Real Estate Investments in China and India: Big returns in big countries?

Transcription

1 Real Estate Investments in China and India: Big returns in big countries? ULI Germany Dr. Tobias Just Berlin, June 5, 2008 Think Tank of Deutsche Bank Group

2 Contents 1 Macroeconomic environment 2 Development of residential property 3 Commercial real estate 4 Be aware of the specific risks 5 Concluding remarks Dr. Tobias Just June 5, 2008 Page 2

3 1 Macroeconomic environment China and India: The giants have awoken Relative shares (2007) of world population CN 19.8% IN: 16.6% Euroland: 4.9% of nominal GDP CN: 6.9% IN: 2.4% Euroland: 22% of world trade CN 7% IN: 1.4% Euroland: 22% Dr. Tobias Just June 5, 2008 Page 3

4 1 Macroeconomic environment China and India: Economic outperformers Slightly lower growth ahead Real GDP, % yoy China India Euroland Both China and India benefit from globalisation (more trade, more capital imports and significant knowledge transfers) which has been pushing up growth rates Though it is unlikely that doubledigit growth rates will be sustained in the future, both countries will continue to post economic expansion Sources: National statistical offices, DB Research Dr. Tobias Just June 5, 2008 Page 4

5 1 Macroeconomic environment Globalisation is a key driver of growth More trade... Exports + Imports, , % Asia-10 China India Korea Malaysia Indonesia Singapore Thailand Philippines Hong Kong Taiwan World trade Trade with Germany Sources: IMF, Nat. statistics, DB Research and more capital flows Annual net FDI flows, USD billion China India Source: DB Research Dr. Tobias Just June 5, 2008 Page 5

6 1 Macroeconomic environment Good long-term prospects Differing education standards India China S. Africa Thailand Spain S. Korea France Germany USA Average years of education in 2005 (left) Change in years of education , % (right) Sources: OECD, DB Research True, both China and India are still running short of highly-skilled employees But, this implies a strong level effect in the future: OECD expects strong rise in average education in India and China and good education is the base for sustainable long-term growth Dr. Tobias Just June 5, 2008 Page 6

7 1 Macroeconomic environment 2 Development of residential property 3 Commercial real estate 4 Be aware of the specific risks 5 Concluding remarks Dr. Tobias Just June 5, 2008 Page 7

8 2 Development of residential property Favourable demographics are important driver The two giants continue growing Population (million) Source: UN Population Division India China Working age population to peak soon in China - but not in India Population yrs, as % of total India China Source: UN Population Division Dr. Tobias Just June 5, 2008 Page 8

9 2 Development of residential property China and India: Economic outperformers Cities expand Population (million) China rural India rural China urban India urban Source: UN Population Division Share of urban population is set to rise from 40% today to more than 70% in China (in 2050) and from less than 30% today to roughly 55% in India (in 2050) According to UN statistics there are currently already nearly 100 Chinese cities with more than 1 million inhabitants and 40 cities with more than 1 million inhabitants in India Each year the number of urban residents in India rises by roughly 15 million (in China, too, the ranks of urban residents swell by 15 million every year) Dr. Tobias Just June 5, 2008 Page 9

10 2 Development of residential property More dwellings needed urgently Number of households counts Number of additional households, , (million) Demand for new housing in India New housing units , (million p.a.) Constant household size Declining household size Total China Smaller households Shortage of supply 1 India Replacement demand Population growth Sources: National Statistical offices, Global Insight Source: DB Research Dr. Tobias Just June 5, 2008 Page 10

11 2 Development of residential property Strong price increases House prices soar House prices, 2001=100, local currency Sources: JLL, KnightFrank Shanghai Beijing Mumbai Average house price growth of 10% in Beijing, 13% in Shanghai and almost 16% in Mumbai Note: Ireland and Spain have seen similar increases for a number of years with significantly lower pent-up demand and lower economic growth But, interest rates have gone up (particularly in India), while affordability has deteriorated RBI has repeatedly warned about asset inflation and some agents have even reported price cuts in some submarkets Dr. Tobias Just June 5, 2008 Page 11

13 3 Commercial real estate Second largest real estate market in Asia Scale of Key Asian Real Estate Markets, USD billion USD billion Investible Stock (LHS) Owner-Occupation Ratio (RHS) Japan China Australia South Korea Taiwan India Hong Kong Singapore Thailand Source: RREEF Research Dr. Tobias Just June 5, 2008 Page 13 Malaysia 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

