Churchouse Letter
April 2012             by Peter Churchouse

Challenging Accepted Wisdom: Real Estate/Gold as a Hedge Against Inflation

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Stay at the Gold House, Bed and Breakfast Without Inflation.

As a naive young 17 year old first year university student enrolled in the Social Sciences faculty of a typical “new” university of the 1960’s I found considerable enjoyment in studying subjects that were far removed from a typical high school education of the time. Most particularly sociology and philosophy. Our sociology professor was a delightful, bright man from the hallowed halls of Cambridge University in the UK. Amongst the many nuggets of wisdom and scholarship that he imparted, one that I remember most shaped a considerable amount of my thinking on many subjects.

A point he made that I have carried with me since that time was that any thinking person should actively question the commonly accepted truths, the accepted wisdoms, those familiar old saws that we so often simply take for granted. Sounds hardly a radical thought today, but was impactful on young gullible minds. The classic example he noted was the old “truism” that says that “travel broadens the mind”, something that we kind of accept without questioning it in any depth. The point for the enquiring mind is to ask the question: Does travel in fact broaden the mind or merely confirm the prejudices that one already had.

On the specific topic of travel, being a post-war child living in the deep south of the Pacific Ocean, international travel had certainly not been on the agenda of many folks from our neck of the woods. However, on reflection, following this simple example, I realised that for some people I knew who had in fact travelled, had returned with a strengthened conviction of their former views and opinions i.e. travel had largely confirmed previous prejudices.

We can apply this principle to just about any subject and in the area of economics and markets, there are many “truisms” that bear challenge. I have mentioned before that rather annoying conviction that many in the real estate industry (salesman in particular) carry – “You cannot lose money in real estate” – it is still surprising how many times I hear this totally misguided piece of tripe. “Property will always go up in value!” – excuse me if I question you on that one sir!

But the truism that I would like to dig into a little here is the one that says that real estate is a good hedge against inflation. This one gets trotted out with regular monotony, but how true is it, if at all? And as a corollary of this there is that old truism espoused by gold bugs that gold is a grand hedge against inflation.

As a fun aside, given that both camps claim their asset class is a good inflation hedge, we will take a look at real estate prices in relation to gold – or “how many ounces of gold does it take to buy a square foot of real estate (or an average house)” How has that changed over time?

Just to make a point on long term data series. When comparing the performance of prices of anything over a long time, the beginning point at which the data is studied can make a big difference in the comparative findings. For example, if we take the starting point for analysis of gold price from say 1979/1980, when the price breached the US$800/ounce mark and consider the next 32 years to the present time, gold never touched its earlier highs until around 2007. So for anyone buying gold in 1979/80, they would have taken about 27 years to see that price again, and that is in nominal terms.

In Asian real estate, anyone buying residential property in the bubble years of 1996/97, would not have seen their assets reach those prices again until about 2008 in the case of Singapore and 2011 in Hong Kong’s case.

Just to assure you that we are not trying to fiddle the figures here by selecting particular start dates for our analysis – we are simply using data for as far back as we have it on the housing prices and housing price indices.

Residential Prices in Nominal and Real Terms

Figures 1-7 illustrate the pattern of long term residential prices in nominal and real terms, in local currency terms. Table 1 contains a summary of the movements in prices over the study period for each market considered in both nominal and real terms.

Figures 8 – 10 show property price growth rates in nominal terms, local currency and in US$.

It should be noted that our charts consider only the capital growth side of the equation, and does not consider rental returns. If we were considering TOTAL returns to investment in real estate, our analysis should include rental income, not just capital gains. This might add some 3% – 5% per annum to net returns over time, and for an investor this could represent a very substantial uplift to returns over time. Our analysis contained in the charts therefore underestimates the potential returns from investment in property given its exclusion of rental income.

