Interesting times

Sustainability is catching on fast in the likes of India and China, which bears witness to the considerable progress that is being made in Asia's vast and diverse property investment landscape. But you can still taste the pollution when you wake in Shanghai and HK, and although many parts of the continent enjoy excellent growth it has felt the effects of the global downturn and the decoupling theories have been largely discredited. As Peter Mitchell, CEO of the region's main real estate body, APREA, explains to Martin Hurst, the challenges ahead remain considerable

The downturn is biting in Asia, both in its developed and developing nations. However, the region has proved to be more resilient than elsewhere. Peter Mitchell, CEO of the Asian Public Real Estate Association (APREA), says that in response to the global financial crisis the Association is devoting increased resources to research, training, seminars and submissions to various regional authorities for regulatory improvement.

Today the organisation he leads is well established and growing: the association has around 120 members, among them from Mitchell's native Australia, as well as from Japan, Singapore, Hong Kong, the Philippines, Malaysia, Vietnam, Korea, India, China, the US and Europe. Meanwhile, the need for market information, the dissemination of best practice and networking is greater than ever in these challenging times. The challenges facing the organisation have grown following the decision to expand its remit to include non-listed as well as listed property; for a membership that straddles both, this was a natural progression.

One of the most often cited phrases since the downturn started just over two years ago has been the ‘flight to quality' - that investors move away from riskier markets to focus on what they know.

Confidence is clearly a key issue. The story in China is as compelling as any in the world today and in any case Mitchell does not see a problem with the fundamentals. "The downturn was not caused by real estate; it emanated in opaque debt products," he says. "So the financial sector created the problem. I don't see any loss of appetite for Chinese or any other Asian real estate product. What will change will be investor approach to quality of management, with an increasing focus at asset level."

The financial sector in Asia has not suffered as much as others, and the message at the APREA Leaders Forum in April (see box) was that the Asian banking system is solid and well capitalised. "The banks didn't get into the products that created problems for many of the banks in Europe and North America," Mitchell explains.

"But it varies from country to country," he continues. "There was concern in Singapore, where there had been a lot of CMBS issuance, and local banks were under pressure to cover for the many foreign banks that have left. However, this is being managed because the local banks are in good shape."

That said capital is in short supply at present and Mitchell describes fund-raising activity as "minimal", although there are signs of increased activity. There have been a number of discounted capital raisings among REITs in Australia and in Singapore in recent times and Mitchell expects "IPO activity to gradually emerge again next year."

He adds: "There is a guardedly optimistic view that we are now bumping along the bottom, with various positive economic signs appearing in the US and China. If that is correct and the end of the recession is near in the US then clearly that will have a positive impact in Asia."

The recent history of the listed market in Asia has been quite volatile. In the last 10 months there was what Mitchell describes as "a major departure" on the part of foreign investors out of the public markets, especially in Japan and Singapore. However, Singapore in particular has seen a major correction
in recent times.

A number of smaller J-REITs are very under capitalised and not on the analysts' radar, and they find it hard to compete for capital. There has been one case of REIT insolvency in Japan. Since then a number of measures have been taken by authorities to support the J-REIT market and these have been welcomed by investors. Additionally, Mitchell says: "We have put some proposals to the regulator in Japan to clarify and strengthen many aspects of regulation as they apply to REITs, for example, to give the managers more capital management tools to work with. The APREA submission has been very favourably received by the authorities and we expect at least some of our proposals to be implemented."

Mitchell adds that there are some regulatory impediments to efficient takeover and taking on private activity in Singapore. However, he points out that while "some of the REITs still have some refinancing challenges, so far they have all been able to meet these challenges. Also, as in Japan, the Singaporean regulators are responding positively to the challenges presented by the global financial crisis."

In spite of the refinancing challenge, the roll-out of REIT markets across Asia is making progress. Mitchell reveals that there is a draft REIT law in the Philippines - "that is getting very close now." He enthuses that things also look good in China where "there has been a lot of publicity and we are likely to see a Chinese REIT sooner rather than later."