14 3 Commercial real estate New economic centres developing (example China) Growth drivers for Tier-2 Cities Chengdu -Target city of Go West Policy -Commercial and economic hub of south west China -IT, R&D and high-tech industry hub Chongqing -Target city of Go West Policy -Heavy industry base in southern China -Large population base and freight center Wuhan -Economic center of Hubei Province -Transportation/distribution hub in central China linking the east and west China -Biggest steel industry, expansion into high-tech Source: RREEF Research Tianjin -Tianjin Bin Hai New District (similar to Pudong in Shanghai) economic centre in North China (free trade zone) -Ground for new financial products -Manufacturing and freight hub -Improving linkages with Beijing Chengdu Chongqing Hangzhou -Economic and political center of Zhejiang Province -Improving linkages with Shanghai -Tourism and IT city in YRD Dalian Tianjin Qingdao Nanjing Wuxi Suzhou Hangzhou Wuhan Dalian -Port, trade, industry and tourism city -IT hub and emerging BPO -Attractive to Japanese investors Qingdao -Port, electrical and chemical industry, and tourism city -Attractive to Korean investors Nanjing -Capital of Jiangsu Province -Key R&D and industrial city in YRD -Large supply of skilled workers Wuxi -Manufacturing hub in YRD -Key industries: electronics & IT, chemical, bioengineering and pharmaceuticals Suzhou -Major high-tech and manufacturing hub in YRD -Proximity to Shanghai -Favoured FDI destination

15 3 Commercial real estate Offices are becoming scarce Rents rising - esp. in Mumbai Prime office rents, USD psm p.a. Yield compression in China Prime office yields, % Shanghai Beijing Mumbai Shanghai Beijing Mumbai Sources: JLL, RREEF Sources: JLL, RREEF Dr. Tobias Just June 5, 2008 Page 15

16 3 Commercial real estate Strong income growth = strong retail sales growth Retail space becoming expensive Prime retail space, USD psm p.a. Shanghai Delhi Strong economic growth creating a new middle class India is considered the most interesting retail target market (AT Kearney) Mumbai Beijing Bangalore Chennai Source: JLL Institutional retail will gain in India, China has already reached high level Pent-up demand especially in Tier-2 cities Only a few locations are suffering from oversupply Dr. Tobias Just June 5, 2008 Page 16

18 4 Be aware of specific risks It may take time to start and to get justice Starting a new business Enforcing contracts SG HK KR DE MY TH IN CN TW VT PH ID Days Numbers of procedures Source: World Bank Doing Business Indicators SG HK KR VT DE CN TH TW ID MY PH IN Months Number of procedures Source: World Bank Doing Business Indicators 2008 Dr. Tobias Just June 5, 2008 Page 18

19 4 Be aware of specific risks Data? What data? Transparency improved JLL real estate transparency index China India Though it is much easier to get good data on Chinese and Indian real estate markets, the quality and stability of the data cannot be compared to US or European standards Even for some Tier-1 cities it is difficult to find reliable information on vacancy rates, rents, yields, transaction volumes etc Lower values indicate a more transparent market. Values between 3 and 4 show a semi to low transparency level. x-axis is inverted. Source: JonesLangLasalle Dr. Tobias Just June 5, 2008 Page 19

21 5 Concluding remarks Six assertions An international real estate investor MUST have an opinion on China and India Long-term growth prospects remain very good Strong residential demand growth expected dangerous exaggerations can occur All commercial real estate segments continue to boom Tier-2 2 cities will gain particularly Investment volumes are still very low. This will change rapidly in the next few years Mind the specific risks: Low levels of liquidity and transparency command higher risk premia Dr. Tobias Just June 5, 2008 Page 21

22 5 Concluding remarks Further information (selection) 1) Housing portfolios in Germany: Scene set for further divestment (2005) 2) Building up India: Outlook for India s real estate markets (2006) 3) German retail property: Opportunities despite oversupply (2006) 4) US house prices declining: Is Europe next? (2006) 5) What can Europe learn from US REITs. Lessons from the ivory towers (2006) 6) German office markets Cyclical upswing, structural differences (2007) 7) Property derivatives marching across Europe (2007) 8) Housing finance in Germany: Four major trends (2007) 9) The real estate sector in relation to monetary policy (2007) 10) 450 bn reasons to invest in India s infrastructure (2008) 11) Megacities: Boundless growth? (2008) 12) Stadtrendite: wirklich von Nutzen? (2008, German only) Dr. Tobias Just June 5, 2008 Page 22

23 Copyright Deutsche Bank AG, DB Research, D Frankfurt am Main, Germany. All rights reserved. When quoting please cite Deutsche Bank Research. The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the author, which do not necessarily correspond to the opinions of Deutsche Bank AG or its affiliates. Opinions expressed may change without notice. Opinions expressed may differ from views set out in other documents, including research, published by Deutsche Bank. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. No warranty or representation is made as to the correctness, completeness and accuracy of the information given or the assessments made. In Germany this information is approved and/or communicated by Deutsche Bank AG Frankfurt, authorised by Bundesanstalt für Finanzdienstleistungsaufsicht. In the United Kingdom this information is approved and/or communicated by Deutsche Bank AG London, a member of the London Stock Exchange regulated by the Financial Services Authority for the conduct of investment business in the UK. This information is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. and in Singapore by Deutsche Bank AG, Singapore Branch. In Japan this information is approved and/or distributed by Deutsche Securities Limited, Tokyo Branch. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product. Dr. Tobias Just June 5, 2008 Page 23