As the worldwide property market continues to spiral downwards there are some rays of hope emitting from the Far East where a number of private equity property funds have been raising significant money to invest into the property market. While at this moment in time it is very difficult to know when property markets will stop falling, and more importantly when they will start to recover, this has not stopped the likes of Carlyle Group looking to increase investor exposure to the Far Eastern property market.
Even though plans for the new property investment funds are being kept under wraps it appears that leaks have emerged suggesting over $1 billion will be raised to invest in markets such as China and Japan, which have both suffered severe falls over the last 18 months.
So what exactly is going on?
Those who follow property markets around the world will be well aware that in the midst of falling property prices it can be very difficult to see any light at the end of the tunnel. The situation we are in today is even worse when you consider that many experts believe the worldwide recession could turn into a depression unless action is taken and money markets are refloated. However, there is no doubt that areas such as China and Japan, though they have suffered double-digit falls over the last 18 months still offer significant appeal to property investors on a long-term basis.
While China and Japan have been highlighted by the media as the potential main markets for this new Carlyle Properly Fund there are also many developed, developing and emerging economies in the area which will also benefit as and when China and Japan start to pick up.
Market timing and use of investment funds
When you consider that Carlyle Group raised a significant of $410 million in August 2005 to invest into Asian real estate it is not difficult to estimate that they will be sitting on significant losses at this moment in time. Even those assets which have on paper held their own would be difficult to sell and unlikely to attract their “real value”. However, early indications show that worldwide investors, although negative has a whole in the property market, appear more than willing to at least take a tentative step into the Asian market via experts such as Carlyle Group.
A number of experts in the property sector are also suggesting that while the market is tough at the moment we will ultimately see a turnaround in property in places such as Japan and China, before many other property markets. As a consequence, rather than wait until the market bounces and investor sentiment improves we are seeing more and more private equity groups loading up their war chests for the battle ahead – ready to release their investment funds at a moments notice!
As we have covered in some of our earlier articles, the Chinese property market had been one of the best performers in the world in the two years prior to the recession, with prices in some cities having doubled. However, the government soon stepped in to try and pop the property bubble by reducing the amount of funding available towards the end of 2007. This resulted in a significant reduction in property market investment, with lenders asking as much as 40% for a deposit, and a general collapse in property prices.
While many hope that the Chinese authorities have learnt from the lessons of 2007 there is no doubt that the country is in a long term expansion phase and is likely to be one of those leading the world economy out of recession.
The Japanese economy is a mystery to many investors around the world having never really recovered from the collapse of the stock market back in the 1980s. However, when you delve underneath the surface there is a vibrant property market, albeit at a significantly lower level than that seen in the 1980s, which is starting to attract the interest of overseas investors. The economy itself has suffered more than most because of the significant reductions in exports which is relevant to many businesses in the country.
However, the Japanese authorities have reduced base rates to 0% in an attempt to both refloated the economy and counter the potential problem of deflation. This has had an impact in the short term although as with all of the economies around the world there needs to be a stabilising of the worldwide economy before places such as Japan and China will start to shine through.
There are some concerns about so-called “zombie companies” which are effectively large public companies being kept alive by government funding. However, as and when the economy starts to recover there is no doubt that these situations will be ironed out and overseas investors will start looking towards Japan once again.
While there is no doubt that a vast array of emerging markets in the Far East do depends to a large extent on countries such as Japan and China, there are more and more coming through in their own right with the likes of Malaysian and Singapore prominent. These two for example are markets which have suffered due to international investors “repatriating their investment funds” at these difficult times, although this will turn round at some stage.
However, it must be stated that emerging markets do carry significantly more risk than so-called developed markets but with good luck and good judgement there will be significant gains to be made in the Far East property market.
The fact that Carlyle Group has followed the likes of Morgan Stanley in raising significant investment funds for new property funds in the Far East is definitely a positive sign. A number of people close to the situation in the Far East believe that both Japan and China, along with the US, will be very prominent as and when the worldwide economy recovers and we could see a significant bounce in the property market.
However, while the Carlyle Group property fund may soon be “ready to go” there is some debate as to how to time future investments. There is still significant risk in the worldwide property market and the worldwide economy although those looking long-term do have significant opportunities to make “serious money”.
We may well be in a market for the “brave” at the moment but when it does turn we could see significant funds flowing directly into the Far Eastern property market over a very short space of time. Some may look to buy before the turn, some may look to buy on the turn and others may look to buy once a trend has been set. It all comes down to investment strategies, funding and above all an ability to read what is one of the most challenging property markets in living history.