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Panel Detail:

Wednesday, April 25, 2007
6:30 AM - 7:45 AM

Real Estate in Asia

Moderator:

Perry Wong, Senior Managing Economist, Milken Institute

Steven Green, former U.S. ambassador to the Republic of Singapore, listens to Mark Karlan of CB Richard Ellis Investors talk about the real estate market in East Asia.

This discussion was highlighted by frequent debate between Steven Green of Greenstreet Partners and Mark Karlan of CB Richard Ellis Investors. Yet while the two panelists often disagreed, there was unanimity on one subject: real estate development in Asia is growing at unprecedented rates. In the words of moderator Perry Wong, "the market will be rising in terms of revenue stream and building activity very rapidly."

In Asia are found the three fastest-growing large economies in the world: China, India and South Korea. The continent will soon be home to the No. 2 and No. 3 economies in terms of GDP, if China jumps to No. 3 in the next two years, as is widely predicted. "In Asia you also have size," said Karlan, referring to the size of the real estate transaction market.

Discussing Asian real estate investment as a whole is difficult, if not impossible. "Asia has a remarkably diverse set of economies and real estate markets," noted Karlan. You can't look at any one of them and extrapolate across the region.

The panel focused largely on China, mostly because of its rapid real estate volume growth and its improving infrastructure. Karlan maintained that "China has accomplished, compared to India, far more in terms of infrastructure and facilitating the investment in real estate." Roads are great, he said, and airports are good. India is one-quarter the size of China, in terms of GDP, and there are relatively small volumes of real estate in India.

Wong said that that if we "look at the conversion in the past 20 years from the rural to urban setting (in China), one thing is almost a certainty: there are many more cities to build, more office space to set up." In fact, he added, China needs to build four cities the size of Boston every year. According to the panel, in the 1990s, more than half of the world's high-rise cranes where located in Shanghai.

But investment risks -- posed by politics and instability in the region -- should not to be underestimated. Karlan emphasized that information for due diligence is much less available in Asia, and that market transparency is a real issue. The data that does exist may or may not be accurate, so local knowledge is essential for "reality checks."

Green added that laws about property rights and enforcement are often ambiguous in Asia. For instance, he asked, "Are you selling ownership, are you selling occupancy? What the heck are you selling?" He noted that in the Chinese alphabet the same character that represents opportunity also represents danger. Though there are great opportunities, he added, the political environment is more of a question. As Asian countries prosper, investors must ask themselves, "What is the impact of affluence on political and social change?"

Green was particularly cautious about real estate investment in China. "There′s a saying that people are not afraid of risk -- they are afraid of missing an opportunity. This may well be the case in China," he said. Citing the financial crisis of 1997, he warned that "we should be very much aware of what drove (that crisis) and ask ourselves, 'What's different?'" He is not convinced that there has been enough structural reform in China to prevent the situation from repeating.

Karlan argued that the crisis of 1997 was caused by liquidity shortages, and that this is no longer an issue for Asia because China can support a crash with its reserves. He also noted that China's banks now have highest foreign exchange reserves in the world. Furthermore, he said, China's economy is poised for sustained growth. Only one of world's five largest IPOs have been in U.S. dollars. Three have been in RMB (including the largest in history, the Industrial and Commercial Bank of China), and all of those are banks that Karlan said would be profitable "if real estate is profitable." He looks at these banks as proxies for the real estate market and believes their success is a testament to the future of real estate in China.

The Chinese currency is undervalued by 8 percent to 30 percent, Karlan added, saying that he expects the currency to rise relative to dollar. Thus, you can get into China and acquire assets today, you are going to see additional gains. He maintained that there is definitely liquidity in this market and countered Green's skepticism about real estate in China by pointing out that many investment firms are willing to disclose their financials and that the results are clear -- they have been profitable in China. He conceded that there are still challenges with exit, in terms of convertible currency and the like, but did not believe that this problem was prohibitive.

Ultimately, the debate about real estate investment in China came down to different assessments of the risks in the region. Green concluded that "it's a very different China (today), but I'm still saying that there are a lot of political risks." China is overly dependent on U.S. consumer sentiment toward the region, he insisted, and political movement exists in the U.S. to push back on the amount of goods imported from China. Wong agreed that risk is high, arguing that since world is more integrated economically than in 1997, the risk is higher. Karlan again pointed out that opportunities abound, saying that the largest shopping centers in the world are in China -- and they are already full. That, he argued, is in itself is a strong advertisement for the region's booming economy.

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