May 2007 - As an investment destination for institutional investors, Asia is entering a new phase of its evolution. Mature markets are evolving new ways of attracting global capital. The less well-developed markets are coming to grips with regulation to curb excessive speculation and corruption among developers and planning officials. Meanwhile, the REIT markets of Asia, although still in their infancy, are growing fast.

In such a constantly evolving environment, it is important for professional firms with international experience to play their part in ensuring an orderly progress. Within its membership, APREA has experts who are consulting with the governments

of China, Malaysia, Singapore, Hong Kong and the Philippines, as those countries look to develop their real estate markets. APREA’s own progress from a standing start two years ago demonstrates just how much is happening in the Asian region.

Speaking at APREA’s Property Leaders Forum in Ho Chi Minh City recently, the economist and fund manager Dr Marc Faber commented: “Today you have many more opportunities in Asia with the opening up of all these different economies.

Global trade is growing much faster now and the fastest growth is occurring in the emerging economies. People tend to underestimate this. If you look at individual sub-sets of these economies - motor cars, planes, cement, steel - they are already much larger than in Europe and the US and are growing faster. And because of the globalisation of trade, Asian economies need not be so concerned about the effects of a US slowdown.”

Capital markets are different, though. They trade more closely to a central mark and are therefore prone to greater volatility. Faber recognises this, but he says investors should not be too concerned about a repeat of the Asian crisis of 1997. “Asia is in a very different position from 1997, because of the level of foreign trade and investment. Asian nations now have huge foreign exchange reserves, whereas in 1997 they were in deficit as foreign investors sold down and currencies fell.”

And despite his reputation, ‘Dr Doom’ is not concerned about asset bubbles in Asia at current levels. “Actually, average real estate values in Asia are lower than they were in 1997, with the exception of Hong Kong. So they are not in a bubble and in global terms they look cheap, even Singapore. China still has a low market cap relative to the size of its economy. Japanese corporates are looking genuinely profitable and they are going to invest more overseas. Their market is still attractive too.”

His concern for the short term is that, as he sees it, “we now have bubbles in many different types of asset, from art to real estate, especially in the west. If these were all to deflate together, that would cause problems.”

The growth of cross-border investment in Asia is one of the major stories of the past 18 months. In 2006, cross-border investment in Chinese real estate totalled $2.2bn, up from only $67m in 2003, with the most active overseas investors being from the US, Singapore and Hong Kong. Australian property firms have also been aggressively globalising their real estate portfolios. Macarthur Cook, an Australian property group with A$1bn of assets under management, has recently completed a $200m REIT IPO on the Singapore Exchange.

ABP, the €200bn Dutch civil servants’ pension fund, is building a network of managers whom it will work with to fund strategic investments in Asia. It has recently established an investment office in Hong Kong. Real estate, private equity and infrastructure will be the focus initially.

Naturally, most global investors are setting their sights on China, but a further

indication of a new phase of Asia’s development is the definite shift of investor focus, from the big cities of Beijing and Shanghai, to the many second-tier city opportunities.

This shift is supported by official figures showing that, from January to April 2007, Shanghai property attracted $690m in promised foreign investment, a drop of over 42% year on year. The average price of homes in Shanghai fell 3% in the first quarter of this year.

One of the real stories of the past 12 months has been the emergence of Macau as a major investment destination. Fuelled by taxes assessed on gross gaming revenues

approaching 40%, this Special Administrative Region of China is undergoing a building boom of mammoth proportions. Ernst & Young’s Dale Anne Reiss calls Macau “possibly the hottest piece of real estate in the world right now”.

In September last year, the Wynn Macau, a 600-room hotel and casino, opened its doors and later this year will see the opening of the MGM Grand Macau, a 600-room resort, and the Venetian Macau, a 3,000-room resort featuring over 800 gaming tables. The market is also attracting hotel operators such as Four Seasons, Shangri-La, Starwood, Hilton and Intercontinental, which have all signed or are in the process of signing agreements with the Las Vegas Sands to operate hotels and casinos in the section of Macau known as the Cotai Strip.

Macau has already surpassed the Las Vegas Strip in terms of gross gaming revenues. It looks like a no-brainer for anyone seeking out Asian opportunity; the Chinese love of gambling and a resort ripe for development a stone’s throw from the mainland. You may already have missed the ferry though. Reiss comments: “Macau represents a learning curve for even the best casino operators. Unlike typical US casinos, emphasis is less on slots and more on table games.”

Kenny Suen, managing director of Vigers Asia Pacific, agrees that foreign investors will keep fuelling Macau’s property investment boom: “I agree with the consensus that prices will continue to rise. The rationale behind such expectation is that Macau’s economic growth still seems assured, which is likely to create continued demand for property. The present housing prices not only reflect the market fundamentals but also serve as a gauge of confidence in Macau. Properties with sea views had attracted participation by overseas funds and executive expatriates as high-end property demand is quite location-specific.”

Apart from the city becoming a favourable gaming and tourist destination, the Macau government has unveiled ambitious plans to transform it into a logistics hub as well as a convention and exhibition centre. The substantial increase in air cargo volume and the close collaboration with other Pearl River Delta cities, in terms of  infrastructure development, has demonstrated the city’s efforts to realise its logistics plan.

The REITs market in Asian may only be five or so years old, with the first ones having been launched in Japan and Singapore in later 2001, but it has captured the imagination of investors. There are almost 100 REITs in Asia now with a market capitalisation of around $70bn. The dominant market in terms of assets is Japan, which accounts for more than half the total. To put the REITs market in perspective, according to RREEF, the total investible real estate in Asia ex-Japan is around $800bn, which means the REIT market so far represents less than 5% of the investible market.

It would be fair to say that without Singapore’s initiative in creating a vibrant local REITs market, the Asian market outside of Japan would be fairly insignificant,

notwithstanding single issues like the LINK Reit in Hong Kong. The government recognised the potential for Singapore to become a hub for Asian REIT listings and moved promptly to enhance the operating environment. As HSBC’s Tricia Song noted in her recent report on the S-REIT sector, “In addition to improving the licensing of REIT managers, alignment of interest of REIT managers and unit-holders, as well as raising the cap on gearing from 35% to 60% (provided the REIT gets a credit rating) there have been several tax concessions.”

These include tax transparency at the trust level, remission of stamp duty on transfer of Singapore properties into REITs, a reduction of the tax rate for non-resident institutional investors from 20% to 10% and tax exemption for foreign-sourced income. As a result of these measures, foreign players have been happy to use the Singapore Exchange, including Hong Kong’s Fortune REIT, Australia’s Allco REIT and Lippo Group’s first REIT.

As RREEF’s Peter Hobbs said recently, “The pace and significance of change in the global real estate securities markets is no better illustrated than in the transformation

under way in the Asian Pacific region.”

His colleague, Tan Yen Keng, at RREEF in Hong Kong, says one of the major risks that remains in Asia is the imperfect nature of market information and availability

of data. China, as a key example, suffers from a shortage of good-quality market and performance data and this makes it harder for investors to gauge the risks of real estate investment. “There are a number of signs that the institutional risks of investing in China are being reduced,” says Tan.

“Improvements in JLL’s transparency rating between 2004 and 2006 were due, in particular, to more effective legal measures that address the compulsory acquisition


Over the longer term, Tan says the increase in the number of investors, both domestic and international, will lead to deeper and more broadly based markets, with a likely reduction on overall market volatility. However, over the shorter term, he predicts that “considerable cap rate volatility can be expected as the investment market grows in scale and critical mass”.