It is clear that in all cases, except Japan, over the period analysed, property prices have gone up in real terms, (Figures 1 – 7 and Table 1) in some cases, not by much. But the pace of increase in real prices is quite different. And in all cases there has been sometimes sustained periods when real prices have trended down or remained flat. So it is largely true to state that property prices have tended to be a decent hedge against inflation, but this may be over the very long term, and there can be long periods within that where property prices do no beat inflation.

Figures 1: Australia – Residential Property Price Index, Nominal and Real – AUD

Australia - Residential Property Price Index, Nominal and Real - AUD (1986-2011).

Source: Thomson Reuters, Portwood Capital

Figures 2: Hong Kong – Residential Property Price Index, Nominal and Real – HKD

Hong Kong - Residential Property Price Index, Nominal and Real - HKD (1978-2011).

Source: Rating and Valuation Dept HKSAR, Portwood Capital

Figures 3: Japan – Residential Property Price Index, Nominal and Real – JPY

Japan - Residential Property Price Index, Nominal and Real - JPY (1975-2010).

Source: Thomson Reuters, Portwood Capital

Figures 4: New Zealand – Residential Property Price Index, Nominal and Real – NZD

New Zealand - Residential Property Price Index, Nominal and Real - NZD (1992-2021).

Source: REINZ Monthly Housing Price Index – New Zealand, Portwood Capital

Figures 5: Singapore – Residential Property Price Index, Nominal and Real – SGD

Singapore - Residential Property Price Index, Nominal and Real - SGD (1981-2012).

Source: URA, Portwood Capital

Figures 6: UK – Residential Property Price Index, Nominal and Real – GBP

UK - Residential Property Price Index, Nominal and Real - GBP (1989-2012).

Source: Nationa Wide, UK, Portwood Capital

Figures 7: US – Residential Property Price Index, Nominal and Real – USD

US - Residential Property Price Index, Nominal and Real - USD (1986-2011).

Source: Case-Shiller Index US, Portwood Capital

Table 1: Summary of Residential Real Estate Price Movements

(Nominal, Real Terms, USD Terms, in relation to Gold)

Australia Hong Kong Japan New Zealand Singapore UK US
No of Years in Data Series a 24 33 35 20 31 23 25
Period of 1986-2010 1978-2011 1975-2010 1992-2012 1981-2012 1989-2012 1986-2011
Inflation
Total % of Change of Inflation b 124.79% 435.29% 79.40% 64.86% 77.20% 85.35% 105.32%
Average Annual Inflation c 5.20% 13.19% 2.27% 3.24% 2.49% 3.71% 4.21%
Gold
Total % Change of Gold Index d 233.21% 726.66% 659.80% 386.42% 265.07% 338.60% 334.50%
Average Annual Growth of Gold Prices e 9.72% 22.02% 18.85% 19.32% 8.55% 14.72% 13.38%
CAGR of Gold f 5.14% 6.61% 5.97% 8.23% 4.27% 6.64% 6.05%
Residential Prices – NOMINAL
Nominal Terms (Local Currency)
Total % Change g 201.00% 714.33% 67.43% 222.50% 348.56% 164.53% 118.37%
Annual Average % Change h=g/a 8.38% 21.65% 1.93% 11.13% 11.24% 7.15% 4.73%
Compound Annual Growth (CAGR) i 4.70% 6.56% 1.48% 6.03% 4.96% 4.32% 3.17%
Nominal Terms in USD
Total % Change j 361.61% 412.10% 529.62% 415.25% 657.75% 163.43% 118.35%
Annual Average % Change k=j/a 15.07% 12.49% 15.13% 20.76% 21.22% 7.11% 4.73%
Compound annual growth (CAGR) l 6.58% 5.07% 5.40% 8.54% 6.75% 4.30% 3.17%
Total % Change in Property Price Index Relative to Gold m 38.54% -38.05% -17.13% 5.93% 107.56% -39.94% -49.74%
Residential Prices – REAL
Teal Terms (Local Currency)
Total % Change n 33.90% 52.13% -6.67% 95.62% 153.14% 42.72% 6.35%
Annual Average % Change o=n/a 1.41% 1.58% -0.19% 4.78% 4.94% 1.86% 0.25%
Compound Annual Growth (CAGR) p 1.22% 1.28% -0.20% 3.41% 3.04% 1.56% 0.25%
Real Terms in USD
Total % Change q 105.35% -4.33% 250.95% 212.54% 327.63% 42.13% 6.35%
Annual Average % Change r=q/a 4.39% -0.13% 7.17% 10.63% 10.57% 1.83% 0.25%
Compound Annual Growth (CAGR) s 3.04% -0.13% 3.65% 5.86% 4.80% 1.54% 0.25%
Total % Change of Property Price Index Relative to Gold t -38.37% -88.43% -53.81% -35.75% 17.14% -67.60% -75.52%

