a few skeletons in the global economic cupboard. So, no-one can say how sustainable the current recovery will be."ADNFCR-3415-ID-800014504-ADNFCR

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*This page is provided for information purposes only and should not be construed as offering advice. IPIN is not licensed to give financial advice and all information provided by IPIN regarding real estate should never be treated as specific advice or regulations. This is standard practice with property investment companies as the purchase of property as an investment is not regulated by the UK or other Financial Services Authorities.

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