China's property prices

Record property prices intensify bubble fears

China's property prices grew at the fastest rate in almost two years in February despite signs that sales may be slowing, exacerbating fears that an asset bubble may be developing, China Daily reported.

Government measures to ease the pace of China's real estate market appeared impotent, as commercial and residential property prices strengthened by 10.7% year-on-year (y-o-y) in February 2010 across 70 of the country's major cities. The price increase trumped a growth of 9.5% y-o-y in January.

The new figures add uncertainty to what appears to be an overheated market, as the data may trigger stronger government measures to tame the rate of growth in the real estate sector and the threat it poses to inflation rates. China's consumer price index (CPI) rose by 2.7% y-o-y in February 2010, the fastest rate for a year. BMI forecasts that it will stay at similar levels throughout the year.

Real estate speculators took the brunt of the blame for the inflation, and Premier Wen Jiabao promised a crack down on property speculation in an annual state address in early March. The price rises have irked the government at a time when it intends to focus on sustained economic growth, rather than scale back stimulative policies. Although the government launched a basket of measures to discourage speculation early in 2010, the price surges are seen as a direct result of the government's CNY4trn (US$585.9bn) stimulus package designed to kick-start the economy.

A levy on property sold within five years of the purchase date was revived in January 2010, in order to discourage investors capitalising on soaring prices and rapidly flipping properties. This reversed a decision in January 2009 to reduce the regulatory obligation to two years. The government has also reportedly cautioned lenders to exercise care when lending in the property market.

Speculation that the string of month-on-month price rises is finally provoking a correction was supported this week, however, as figures showed residential property sales cooling. Data from the National Bureau of Statistics revealed a deceleration in growth of residential real estate sales to 37% for January and February combined. The growth in sales towards the end of 2009 was as high as 50%. The drop in the residential property market indicates that a sufficient number of buyers are being priced out to rebalance demand/supply fundamentals. The easing in growth also indicates that the market is anticipating a decline in prices as a direct result of a greater backlash from the government.

Apollo snaps up Citi real estate division

In a bid to streamline its business and focus on core operations, banking giant Citigroup has announced the sale of its real estate investment unit, Citi Property Investors (CPI), to US-based private equity firm Apollo Global Management.

As reported by Bloomberg, Apollo has signed a letter of intent that will see the New York-based firm's real estate assets treble. Beating off rival potential bidders including Australia's Macquarie Group, Apollo will absorb 65 investments with a net value of US$3.5bn across 26 countries.

The deal will see CPI return to the familiar management of Joseph Azrack, who left the division after four years in 2008 to head Apollo's real estate operation. Some see Azrack's involvement as a key element that secured the unit for Apollo. Although the deal is subject to further negotiations, it is expected to be finalized in the coming months.

CPI's Asia Pacific-focused fund will compliment Apollo's aim to establish a Hong Kong-based team dedicated to investments in the Japanese, South Korean and Australian markets. CPI's investments are also spread over North American markets, while the acquisition will also see Apollo manage European assets for the first time.

Citigroup's divestment of the division comes as no surprise since the banking group has been under market and regulatory pressure to lighten its balance sheet and refocus its operations on its core banking services. Chief executive Vikram Pandit has previously announced his intention to divest or overhaul Citi Holdings, the division that CPI falls under. Citi Holdings was created in 2009 to hold the Group's riskier non-core assets. These are now being sold-off as Citigroup seeks to return to profit. The company received three bailouts, as part of the US government's economic stimulus package, with Federal investment eventually reaching US$45bn.

CPI's investments were severely impacted by the global recession in line with declines in the wider real estate market. CPI's North American fund, for example, lost 28.2% of its value year-on-year (y-o-y) from December 2006 to June 2009, according to the New York State Teachers Retirement System, which is one of the fund's limited partners. Meanwhile, the value of commercial real estate deteriorated by 41% in the US compared to values during the boom in 2007, as stated by Moody's Investors Service. Some will therefore see Apollo's acquisition as a move to take advantage of a buyer's market while the real estate sector continues to bottom out. However, BMI cautions that recovery could take as long as a decade in the US market, which will drive investors - including Apollo - eastwards where markets are experiencing more rapid growth. Indeed, in China growth rates in the residential sector were in excess of 50% at the end of 2009. China is now in danger of becoming a victim of its own success with high-prices beginning to deter investors.