Source: Various Government Statistics services, Thomson Reuters; Case-Shiller Index; Portwood Capital; Nationwide Building Society (UK), Rating and Valuation Dept (HK)

Figure 8: Annual Residential Price Increases (As a % in Nominal and Real Terms, Local Currency)

Annual Residential Price Increases (As a % in Nominal and Real Terms - Local Currency) for Australia, Hong Kong, Japan, New Zealand, Singapore, UK and US.

Source: Thomson Reuters Eikon, Various Government Statistics Services

Figure 9: Average Annual Growth of Property Prices (As a % in Nominal Terms, Local Currency and USD)

Average Annual Growth of Property Prices (As a % in Nominal Terms, Local Currency and US Dollars) for Australia, Hong Kong, Japan, New Zealand, Singapore, UK, US.

Source: Thomson Reuters Eikon, Various Government Statistics Services

Figure 10: CAGR of Property Prices (As a % in NOminal Terms, Local Currency and USD)

CAGR of Property Prices (As a % in NOminal Terms, Local Currency and USD) for Australia, Hong Kong, Japan, New Zealand, Singapore, UK, US.

Source: Thomson Reuters Eikon, Various Government Statistics Services

Hong Kong’s Property Price Increases are at Low End of Range in Real Terms

For example, take Hong Kong where home prices are regularly heralded as the most expensive in the world, with the word “crazy” being used to describe the lofty heights of the city’s housing costs. Hong Kong has seen a 714% increase in nominal house prices from 1979 to the present, by far the highest in the sample. But in real terms Hong Kong house prices have risen by only 52% in that 33 year period, equating to an average increment in real terms of a mere 1.3% per annum. Hong Kong has endured average inflation rates of more than 13% over the study period, significantly higher than other sample markets where annual inflation rates have averaged between around 2.3% and 5.2% in the case of Australia.

Hong Kong’s pegged currency contributes significantly to the risks of higher inflation rates given its inability to raise interest rates in the face of inflationary pressures.

Singapore has hugely outperformed Hong Kong real estate in real terms.


Singapore, its main rival in the region has seen a much more modest 349% increase in nominal prices since 1981, but enjoyed a much higher increase in real terms of 153% over a 31 year period, representing an average annual increment in real terms of 3% per annum, more than 135% higher than the annual real terms increment of Hong Kong real estate.

Even little old New Zealand outstrips Hong Kong in its property price increases on an inflation adjusted basis. Over the 20 year period for which we have property price data, nominal prices increased by about 223%, with real prices increasing by 96%, equating to a CAGR of around 3.4%, the highest in our sample.

For Japan, residential property has gone down slightly in real terms over the 35 year data period.

The recent financial crisis and its impacts on the property markets of the US and the UK are particularly noteworthy. For the US, property prices in real terms are now roughly where they were in 1986, but in the UK are still up about 43% in real terms on the 1989 base date.

It is possible to argue that property has been a hedge against inflation in most markets, but the entry point is critical to that claim, and there have been long periods in all markets when property has gone down or remained roughly flat in real terms.

