The juxtaposition of the Aviva Investors press release and the report of the comments of China Banking Regulatory Commission (CBRC) chief Liu Mingkang in the online edition of today’s Hong Kong Standard is the latest evidence that investors chasing emerging market assets is causing concern and, some say, potential problems in some of these markets.
An Aviva Investors spokesman noted that the company’s assessment of Asia’s real estate market opportunities was focussed mainly on commerical rather than residential property. Commercial real estate investment in Asia Pacific at the end of the first quarter of 2010 stood at $38.6bn, a 37% increase over the three-month period, according to AI, which cited DTZ data.
Also today, China’s foreign exchange reserves were reported to have touched a new record of $2.65trn at the end of September, which is expected to lead to more complaints, notably by the US, that China’s efforts to hold down the value of its currency are distorting global financial markets.
Yesterday, meanwhile, the Thai cabinet removed a 15% tax exemption for foreigners on income from Thai bonds, as it joined other emerging market countries trying to protect its currency, which is now trading at its highest rate against the US dollar since the Asian crisis of 1997. Brazil and South Korea have recently introduced similar measures in an effort to control their rising currencies, which endanger their exports by making them more expensive.
The Thai baht has risen by more than 10% against the dollar so far this year, the biggest gain by an Asian currency apart from Japan’s.
Asia less leveraged, ‘strong fundamentals’
In a statement accompanying the Aviva Investors release, chief executive of Aviva’s Asia Pacific Real Estate operation Ian Hally noted that the region’s appeal for Western investors lay in Asia having taken on less debt over the past decade at the government, corporate and personal levels, which he said "should lead to stronger investor and occupier demand".
Asia’s economies also "look to be much better placed for recovery than their Western counterparts," he noted.
Simon Mungall, head of multi manager at Ignis Asset Management, said he could not comment on Asian property per se or the Aviva Investors report, but cautioned against simplistic talk of a "currency war" in foreign exchange markets.
"It is in fact natural that emerging market currencies should appreciate against those of the developed world as the relative strength of emerging economies improve," he said.
"It is wrong to resist this long term process, and any attempt to do so will ultimately be futile."
As for what investors might best do in the current situation, Mungall said there are "surely many views" in the market at the moment, but for him, "as with all bubbles, [one should] keep a cool head and resist the forces that might otherwise suck you into a dangerous trend.
"Stay liquid, stay flexible and be prepared to give up some relative performance in the short term as the market approaches a top."
Regulators’ motives questioned
Max King, Investec Asset Management’s strategist and manager of its Multi-Asset Protector Fund, questioned the motivations of regulators whose public statements seem to be aimed at herding investors away from investments they instinctively favour, towards such regulator-preferred options as bonds.
Regulators, as he sees it, typically portray bonds as “safe and low risk, despite clear evidence of rising sovereign risk and irresponsible fiscal policies…[while] they are also arm-twisting banks to buy government bonds, using the zero capital weighting argument.
“The problem is that bond returns over the last 30 years have been close to those in equities, when the risk premium teaches us that equities should return 4% per annum more – 224% over 30 years.
“Are regulators just the world’s worst investors, obsessed by unsustainable trends, or are they in league with the governments in helping them finance their deficits?
“If the regulations result in disastrous asset allocation for banks, insurance companies, pension funds etc, how can the regulators be held to account? Who regulates the regulators?”
Shanghai market leaps 41.9%
In his remarks in today’s Hong Kong Standard, CBRC’s Liu noted that China’s property market had heated up in August and September after cooling somewhat between May to July, with the majority of the recent transactions taking place at the higher end of the market. This, he was quoted as saying, suggested that buyers were “purchasing flats to sell” rather than to live in.
"It is wrong to use property as an investment tool to make a profit as it does not comply with the government’s policy," Liu said in his televised remarks.
According to caing.com, a Beijing-based financial news website, house sales in Shanghai, one of China’s most active real estate markets, leapt almost 42% to touch a 49-week high during the first week in October, thus returning to last year’s peak levels "despite a series of government measures to rein in the market".
It noted that the number of transactions recorded also hit a 49-week high "and returned to last year’s peak levels, when housing prices were surging".
China has not been alone in trying to harness its booming property market. As reported, the Monetary Authority of Singapore at the end of August issued a raft of new regulations aimed at cooling its booming property market.
The regulator said it took the action in the wake of an 11% rise in the cost of private residential properties in the first half of 2010, to the point where prices at that point exceeded a historical peak last touched in the second quarter of 1996.
The action by Singapore’s MAS, its third such effort in 12 months, was designed to encourage people to hold on to their properties longer and not to buy and sell them as often.