2014 Residential Asia Forecast: Tokyo Promising

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After several years of poor performance, it's the developed world that is attracting the most attention for real estate investors going into 2014. Some of Asia's traditional high flyers and most popular spots for investment properties look highly priced to many, potentially entering dangerous territory where the risk of a bubble bursting is high.

Prices are getting frothy in places such as Hong Kong and Singapore as well as in the largest Australian cities, according to the investment bank Macquarie, which says property values are gradually disconnecting from economic fundamentals. That raises the prospect of bubbles developing, although the bank does not think we have reached that point yet.

"We are concerned that Singapore has one of the world's most extended real estate markets and it is probably just a matter of time before it corrects," the company says. Hong Kong is in a "classic bubble," Macquarie believes.

Both countries have slapped an extra 15 percent tax on overseas buyers, hurting the reputation of the two city-states as free economies. With U.S. interest rates slowly starting to rise, housing prices are likely to come under pressure, as mortgages get more expensive in Hong Kong, which "imports" U.S. rates through a currency pegged to the U.S. dollar, and Singapore, which manages its currency compared to a currency "basket" with a hefty U.S. dollar component. Hong Kong property is forecast to fall around 10 percent next year.

Many blame Chinese buyers for driving prices around Asia higher. Chinese citizens view property as an excellent way to store wealth, with few other ways to invest money in China. So after more than four years of restrictions at home, they are looking to broaden their horizons - and store a bit of wealth outside China, mostly illegally, since in theory Chinese citizens can only move $10,000 offshore per year.

But their influence has been felt far and wide, not just in the West but in most Asian nations. One exception is Tokyo, which finally holds some promise after more than 20 years in the doldrums - but that may be set to change.

The Japanese capital has seen prices rise 13 percent in the last year, according to Knight Frank's prime global cities index, with the gains speeding up as the year went on. While Japan's population has been falling since 2010, undermining any need for new housing stock other than for home upgrades, there's optimism that Land of the Rising Sun will get back on its feet under Prime Minister Shinzo Abe's plan to step up government asset purchases - at a time when the United States is looking to cut its own program.

Winning the 2020 Olympics has already given a boost to apartments around Tokyo Bay, and they are likely to see a 20 percent rise, according to property company Sanyu Appraisal Corp. The Olympic village will be in Harumi, reclaimed land on the bay and only a couple of miles south of the city center. Of the venues, 84 percent will be within five miles of the village, travel time of 20 minutes or less.

Japan is one of the few countries in Asia that has not slapped restrictions on property purchases, particularly by foreign buyers. Although it's not an easy market to navigate, it does allow overseas citizens full access to its property markets, like its neighbor South Korea.

That, to Freya Beamish at Lombard Street Research, suggests "that Japan is now benefitting from second-round effects of Asia's overheated property," she writes in a report. "Chinese individual investors now appear to be dipping their toes in the water and considering Japan as the next destination, a wave that could be reinforced as capital controls in China are lifted."
 
Indonesia has been the star, and surprise, performer of 2013. Home prices in the capital, Jakarta, posted the biggest gains in the world in the last year, up 27.2 percent, again as of Knight Frank's residential index. Those higher home values are being driven by rising middle-class wealth, and a resource-fuelled economy that is becoming increasingly driven by domestic consumption instead of exports. In theory foreign buyers can't buy property, but temporary residents can get a 25-year lease on certain types of home.

Although there's a sizeable Chinese influence on Indonesia's business community, those home-price gains aren't likely to continue, and prices were flat heading into year-end. The cause is that, after three years of growth that topped 6 percent, Indonesia's economy slowed in 2013. It is expected to rise at a still-healthy 5.5 percent next year, but that still represents a slowdown that has caused sales to fall sharply. The central bank, fearing the market was overheated, also slapped tougher restrictions on lending, increasing the minimum downpayment to 40 percent for a second home and 50 percent for a third, up from 30 percent.

Indonesia's currency, the rupiah, fell 11 percent in 2013 against the U.S. dollar, while India's rupee dropped 19 percent. Both countries were battered by fears money would flow out of emerging nations as the Fed "tapers" its quantitative easing, which would increase U.S. rates and strengthen the dollar. That could happen if the Fed does cut back as expected again next year, and the central banks in Indonesia and India are both likely to hike interest rates to attract foreign cash and investors - interest rates that would hurt interest in property.

Other markets in Southeast Asia have been posting increases of between 2.5 percent for the Thai capital, Bangkok, and 6 percent, for Kuala Lumpur, Malaysia's largest city. Manila falls in the middle of the pack at 3.4 percent annual growth but is showing healthy sales activity and strong demand from local investors, according to Jones Lang LaSalle. That suggests a solid year ahead for property in the capital of the Philippines.

With a casino boom that has seen it overtake Las Vegas as the world's gambling capital, prices continue to rise in the former Portuguese colony of Macau. Prices were up 10.5 percent year on year for the month of October, the most recent figures available show, in the only place in China that allows casino gambling. But as prices rise and with uncertainty in near-neighbor Hong Kong, volumes have also dried up, with the number of residential transactions down 58 percent compared to 2012.