For families living in these countries, it is local currency prices that are important. And that is what is reflected in our data. However, for international investors, it might be important to consider price moves in terms of another currency – say US$. Figures 9 – 17 show the nominal and real terms price movements, adjusted to a US$ base. This can change the perspective dramatically, nowhere more so than in the case of Japan.

Property Movements in US$ Terms

See Figures 11-17.

In local currency terms residential prices in Japan have moved up by a modest 67% since 1975, but in US$ terms have put on a stellar 530% for a CAGR of around 5.4%. So a US$ based investor in Japan real estate over this period has done remarkably well, given the huge devaluation of the US$ against the Yen. In 1975 it took 305 Yen to buy US$1 — it now takes a mere 81 Yen to buy a dollar.

New Zealand the biggest gainer in US$ Terms

Similarly a US$ based investor in New Zealand real estate has benefited substantially from currency appreciation. In local currency prices have put on a handy 222% since 1992, but in US$ terms the market has delivered a CAGR of 8.54%, the highest of all the markets covered here.

Both Australia and Singapore residential markets have delivered around 6.6% – 6.8% CAGR in US dollars.

For Hong Kong, prices have risen by 714% in local currency terms, but only 412% in US$ terms, the only country in our sample where returns have been less in US$ terms. This reflects the implementation of the currency peg to the US$ in 1983.


Hong Kong’s CAGR of only 5.07% in US$ terms lags all its regional peers, including Japan!

If nothing else, this analysis points to the substantial benefits for US$ based investors of real estate investment diversification. Or alternatively, for those who think the US$ depreciation is likely to continue in the long term, this might force an investor to question the long term currency impact of a real estate investment in the US.

Gold Adjusted Real Estate Prices

Now for some fun stuff!

Figure 18 plots the gold price since 1968 (in US$). Over this 44 year period the gold price has risen by almost 42 times, but has had long periods of declines, accompanied by two sustained periods of very sharp increases. Seems like gold has massively outperformed pretty much everything.

(Figures 19 – 25 plot gold price and real estate prices both in US$ terms, from a common index base.)

Figure 11: Australia – Residential Property Prices in Local Currency and USD

Australia - Residential Property Prices in Local Currency and USD (1986-2011). Nominal Prices Index AUD and USD.

Source: Thomson Reuters, Portwood Capital

Figure 12: Hong Kong – Residential Property Prices in Local Currency and USD

Hong Kong - Residential Property Prices in Local Currency and USD (1978-2011). Nominal Prices Index HKD & USD Terms.

Source: Rating and Valuation Dept HKSAR, Portwood Capital

Figure 13: Japan – Residential Property Prices in Local Currency and USD

Japan - Residential Property Prices in Local Currency and USD (1975-2010). Nominal Prices Index JPY & USD.

Source: Thomson Reuters, Portwood Capital

Figure 14: New Zealand – Residential Property Prices in Local Currency and USD

New Zealand - Residential Property Prices in Local Currency and USD (1992-2012). Nominal Prices Index NZD & USD.

Source: REINZ Monthly Housing Price Index – New Zealand, Portwood Capital

Figure 15: Singapore – Residential Property Prices in Local Currency and USD

Singapore - Residential Property Prices in Local Currency and USD (1981-2012). Nominal Prices Index SGD & USD.

Source: URA, Portwood Capital

Figure 16: UK – Residential Property Prices in Local Currency and USD

UK - Residential Property Prices in Local Currency and USD (1989-2012). Nominal Prices Index GBP & USD.

Source: Nation Wide, UK, Portwood Capital

Figure 17: US – Residential Property Prices in Local Currency and USD

US - Residential Property Prices in Local Currency and USD (1986-2011). Nominal Prices Index in USD.

Source: Case-Shiller Index US, Portwood Capital

Figure 18: Gold Prices Since 1968

Gold Prices US$/oz 1968-2012.

Source: Thomson Reuters

However looking at gold moves over the same period as the property data puts a slightly different perspective on things. For example in Singapore, over our data period from 1981, gold has produced a return of about 260% in US$ terms, while real estate has done somewhat better at around 348% in nominal terms and 657% in US$ terms.