Depressed Dubai property market could be ideal for REIT revival

A sharp drop in prices and scattered demand for the vast amount of properties coming to market in Dubai has made the UAE an ideal location for a rebound in real estate investment trusts (REITs), according to local news reports.

The combination of the current valuation of real estate assets in the UAE and Dubai's continuing appeal as an investment destination provides an opportunity to consolidate properties in REIT vehicles. A REIT - a fund that invests in real estate assets and typically distributes 90% of returns to investors - established in the Dubai International Financial Centre (DIFC) would attract local and international institutional investors, according to law firm Al Tamimi & Company, as quoted in Emirates Business.

Optimism in the long-term viability of the real estate market matches local conglomerate Shaikhani Group's expectation that the scrapping of some 566 real estate projects and an increase in demand in 2010 will stabilise the UAE's property market this year. Project cancellations will be balanced out by a total of 806 properties that expected to be completed relatively soon, the group said. Shaikhani Group is in the process of constructing properties with a combined value of AED1.34bn (US$370mn). Some estimates suggest that the UAE will attract 44% of total real estate investments in the region by 2013. Indeed, despite the fall-out from the Dubai World debt crisis, BMI believes that the outlook for the real estate market in the UAE is positive, although Dubai will be far slower to recover than neighbouring Abu Dhabi.

Indeed, developers and investors have been encouraged by signs that UAE's mortgage rates have been declining in recent months in an attempt to revive the country's real estate sector. However, the mortgage rate cuts made by a number of banks in the country may not be sufficient to fully resuscitate the market in 2010. UAE's capital Abu Dhabi, for example, is likely to see additional delays in real estate projects, while prices will main remain suppressed if the limited transaction volumes in January and February continue throughout the year.

Although many REITs have seen their value slashed and their share prices plummet during the earlier stages of the global financial crisis, the funds achieved a rebound in 2009. Increasing interest in initial public offerings as well as renewed merger and acquisition activity should see REITs grow in 2010. As a relatively conservative financial vehicle, REITs can be seen as a way to bolster overly-leveraged real estate markets. This translates well into Dubai's debt-driven property market, where REITs listed on a DIFC exchange could help recapitalise the sector.

Real estate activity nudges construction towards recovery

Residential and commercial real estate activity helped flatten a decline in the UK's construction industry in February, according to the latest CIPS/Markit Construction Purchasing Managers' Index (PMI), which is collated by the Chartered Institute of Purchasing and Supply (CIPS).

The PMI posted a score of 48.5 in February 2010 - with anything below 50 representing a contraction. This was fractionally lower than the score of 48.6 recorded in January, which suggests that the rate of decline in the sector is now slowing. Of the three main sectors of the UK construction only house-building showed a rise in activity in February. In contrast both commercial construction and civil engineering continued to decline, according to the CIPS.

Still, there remains optimism in the industry that activity in the construction sector will improve over the next 12 months. Indeed, the overall economy has now pulled out of recession, even if growth rates remain low. Also, the construction sector may have been adversely impacted in early 2010 by the bad weather conditions. Still, BMI believes that operating conditions remain tough, with new project financing remaining depressed. In addition the general election - which will most likely take place in May or June 2010 - could result in a new government and deep public spending cuts. We forecast that the construction industry will contract by 4.6% in real terms in 2010.

Indeed, according to figures from Halifax, house prices fell by 1.5% month-on-month (m-o-m) in February 2010, following a sharp drop in demand. This was primarily attributed to the end of a temporary suspension of stamp duty on homes priced between £125,000 and £175,000, which inflated house sales at the end of 2009. However, not all the indicators are bad. In February 2010 house prices were up 4.8% y-o-y. When just factoring in sales in just England and Wales and also including cash purchases, prices rose by 9.7% y-o-y, according to Acadametrics. Meanwhile, the latest data point to a sustainable narrowing of contractions in the UK's real estate markets, which lost around 44% of its value from mid-2007 to mid-2009.

By 2011 the construction sector market should have returned to growth, buoyed by the run-up to the 2012 Olympic games, but BMI does not expect industry value to return to pre-crisis levels until 2012 at the earliest.

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