Clear vision required

The Asia juggernaut is building momentum but don't be blinded by the headlights. This was a key message that came out of the recent REIW Asia conference in Singapore Martin Hurst reports

The excitement surrounding Asia as an investment opportunity for pension funds was matched by the breadth of subject matter covered at this year's Real Estate Investment World conference held in Singapore.

Equally, a somewhat self-congratulatory tone was matched by warnings to do one's homework very carefully before venturing into Asia's emerging bonanza.

A pre-conference masterclass focused on the application of property derivatives in Asia. Kevin Swaddle, managing director of IPD in Asia, drew attention to research by Jones Lang LaSalle showing the transparency of various jurisdictions in Asia and found Hong Kong to be the most transparent followed by Malaysia and Singapore.
Swaddle said that Hong Kong and Singapore are ¬priority markets for indices given their maturity. Less transparent Asian markets include Taiwan, followed by South Korea, the Philippines, Thailand, India, China, Macau and Indonesia with Vietnam at the bottom of the table.

Stephen Moore, head of Hong Kong-based GFI Colliers, looked at the potential for a property derivatives market in the former UK colony. He pointed out that there are 100,000 real estate transactions a year across all sectors and where on average a residential unit transacts once every 3.4 years (compared with 8 years in the UK and Australia). Therefore, he argued, "there is a large data set with many observation points in a market where prices can rise and fall 50-60% per year."

Conference chair Kurt Roeloffs, Asia Pacific CEO at RREEF, highlighted the shift of investor interest to Asia and referred to the advent of public to private plays. He spoke of the convergence of hedge funds, private equity funds and real estate into the same competitive sphere. He also noted that regulators across the region are struggling to manage the high growth without knocking out the market or damaging its prospects.
Michael Smith, head of Asian real estate investment banking based in Singapore, referred to the buying frenzy in Asia, with demand outstripping supply and a compression of yields. He spoke of a boom in private equity and "inevitable" REIT consolidation.

In the CEO leadership panel, Stephen Riady, deputy chair of Lippo Group, referred to the challenge of rising prices. "The number one principle is timing," he said, "but prices have increased so much that the focus has shifted to location and management."

One delegate referred to the fact that investors in Asia should not be focused on yield alone since high demand is forcing yields down. They must give greater weighting to the prospect of economic and future rental growth.

Peter Barge of JLL said that the current levels of growth are unsustainable. "Old mother gravity is there and there will be corrections." Speaking of India he referred to the bullish sentiment but also highlighted the fact that the legal system is still a big issue for investors into the country. He also said that India's middle class would soon be equal to the population of the US, which would be a major element of growth in the region.

Ian Hawksworth of Liberty International said that the development sector in Asia is miles ahead of  Europe. He also stressed the importance of a credible local partner. "It is very difficult to get things done," he said. "The leasing market is unsophisticated as is the debt capital market but things are improving."

Comparing the attractiveness of different locations in Asia, Hawksworth also said that it is easier to get capital into China than it is into India because product is coming on stream in China, while in India there is no primary investment market yet - it is more of a "developers' paradise". 

He added that the world is more cautious but that there is still a massive amount of capital coming into the region. "Investment from the Middle East is fuelling demand for land," he said. A panelist in a later session pointed out that Middle East economies run on around $35-40 a barrel, and everything above that is a surplus that has to be invested.

One panelist said that China is so big that it will take at least five years for dominant players to emerge. He said that investors should not overlook China's second-tier cities where there is higher growth than in the main centres. 

In a panel discussing India, Roeloffs said that there was no way that all the capital raised for India can possibly be invested. "There is a shortage of opportunities which are appropriate for investors." He also noted that India's capital markets are far more developed than in China, as is its legal system, even though there are issues with the latter. "I also like India's entrepreneurial culture," he said. In a panel looking at the prospects for China the point was made that the degree to which the government restricts capital flows will be a major factor in determining the extent of China's potential. Apparently the government felt that it had not gone far enough in this regard. The panel also pointed to the expectation that the RMB would appreciate further as an additional factor in China's attractiveness for ¬foreign capital. 

Richard van den Berg at ING Real Estate pointed out that regulations in China are rather harsh but the degree to which they have an impact depends on the structure of the product. "Over the last six months the impression has been one of increasing strictness in the regulatory environment although the flow of investment capital will not dry up as a result." He referred to the Chinese saying: "the mountain is high but the emperor is far away. So how easy will it be to implement the regulations across the country?"

One panelist said that in second-tier and third-tier cities very large developments would be required to put investor capital to work, thereby increasing the execution risk in these areas.

He pointed out that in China one needs to follow the regulations exactly. If you don't you will have trouble later," he said.

"Regulations are a problem across the region," he continued. "In many countries you need a licence  to operate - but then, for whatever reason, you find that you can't get the licence." You can use creative structuring but this won't solve the problem. The exceptions to this are Singapore and Hong Kong."  

Japan was also the focus of some interest at the conference, emerging as it is from a lengthy recession. One delegate referred to the fact that much real estate remains on corporate balance sheets. As in Germany, the perception exists in Japan that if it puts its real estate on the market the company in question must be in difficulty. But while Germany has moved on, the problem still exists in Japan. 

APREA CEO Peter Mitchell referred to the amount of real estate "weighing down corporate balance sheets in Asia" and that the case for REITs was therefore "compelling", and said that the potential for REITs in Asia is huge. He spoke of the imperfect REIT laws in Thailand and South Korea which are experiencing a push for reform. He also referred to countries such as India, Pakistan, China, Indonesia and the Philippines where there is no REIT law in the pipeline.

The conference also surveyed delegates for their views. One survey found that delegates felt that office and residential would be the strongest areas for growth in Asia. Another found that the preferred capital raising tool for Asian developers would be the REIT.