Gold has, however, outstripped real estate prices in 4 of our 7 sample countries with real estate outperforming in just Singapore and Australia. Gold and real estate have performed in line in New Zealand. It is perhaps worth reiterating that investment in real estate should produce a rental return that is not included here, while gold does not.

How Much Gold Needed to Buy a Unit of Real Estate

Figures 26 – 32 plot the gold price relative to property price — or effectively how much gold is required to buy a unit of real estate.


For the markets covered it shows that property prices have dramatically underperformed gold over the past decade in Asia, and over a more recent period in other countries.

Or perhaps rather, gold has gone up very much more than real estate over recent years. So despite much wailing and gnashing of teeth about high real estate prices in recent years, gold, that other great claimed hedge against inflation, has done much better.

Question now might be whether gold will continue to outperform its other claimed inflation hedge, or might we see a “mean reversion” situation emerging where gold will come down relative to real estate, reversing trends of recent years.

An interesting trade to ponder perhaps!

Figure 19: Australia – Residential Property in USD Terms vs Gold Prices

Australia - Residential Property in USD Terms vs Gold Prices (1986-2010).

Source: Thomson Reuters, Portwood Capital

Figure 20: Hong Kong Residential Property in USD Terms vs Gold Prices

Hong Kong Residential Property in USD Terms vs Gold Prices (1978-2011).

Source: Rating and Valuation Dept HKSAR, Portwood Capital

Figure 21: Japan – Residential Property in USD Terms vs Gold Prices

Japan - Residential Property in USD Terms vs Gold Prices (1975-2008).

Source: Thomson Reuters, Portwood Capital

Figure 22: New Zealand – Residential Property in USD Terms vs Gold Prices

New Zealand - Residential Proeprty in USD Terms vs Gold Prices (1992-2011).

Source: REINZ Monthly Housing Price Index – New Zealand, Portwood Capital

Figure 23: Singapore – Residential Property in USD Terms vs Gold Prices

Singapore - Residential Property in USD Terms vs Gold Prices (1981-2012).

Source: URA, Portwood Capital

Figure 24: UK – Residential Property in USD Terms vs Gold Prices

UK - Residential Property in USD Terms vs Gold Prices (1989-2011).

Source: Nation Wide, UK, Portwood Capital

Figure 25: US – Residential Property in USD Terms vs Gold Prices

US - Residential Property in USD Terms vs Gold Prices (1986-2011).

Source: Case-Shiller Index US, Portwood Capital

Figure 26: Australia – Residential Prices in USD Terms Relative to Gold

Australia - Residential Prices in USD Terms Relative to Gold (1986-2010).

Source: Thomson Reuters, Portwood Capital

Figure 27: Hong Kong – Residential Prices in USD Terms Relative to Gold

Hong Kong - Residential Prices in USD Terms Relative to Gold (1978-2011).

Source: Rating and Valuation Dept HKSAR, Portwood Capital

Figure 28: Japan – Residential Prices in USD Terms Relative to Gold

Japan - Residential Prices in USD Terms Relative to Gold (1975-2010).

Source: Thomson Reuters, Portwood Capital

Figure 29: New Zealand – Residential Prices in USD Terms Relative to Gold

New Zealand - Residential Prices in USD Terms Relative to Gold (1992-2012).

Source: REINZ Monthly Housing Price Index – New Zealand, Portwood Capital

Figure 30: Singapore – Residential Prices in USD Terms Relative to Gold

Singapore - Residential Prices in USD Terms Relative to Gold (1981-2012).

Source: URA, Portwood Capital

Figure 31: UK – Residential Prices in USD Terms Relative to Gold

UK - Residential Prices in USD Terms Relative to Gold (1989-2012).

Source: Nation Wide, UK, Portwood Capital

Figure 32: US – Residential Prices in USD Terms Relative to Gold

US - Residential Prices in USD Terms Relative to Gold (1986-2011).

