Reuters Edge

Japan landlords best bet in Asia property downturn

HONG KONG (Reuters) - Asia property stocks are definitely out of fashion in 2009, but brave contrarian investors may find dabbling in Japanese landlords or Chinese developers could pay off.

Asia property markets are slumping in the same way they did after the 1997-98 financial crisis and probably will not recover until 2010, with home prices in Singapore and Hong Kong forecast to slide 20-25 percent this year as the global economy weakens.

But a strong rebound in property counters across the region toward the end of 2008, even as developers reported slumps in home sales, suggests investors will buy if they see deep value.

More bad economic news in Asia, such as waning exports, would spark flurries of broad market selloffs, but also give investors with longer-term investment views a chance to hunt for bargains.

“The market’s divided on whether stock prices will make new lows in 2009, but we expect volatility to continue,” said Adam Upton, who helps manage the JF Asia Property Fund in Hong Kong.

“In this environment the fund will look to take advantage of near-term trading opportunities.”

The JF Asia Property Fund is keen to trade volatile Chinese property stocks, but is underweight on Australia and mostly neutral on other markets in the region.

Asian property stocks have risen more than 30 percent from lows in late 2008. Chinese shares led the way with a 70 percent surge after Beijing unveiled measures to aid the ailing sector, even though many analysts believe government efforts to build mass-housing will undercut listed developers.

Shares in China Overseas Land & Investment 0688.HK have gained 75 percent from their October low of HK$5.93. The stock is trading at around a 20 percent below its net asset value (NAV), while several other Chinese developers such as Shanghai Forte Land 2337.HK are trading at discounts of as much as 70 percent.


Investment house CLSA is neutral or negative on all Asian property markets but likes Hong Kong property trust Link REIT 0823.HK and some property trusts in Japan, as well as office landlord NTT Urban Development 8933.T.

Link REIT has been billed as recession-proof because many retailers in its shopping malls sell necessities ranging from rice to toothpase, unlike swanky new malls where retailers are struggling as consumers cut spending on expensive items.

Link REIT is trading at a 6 percent dividend yield for 2009, and at a 38 percent discount to net asset value. By comparison, 10-year Hong Kong government notes are yielding xxx percent.

Tokyo’s office market, seen by some as the last stronghold for property investors in the recession-hit economy, is expected to stay resilient because of a shortage of top-notch buildings.

Even with vacancies creeping up, rents for existing contracts will decline only slightly, and not until 2010, according to CLSA. Landlords reacted slowly to a climb in office values in the last four years and are still able to nudge rents up this year.

Asian developers learnt the lessons of overbuilding in the 1997-98 crisis, and only Singapore has a large supply of new office blocks coming onto the market in the next few years.

“We have less of an issue of supply,” said Frankie Lee, fund manager with Henderson Global Investor in Singapore. “It’s all about demand and whether the growth will pick up later this year, after all the government stimulus take effect.”

Lee, who helps manage 1.4 billion euros in investment, counts Japanese property firms Mitsubishi Estate 8802.T and Mitsui Fudosan 8801.T among his top picks.

Mitsui Fudosan is trading at 12 times estimated 2009 earnings and Mitsubishi Estate at 24 times, compared with 14 times for the Japanese property sector. UBS analysts have price targets for the two stocks that give a potential upside of around 70 percent.

But analysts warn investors to steer clear of Hong Kong and Singapore office landlords as both cities will be hit hard by the global trade slowdown and upheaval in financial markets.

CLSA, which has office landlord Hongkong Land HKLD.SI on its sell list, expects office rents to dive 60 percent over two years in Hong Kong and Singapore as job losses in the financial sector grow.