In a marked contrast from last year, investors in Asian real estate are searching for safety -- or a dose of Vietnamese fresh chili for their risk. One camp seeks security above all else, finding it in Australia. The other is willing to bet that the surer emerging-market bets will pay long-term dividends.
That's a dramatic shift in sentiment from last year, when risky markets such as Bangalore, Mumbai and Manila drew the most attention. Investors may subsequently have been undone by, for instance, India's yo-yo economy this year, buffeted by the sudden demonetization last November and a new sales tax in mid-year.
This time around, institutional investors have identified the Australian gateway cities of Sydney and Melbourne as the most-attractive prospects for development and investment in 2018.
They have reflected what appetite they have for risk entering next year by identifying Ho Chi Minh City in Vietnam -- Saigon to you and me -- as the only other market to have prospects for property development that they classify as "generally good."
The findings come from the 2018 Asia Pacific edition of the Emerging Trends in Real Estate report. The study, compiled by the Urban Land Institute and PwC, synthesize the opinions of 710 real-estate developers, institutional owners, fund managers, bank lenders, advisory firms and institutional-equity investors.
That then provides guidance on institutional-investor intentions for the year ahead. The study compiles two measures of attractiveness: for development, and for investment.
Sydney and Melbourne top the city investment prospects, in that order. They are first and third on the ranking of city development prospects, split only by Saigon.
While those three cities are the only three markets given the green "generally good" verdict for development this year, the money managers polled have a broader view for investment. Besides Sydney, Melbourne and Saigon, Singapore and Shanghai are also "generally good" in terms of prospects for investment in 2018.
Office space in Sydney, at an average net effective rent of $550 per square meter on a capital value of $14,340, generates a rental yield of 3.8%. Not too shabby, although before values began a recent run that was closer to 5%.
Melbourne's figure is less attractive, at a rental yield of 2.6% on a property price of $9,712 per square meter. But it is the trend in rents that truly sets Melbourne and Sydney apart.
Unlike the vast majority of cities in the region, which are seeing slowing rental growth on high capital values, Aussie rents are still heading upwards. CBRE projects that Sydney office space will also offer rental gains of 5% over the next three years. The rental growth is 5.5% in Melbourne over the same period.
The office yield in Saigon is far higher, investors rewarded with an annual rental of $465 per square meter on a value of $5,107. That's a very eye-catching yield of 9.1%.
But investors are really happy with a yield of half that -- 4% to 5% -- one fund manager said during the survey. That's a pretty safe bet, with the country's economy growing at 7.4% this year.
"We go in with a long-term perspective about being ether for the next 10 to 20 years and being part of this stellar demographic cycle," the fund manager said. "There is retail consumption, there is office demand, IT demand, domestic demand that hasn't come out yet."
One problem: there isn't any office space to buy. There has been very little development of prime office buildings in Saigon in recent years. So large investors struggle to find projects. They currently typically enter the Vietnamese residential property market through a local partner instead.
Another fund manager was encouraged by the strong wage and growth prospects at a macro level. "Our entry point there is mid- to affordable residential housing, which has a natural exit," the manager said. "It's very demand-based. That's a strategy we're executing on now."
Foreign investors account for 40% of the investment activity in Australia. Besides the positive rent trends, they also benefit from a sizeable spread between rental yields and the cost of borrowing on sovereign bonds. Australian office leases also tend to be particularly long, often 10 years, double what you'll find in many other Asian markets.
The problem is finding enough buildings. Transaction volume fell 37% in the first half of this year, because there simply isn't available stock. With little due to come on the market, either, prices look to have solid support but investors have to strive hard to put their money to work.
"The challenge has been putting sites together," one Sydney-based fund manager said. As far as upcoming supply of new office developments goes, "the ones we are seeing at the moment are pretty much it."
Many smaller buildings in the central business district of the city have been sold off with strata title, so floors of a building are individually owned. That makes it hard to consolidate sites with a large enough floor plate to make a new building attractive to tenants.
On the residential side, it's all about China. Chinese buyers accounted for 87% of all foreign purchases Down Under, which is causing no small amount of enmity. Sydney's housing is now the second-least affordable on the planet, according to analysis by the group Demographia. Despite government measures to make purchases by foreign buyers less attractive, those polled thought prices would still continue to rise.
Indonesia and India were the two darlings of the 2017 report, heading into this year, marking the first time either nation had attracted significant interest from institutional real-estate investors.
But Indonesia has dropped well down the rankings in terms of popularity, with an office supply glut in the capital, Jakarta.
India still attracts some investor interest for the year ahead, although it's well behind Vietnam. Again, investors are looking to front-run economic growth and also benefit from reforms by the business-friendly administration of Prime Minister Narendra Modi.
India also offers much more massive scale than Vietnam can provide. To date, it has been the likes of Blackstone (BX) and Brookfield Asset Management (BAM) that have bought into India. Smaller funds are now lining up to enter the market -- but all they've done is talk and listen, so far.
"There's a real gap between the large LPs [limited partners] who are comfortable going alone, and the LPs who have traditionally backed funds," one fund manager said. "It's probably the market where we see the biggest gap between registering interest and actually doing something. So there's a significant amount of tire-kicking going on."