Japanese parked surpluses, pushed up prices
Points made by Hong Kong real estate boss CY Leung last week are so blindingly obvious, but it seems they need to be made quite often.
Mr Leung, whose firm is part of the DTZ Debenham Tie Leung group with which Auckland firm Bayleys is associated, gave the valuers’ Pan Pacific Congress an international perspective, chiefly about the 1997 Asian meltdown.
He began by saying the Japanese were the first major cross-border investors in Asia because they wanted to park their colossal trade surpluses, and bank loans were an important part of that parking exercise. By 1997 the Japanese banks had $US250 billion on loan through Asia, much of it on real estate.
“The injection of loan funds into real estate markets pushed prices up, sometimes against fundamental factors. Increasing prices of real estate induced more loans into real estate. The all-too-familiar cycle was set in motion.”
Japanese and German banks had 40% of the Hong Kong project finance market at that time, worth $US24 billion, equal to the outstanding loans on 120,000 units, or 12% of Hong Kong’s housing stock. Come crisis time, and those Japanese banks began calling in their mortgages. They were able to do so on many loans on only seven days’ notice.
Around Asia, Mr Leung said, much of the lending was done without proper safeguards, very often on the basis of personal or political relationships and not the viability of the project. He recalled an address he gave to Thai bankers in 1992, when he noted that “basic ground rules such as asset valuation guidance notes were yet to be formulated.
Valuations became more of a form and a ritual than a safeguard against anomalies.”
Loans were denominated in US dollars, on the understanding that the valuation in local currency would not change on redemption. This relationship ended with the 1997 crisis, leaving greatly overvalued assets created on easy loan money.
Mr Leung said the importance of current cost accounting was not recognised in Japan until early 1998, so corporations carried real estate assets on their books at historical cost or valuation.
The foreign vulture funds arrived to invest, but Mr Leung said few had done so. Currency risk remains one of their concerns, and many of these investors have not differentiated between currency systems or the currencies of strong and weak economies.
“The Hong Kong peg system is still talked about in the same breath as the link-rates system elsewhere.”
Two other concerns have kept these investors out: the expectation gap and title risk. “Many international investors have an IRR expectation of about 15% to provide the necessary incentive over and above the 10% IRR available in, for example, the US.
“However none of the low-risk markets in Asia Pacific such as Hong Kong and Singapore offers this level of return. Markets in Asia that do offer such high returns are considered risky and unpalatable.
“Furthermore, future capital appreciation on which Asian investors heavily rely, is generally not featured as prominently in the cashflow analysis of international investors from outside this region.”
On title risk, Mr Leung said many international investors walked away from seemingly attractive propositions because they could not be satisfied on title, lease agreements or building contracts. “International investors who jumped at opportunities in Asia, taking the reliable legal and title frameworks in their home markets for granted, are already counting the costs of title risks.”
Mr Leung did not stretch beyond the meltdown, but his point on parked trade surpluses should raise awareness on investment from similarly inflexible surpluses such as national superannuation funds.
Singapore is steadily expanding its investment overseas as it hunts for new avenues for its pension investments, and Australia is starting in the same direction.