Generally governance in the region is progressing well. APREA's Best Practices Handbook was launched last month (see box). Mitchell suggests that if history is any indication, the crisis will have a beneficial impact on governance, driving forward regulation in the region. He points out that "as a result of the market crises in Australia and the US in the early 1990s regulation was improved and their REIT markets flourished."

This is not the case in India. A draft REIT law was issued in December 2007, which Mitchell describes as "quite flawed". The reaction of the regulator was
to take it off the table. They were saying: "This is not the time to be talking about REITs." Our view is that this is a major mistake because at a time like this serious efforts need to be made to revitalise the real estate market.

India has seen a real estate market collapse and some of the big companies are trying to recapitalise and get some liquidity onto their balance sheets. Fresh sources of capital need to be found so one would want to be pushing ahead with REITs. We ran a roundtable in India to engage on the subject of their draft law last September but we found that at the political level there seems to be little support for REITs and no understanding of the benefits that REITs can bring to an economy.

Investors often mention India and China in the same breath. "This is a mistake," Mitchell asserts. "China has been emerging for about 20 years and has been working on laws designed to facilitate investment and development; India by contrast was in relative isolation until only a few years ago and has a long way to go from the point of view of the investor. It's very hard for foreign investors to get into Indian real estate due to red tape and the bureaucracy of the federal system and a plethora of laws and taxes."

The rapid pace of investment into China was discussed upon at the APREA Leaders Forum where one message to investors was to get out of their comfort zone and look at its second tier cities. "China is so huge one might not know where to start," Mitchell says. "The point at the forum was that with the right focus foreign investors can find opportunities with the right partner."

He explains that while much development activity has been concentrated on Shanghai and Beijing, there are many 1-5m population cities that have not received the same attention from foreign investors. "The infrastructure needs improvement, and controls over foreign investment in infra-structure are more liberal than foreign investment in real estate. So there are psotentially all sorts of opportunities."

Property and fund management skills are developing rapidly in the region but the skill base is still behind that found in North America and Europe. Consequently, education and training is something APREA takes very seriously and with this in mind it established the APREA Institute last year.

"We undertook a huge amount of industry consultation back in 2007 and the very strong message back was that the industry would like to see training delivered at the mid-management level," Mitchell explains.

"Programmes include a full certificate course, in-house training and short course workshops covering topics such as asset management, investment accounting and cross-border investment risk in real estate. We have also rolled out a new short course in structuring finance - as opposed to structured finance - in the new environment of non-securitised debt. The course examines the new options for financing real estate."

Another major activity of APREA is research. "We have developed a large programme of priority research topics with our research committee, which includes our academic members," Mitchell explains.

One of the topics is a study of Asian investors, including sovereign wealth funds - how significant they are in terms of volume of investment into real estate and what, moving forward, will be their approach to real estate allocation? Also, what are the regulatory impediments to greater Asian pension fund real estate investment? "Our research is directed at getting a better understanding of behaviour and allocation to real estate among Asian investors."

APREA is also about to run a couple of Shariah investment courses focusing on what it can do for a portfolio from a diversification point of view. A significant body of investment is set to come from the Shariah finance community. Some Asian markets have already recognised the opportunity. "Malaysia is leading the way, and Singapore and Hong Kong have also stated they will encourage Shariah investment vehicles," Mitchell says.

Such has been the pace of growth in Asia and the untapped potential in the race for economic progress that one would not necessarily associate this vast continent with the subject of sustainability. The perception of China in the developed nations of the west is that it is something of a pariah given mind-boggling statistics about its power station building programme, pollution levels, and its seemingly insatiable hunger for resources in general. And, of course, this perception is not confined to China alone.

But there has been progress and Mitchell is keen to put the record straight. "Investors perceive Asia as being backward as regards sustainability, but first impressions can be deceptive," he says. "In China, there is increasing take up of sustainability in building practices and other areas too; there are some sustainability-savvy investors in India and their number is growing; Japanese and Singaporean property developers are as advanced as any in the world today.

"The report presented at our Forum shows that there is an increasing number of Asian companies that are really committed to sustainability. We are working with one of our members to present an empirical cost-benefit study of sustainability, which will be covered at our Forum in 2010."