With the spotlight on Asia, its luxury residential market is on many investors' radar. But within Asia itself, the investment choices are many and diverse and it is important to have an understanding of the key markets to ensure a sound investment decision.
Overall as a region, luxury home prices in Asia have increased progressively, with a recorded price gain of 1.5% quarter-on-quarter according to the CBRE Asian Luxury Residential Price Index. This has been partially driven by the economic growth in Asia Pacific, the revival in growth in China and reduced concerns over the eurozone debt crisis.
Steady price growth was seen in first-tier cities in China including Shanghai and Beijing despite cooling measures, while Southeast Asian markets such as Bangkok, Kuala Lumpur and Manila saw a range of price increases driven by positive buyer sentiment with continued economic growth.
Bangkok emerged as the strongest Asian market, recording the highest price gain of 3.8% quarter-on-quarter as of the fourth quarter of 2012, and 7.8% year-on-year.
The fundamentals of the Asian luxury residential markets remain favourable, underpinned by a steady demographic growth, urbanisation and the rising number of high net worth individuals in the region which will continue to support further price growth and demand throughout 2013.
However, each luxury residential market in Asia is at a different stage of the property cycle and is being driven by varied dynamics. Factors that come to play affecting these markets include mortgage rates, project financing, government cooling measures, labour shortages and demand drivers.
China, one of Asia's biggest luxury markets, is largely driven by pent-up demand for upgrading as market sentiment and its economy continues to improve. This, coupled with the limited supply of high quality residential stock in first-tier Chinese cities, will provide an additional push to prices.
In Shanghai, sales volume of luxury apartments rose 7% quarter-on-quarter at the end of 2012, with the majority of purchasers being end-users.
Given the present market sentiment, many developers no longer offer price discounts.
However, on the development side, the main concern faced by Chinese developers is the increased borrowing costs for real estate project financing. Developers have either been forced to seek alternative sources of financing as a result, or have shown greater interest for joint ventures with foreign investors for residential projects.
Contrary to the Chinese market, price growth in Hong Kong and Singapore have been moderated through government cooling measures that are expected to remain in place for the rest of the year. Both governments have rolled out cooling measures including raising stamp duties or lowering the LTV (loan-to-value) ratio to curb speculative demand. The resulting impact is that both markets are experiencing a slow-down in price growth and dampening buying interest as potential buyers adopt a wait-and-see attitude.
In Hong Kong, transaction volume is likely to remain subdued as much of the speculative demand has shifted to the commercial sector. Nevertheless, with a limited luxury future supply, prices are well positioned for further growth.
In Southeast Asia, the dynamics vary between markets. Prices in Kuala Lumpur remained stable, with minimal growth. The key factor that will affect this year's outlook is the entry of a large volume of supply that is approaching completion (a total of 8,300 units) and the general election that is due to take place in the first half of 2013. The market is expected to remain quiet in the period leading up to the election.
Bangkok is one of the strongest performers at the moment for the luxury residential sector in Asia as it reported the highest price increase. This has been driven by a combination of stronger buying demand and limited luxury stock in prime locations. While luxury stock is expected to increase in 2013 with new launches, the market demonstrates a willingness by purchasers to pay a premium for quality and well located properties.
The main concern for the Bangkok market is a labour shortage, which is resulting in higher construction costs and delayed construction progress. Leading large-scale developers have attempted to overcome this challenge by producing prefabricated modules.
At the opposite end of the market is Ho Chi Minh City, where luxury property prices fell by 0.7% quarter-on-quarter. Buyers in Vietnam are currently unwilling to enter the market due to high prevailing prices and high mortgage interest rates.
A condition that remains favourable across most markets is interest rate levels that have held firm since last year.
Among the Asian markets, the mortgage rate is lowest in Hong Kong at 2.8% and highest in India at 14.5%. Interest rates in Hong Kong and Singapore were below 3% throughout last year and are expected to be maintained at this same level over the course of this year.
While there are some commonalities in the luxury residential sector, each of the Asian markets is being driven by very different dynamics and challenges. Investors who are truly global will consider all market options before investing, hence an understanding of the individual markets is essential in making a sound decision.
James Pitchon is executive director and head of CBRE Research and Consulting, CBRE Thailand. He can be reached at bangkok@cbre.co.th; Twitter: @CBREThailand; Facebook: www.facebook.com/CBRE.Thailand.