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Of the 10 major economies in the Asian region, there are only four cities – Tokyo, Seoul, Hong Kong and Singapore – in which a broad range of institutional investors will actively consider placing major investments, because of a number of factors that collectively create an acceptable environment (see box).
There are also cities in Asia that institutional investors consider well worth looking at in the short term. These fall short with respect to a number of major preconditions, and therefore are only suitable for investors willing to accept a higher element of risk. These cities are Beijing, Shanghai, Guangzhou, Bangkok, Taipei and Manila.
A third tier consists of cities suitable only for overseas investors willing to accept the high level of risk that comes with regulatory or political uncertainty, in markets that may appear opaque, at least to the uninitiated, and therefore can only be considered as medium to longer term investment prospects (Jakarta, Manila, Ho Chi Minh City, New Delhi, Mumbai, Bangalore).
From a non-resident institutional investor’s perspective, political stability does not necessarily mean a democratically elected government but rather a government with authority that commands the respect of its people. Many institutional investors consider Singapore stable, both politically and socially. Social stability here refers to wealth gaps, racial conflicts and disputes among interest groups and so forth. Other cities or countries considered stable include Japan, Hong Kong, Thailand and China. Although South Korea is under constant nuclear threat from North Korea and has been periodically unsettled by labour unrest over the past few years, the country is still considered as relatively stable, both politically and socially, but would certainly receive a slightly lower score in this regard than Japan or Singapore. Taiwan’s political stability is affected by its uncertain political status and potential for conflict with China, this being one of the reasons that it has been relegated to second-tier status by many institutional investors, except for the pursuit of certain ‘special situations’, such as the acquisition of non-performing loans. Indonesia and the Philippines are considered less acceptable in terms of political stability, not only because of the heightened uncertainty in the run-up to their presidential elections in mid-2004, but because there is continued risk of terrorist attacks.
The governments of the first-tier investment markets, Japan, South Korea, Hong Kong and Singapore, work hard to ensure a strong, business-friendly environment, providing an essential support framework to enable the private sector to prosper. They are market-based economies with sound legal systems to protect private property rights. They have relatively impartial judicial systems in which overseas parties can receive fair hearings. The quality of government is generally satisfactory, as there is a system in place to combat corruption; government is generally responsible, efficient, less bureaucratic and has a clear organisational structure. Efficient government tends to drive infrastructure development and hence enhances its ability to prosper in future, which affects the prospects of property prices.
The institutional investor will also look at currency risk. It is imperative that the currency is reasonably stable and freely convertible and that there are no restrictions on repatriation of income and capital gains. These are among the most important virtues shared by the first-tier investment markets, and most severe drawbacks of the third-tier markets.
With respect to real estate issues such as land ownership, the institutional investor expects the system to be internally well-regulated, so that the retrieval of title documents and verification of property title can easily be undertaken. Difficulty of accessing or procuring title documents presents a serious obstacle to property investment. Equally inhibiting are opaque or only semi-transparent market conditions and especially lack of public access to transactional records. The latter two factors continue to impact on institutional perception of the viability of China, Vietnam and India.
To an extent, Japan is less transparent than the other first-tier markets in terms of public access to transaction details. But because the volume and consideration involved in property transactions is among the largest in the world, Japan is a market that institutional investors cannot overlook.
Other real estate issues such as availability of investment-grade property, initial yield levels, cap rates and suitable lease structures are also important in assessing the suitability of a given market. The lack of high-quality income-producing assets for acquisition in Thailand, for example, hinders the development of its investment market, since the size involved may sometimes be considered too small to be worth the due diligence work prior to acquisition.
Lease structures in Hong Kong may be an issue for some medium- to long-term investors. Most commercial leases are of three years with option to renew for another three. Residential leases are usually two years. Short lease structures tend to incur extra costs since finding new tenants will result in agent fees, legal fees and loss of income during void periods.
There are also taxation issues to be considered, such as capital gains tax, property tax, duties and other fees levied on property transactions. A complicated tax regime with excessive taxes levied on property transactions will definitely act to diminish institutional interest in a given investment market. Another potential deterrent is the substantial grey area around an existing body of property law, where local governments may undertake to provide certain kinds of ‘preferential treatment’ not clearly specified by law.

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