Source: Case-Shiller Index US, Portwood Capital

Inclusion of Rental Income Adds Materially to CAGR’s

In Table 2 we take a stab at including some notional rental income into the long term returns of residential real estate in an effort to approximate TOTAL returns to investment in the asset class. Rental yields vary considerably across different markets, over different types of property within the same market, and over time within the same market. Moreover, gross yield is often quite removed from net yield. Owners of real estate may have maintenance costs to deal with, agents fees, periods when property is vacant and a raft of other potential costs.

Table 2: Property Price Performance, Including a Rental Component – Singapore/New Zealand Outperformance

Capital Value Only Capital Value + Rental (at 3% yield)
NOMINAL TERMS No of Years % Change Annual Avg % CAGR % % Change Annual Avg % CAGR %
Australia 24 201.0% 8.4% 4.7% 336.8% 14.0% 6.3%
Hong Kong 33 714.3% 21.6% 6.6% 1035.7% 31.4% 7.6%
Japan 35 67.4% 1.9% 1.5% 278.2% 7.9% 3.9%
New Zealand 20 222.5% 11.1% 6.0% 341.1% 17.1% 7.7%
Singapore 31 348.5% 11.2% 5.0% 556.2% 17.9% 6.3%%
UK 23 164.5% 7.2% 4.3% 275.3% 12.0% 5.9%
USA 25 118.4% 4.7% 3.2% 245.1% 9.8% 5.1%
Capital Value Only Capital Value + Rental (at 3% yield)
REAL TERMS No of Years % Change Annual Avg % CAGR % % Change Annual Avg % CAGR %
Australia 24 33.9% 1.4% 1.2% 94.3% 3.9% 2.8%
Hong Kong 33 52.0% 1.6% 1.3% 112.2% 3.4% 2.3%
Japan 35 -6.7% -0.2% -0.2% 110.8% 3.2% 2.2%
New Zealand 20 95.6% 4.8% 3.4% 167.5% 8.4% 5.0%
Singapore 31 153.1% 4.9% 3.0% 270.3% 8.7% 4.3%
UK 23 42.7% 1.9% 1.6% 102.5% 4.5% 3.1%
USA 25 6.3% 0.3% 0.2% 68.1% 2.7% 2.1%

Source: Portwood Capital

In an effort to simplify all these variables, we have simply assumed a net yield of 3% for all markets, over the data period used. We know that this will not reflect conditions in each market over time, but take this as approximating some kind of crude average over the long term. For example, gross yields in Australia and New Zealand typically will be somewhat higher than markets like Singapore and Hong Kong right now – but it has not always been that way. Some years back, in the 1980’s for example, yields in Singapore and Hong Kong were often in the range of 7% or so, compared with more like 3% – 4.5% typically today.

This analysis does not alter the rankings of performance across the markets considered, but does add from 1% to 2.4% to the CAGRs in both nominal and real terms, a significant uplift. In Japan’s case for example, the inclusion of yield in the mix lifts CAGR from -0.2% in real terms to +2.2% for the analysis period.


In summary, we can make the following conclusions:

    For all markets in our sample real estate prices have delivered positive compound annual growth rates over the data periods considered in local currency terms, even Japan. Hong Kong and New Zealand sit at the top of the heap with CAGR’s of over 6%, with Singapore delivering just under 5% per annum growth.

