As anyone who does business in Asia will know, having access to the right partners is of paramount importance in this region. This is especially true when it comes to investing in real estate, where the rules can change without warning.
According to Henry Ching, Watson Wyatt’s Manager Research Consultant in Hong Kong, “Getting the investment thesis right is just the beginning of the story. Practitioners in real estate know that successful investing in real estate requires many things to go right and it’s genuinely the product of team work. Managers need to employ a mix of professional skills (lawyers, politicians, developers, architects, financiers, asset managers, leasing agents, operators, suppliers and so on) to invest in compelling ideas and skillfully implement them.”
In emerging Asia, there are plenty of skillful people in the real estate development space, to judge by the number of property developers in the listed indexes. However, weak spots exist across the entire real estate value chain. Ching says, “Developers, property managers and operators who look good on paper, often have no real experience and fail to deliver. In addition, many traditional Asian partners don’t feel comfortable in delivering bad news. This means that it is often too late when investors learn of the problems and by then little can be done to remedy the situation.”
The legal minefield in China is a perfect example of the complexity of investing in Asian real estate. Managers often have to deal with multiple regulatory frameworks, which are apt to change on a regular basis. That is where local knowledge can add huge value. Ching says, “The ability to structure investments in a tax efficient manner, and to protect investments from undue risk, is at least as important as the ability to find good investments. For instance, a properly structured investment in Japan can reduce tax drag from over 40% to 20% but the same structure will have absolutely no benefir in other parts of Asia.”
Understanding the political environment and policy objectives of the government at the provincial and federal level is also critical in ensuring success. The think local dictum was never more true than here. Ching says, “Governments sometimes place more importance on areas such as employment, social and capital market stability and knowledge transfer than on investment returns. Understanding the needs of the different stake holders and being able to meet them determines a manager’s ability to capture value.”
Access to local financing is another area that shouldn’t be underestimated. In good times, this can lower financing costs by as much as 50bps according to some managers. In bad times, it can mean the difference between survival or failure.
The current liquidity crunch in Japan and the recent rapid economic growth in China and India have attracted much interests in the region, spawning many niche and regional managers focusing on strategies ranging from development to distressed. Many are running their first time fund or pursuing a new strategy. Ching’s view is that “Successful managers in Asia, especially the local ones, often carry substantial key-person risk as the founders are usually the source of competitive advantage in the relationship-driven Asian business environment. So we assess managers as if we are assessing potential business partners. Do they have integrity and a clearly articulated philosophy which guides everything they do? Do they have passion for investing to the extent of being obsessive? Do they have the desire to win and succeed? Can they think laterally but at the same time take a practical and pragmatic approach to investing?
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