  1. In inflation adjusted terms all markets except Japan have delivered positive CAGR’s in local currency terms. Singapore and New Zealand have produced CAGR’s of more than 3%, while the US has only just outpaced inflation with a CAGR of just 0.25%. In real terms HK’s market has produced a modest 1.3% CAGR in residential real estate.
  2. Real estate has proved to be a hedge against inflation, but this is not as unequivocal as many might believe. There have been long periods when real estate prices lagged inflation.
  3. In US$ terms all markets have delivered even higher CAGR’s due to depreciation of the US$ against most of the currencies in the sample. New Zealand’s CAGR of 8.5% in US$ terms ranks head and shoulders above the others in the sample, with both Singapore and Australia delivering US$ CAGR’s in excess of 6.5%.
  4. Including rental income adds substantially to annual returns, adding 1% – 2.4% CAGR’s.
  5. In only three markets have real estate prices equalled or beaten gold (in US$ terms) over the relevant data periods — Singapore being the big outperformer, with Australia and New Zealand also showing outperformance. Real estate substantially underperformed gold in the other markets. In the US, real estate price appreciation has been around 50% of that of gold, and for Hong Kong and the UK real estate has appreciated at about 60% of that of gold.
  6. Gold has substantially outperformed real estate in the past decade in all of our sample markets.

  7. Figure 33: Hong Kong Property Stock Index, REIT Index 12 Month Performance

    Hong Kong Property Stock Index, REIT Index 12 Month Performance ending 4/2012.

    Source: Reuters

    Figure 34: Shanghai Property Stock Index 12 Month Performance

    Shanghai Property Stock Index 12 Month Performance ending 4/2012.

    Source: Reuters

    Figure 35: Japanese Property Stock Index, J-REIT Index 12 Month Performance

    Japanese Property Stock Index, J-REIT Index 12 Month Performance ending 4/2012.

    Source: Reuters

    Figure 36: Singaporean Property Stock Index, REIT Index 12 Month Performance

    Singaporean Property Stock Index, REIT Index 12 Month Performance ending 4/2012.

    Source: Reuters

    Figure 37: New Zealand Property Stock Index 12 Month Performance

    New Zealand Property Stock Index 12 Month Performance ending 4/2012.

    Source: Reuters

    Figure 38: Australian Property Stock INdex, REIT Index 12 Month Performance

    Australian Property Stock INdex, REIT Index 12 Month Performance ending 4/2012.

    Source: Reuters

    Asian Real Estate Stocks — Thank You European Central Bank!

    Real estate stock indices generally underperformed their local markets substantially for most Asia Pacific markets in 2011. This was not due to underlying problems in the local real estate markets, but rather the opposite. Following the massive injections of liquidity into the global financial system in the year or so following Lehman’s demise in 2008, Asia’s real estate markets performed a very rapid “V” shape recovery that saw sharp rises in prices of many asset classes. Many markets saw prices surge sharply back toward pre GFC levels and in some cases beyond. Regional and central banks and governments reacted swiftly to enact a wide range of monetary and fiscal policy settings specifically aimed at curbing inflationary pressures, particularly real estate prices.

    Property stocks immediately took umbrage and went into a sulk, with considerable underperformance in most markets, particularly in residential property focused companies. They were right to do so. Actual property prices did in fact turn down in many markets and sectors, but only some time after policy initiatives were enacted. The European crisis and local curbs on lending to the sector played a part in the underperformance.

    Europe’s Long Term Refinancing Operation — A Boost to Equity Markets

    But by late November, some solutions to the immediate Euro crisis appeared to be emerging, and with the first LTRO lending injection in December, the stage was set for a rebound in equity markets, and particularly stocks in hard asset sectors that had been hit by cooling policy initiatives.

    For some time I have been arguing that a slide back into recession in Europe, with weaker economic growth prospects in the US, might in fact prove positive, curiously enough, for Asian real estate stocks, particularly in China. Cooling Euro/US economies would undermine economic growth prospects in the region, likely reduce inflationary pressures — including in hard assets such as real estate — and provide an opportunity for policy settings to be put on hold or even eased.

    China has been the most notable case study. The Reserve Ratio Requirement (RRR) for the local banks has been cut, releasing hundreds of billions of Rmb for additional lending into the domestic economy. Changes have been made to some fiscal measures that will lower taxes for residential real estate and the government has been vocal in exhorting banks to boost lending to lower income and/or first home buyers. In addition, banks typically get their loan quotas for the year handed down in January, enabling them to boost lending again in Q1 and Q2, only to risk drying up again in the latter part of the year.

    On the way down, as could be expected, REIT indices tended to outperform broader based general real estate indices that tend to be dominated by residential developers. Following the Euro crisis compromise, the higher beta developer stocks have tended to outperform REITs, most notably in Japan and Singapore. In Hong Kong a scandal affecting Sun Hung Kai Properties (16:HK), one of the largest listed property companies in the world, has produced a marked stumble in the performance of developer stocks, with REITs outperforming YTD against the trend in the region.

    Not only have stocks picked up their heels, but also residential property transactions volumes and prices have surges sharply in Hong Kong and Singapore, in the past 6-8 weeks. In China, transactions volumes have risen sharply, though prices are still subdued. Stocks have been supported by moves in the underlying assets, particularly for residential stocks.

    Further Rough Water Ahead in Europe

    It is hard to believe that Europe is going to face anything other than more financial turbulence in the coming months. The current market sweet spot may prove to be short lived. Spain is rapidly looming as the next wall to fall, and elections in France are posing another round of uncertainty in the likely event of a Socialist victory.

    Another bout of Euro worries similar to those of 2011 seems very likely. In the event, equity markets will likely take another dive.

    If further downside risks emerge for Asia’s export led economies, we are likely to see further easing of policy settings in an effort to encourage a more domestic demand led local economy, nowhere more so than in China. This makes the chance of a roll back of some of the policy initiatives introduced to slow asset prices in China’s real estate sector quite likely in my view. China’s leadership does not wish to see a huge surge in non-performing loans in its banking sector, nor does it wish to face the ire of vast swathes of its urban population bitter at a government that appears to have deliberately engineered a collapse in their most precious assets — their home.

    Although the road is likely to be a rocky one, I am betting that share prices in the China property space will end the year higher than at the start in response to shifts in policy during the course of the year.

    The policy environment in Singapore and Hong Kong is less clear cut. Recent sharp upside moves in property transactions and prices mitigate against an early roll back of property cooling measure introduced in the past year. Hard asset stocks in markets such as Thailand, Malaysia and Philippines are likely to continue to prove decent performers over the course of the year. In Japan, real estate markets, particularly office property are probably at or close to a bottom, with some degree of recovery likely to become visible during the latter part of the year. This may support the performance of the large office based REITs in Japan as well as the “Big Three” developers who all have large exposure to the Tokyo office market.

    Table 3: Asian Property Stock Performance 26/04/2012

    Asian Property Stock Performance 26/04/2012.

    Source: Reuters

    Table 4: Comparison of Index Performance

    Reuters Country Sector % Change 2011 % Change Year to Date
    .FTEGASY Asia Property -27.5% 23.4%
    .BSESN India Overall -24.8% 11.3%
    .FTFSTAS8600 Singapore Property -28.1% 21.7%
    .FTFSTAS8670 Singapore REIT -16.5% 13.4%
    .FTSTI Singapore Overall -18.2% 13.1%
    .HSNP Hong Kong Property -25.9% 12.0%
    .HSREIT Hong Kong REIT -13.3% 11.9%
    .HSI Hong Kong Overall -21.3% 13.3%
    .NZPR New Zealand Property 3.6% 8.1%
    .NZCI New Zealand Overall -4.1% 7.9%
    .AXPJ Australia Property -6.8% 10.2%
    .AXREJ Australia REIT -7.7% 10.0%
    .AORD Australia Overall -15.2% 8.0%
    .SSEP China Property -21.7% 23.0%
    .SSEC China Overall -22.9% 9.1%
    .TCOI Taiwan Property -38.5% 15.2%
    .TWII Taiwan Overall -38.5% 15.2%
    .IRLTY.T Japan Property -27.4% 26.1%
    .TREIT Japan REIT -27.9% 16.8%
    .NOTC Japan Overall -6.8% 17.7%

    Source: Reuters

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