One of the current hotly-debated topics in Asia-Pacific amongst Capital Markets professionals is the uncertainty surrounding interest rate direction and the stabilisation of equity and bond markets. There remained continued uncertainty about the strength of the global economy and how economic factors will impact the region, particularly regarding inflation expectations and yields.
Falling yields in other asset classes have driven increasing allocations to real estate. Even funds that have already allocated a customary real estate exposure in the 10% range are planning to increase their allocations further. There have also been a number of new investors to the sector, albeit with allocations in the 5% range or below. Given the outlook for continued low interest rates, appetite from buyers is rising and this demand is stemming from corporates, insurers and sovereign wealth funds. To tell us more about the trends in the capital markets sector in the Asia-Pacific region, Finance Monthly talks to Dr Megan Walters who is the Head of Research for Asia-Pacific Capital Markets at Jones Lang LaSalle in Singapore.
What are the new demographic trends shaping the real estate landscape in the Asia-Pacific Capital Markets sector?
Some of the key demographic trends that are changing the real estate landscape in this region are firstly – urbanisation. ASEAN alone will see a further 40 million people relocate to cities by 2020. Secondly, China’s aging population means that its old-age dependency ratio will rise to 56% by 2030. Further, China is forecast to add just 18 million jobs compared to say the expected 81 million in India, which could lead to further pressure on its economy.
Currently, cooling measures by some governments in Asia Pacific’s residential markets are driving investors and developers into the commercial property sector. Keen competition for limited higher-yielding assets in seven of the major Asia Pacific real estate markets, namely Shanghai, Tokyo, Japan, Singapore, Hong Kong and Sydney and Melbourne, has caused investors to consider assets in what may be classed as smaller or second tier cities such Bangalore, Adelaide and Auckland.
Please tell us a little about your typical work related to the Capital Markets?
Part of my responsibility involves tracking and providing insights on cross borders/big-ticket office deals. Examples include the sale of Asia Square Tower 1 for SGD 3.4 billion (the largest ever single-tower transaction in Asia-Pacific), as well as The Vicinity Centres Portfolio which is Australia’s largest retail portfolio deal since 2010. I keep our core clients updated with trends and changes . Our key clients include sovereign wealth funds (SWF); private equity funds; insurance companies as well as developers and high-net worth individuals.
What common challenges do you face and how do you navigate them?
My job includes keeping investors appraised of opportunities. Even in a market that might be trending downwards, there will still be great opportunities because each investor’s risk appetite is different. While current market remains volatile, that volatility in itself creates windows of opportunities.
The world is awash with capital targeted at real estate. One challenge is finding sufficient stock for the capital that wants to be deployed. One route is for investors to explore the development process and access completed core products that generate good and stable income. The other is to look for assets in smaller cities with good growth potential.
Have there been any major legislative changes that have affected this sector recently? Can you tell me about them?
Some of the economies in the region are developing rapidly and there has been great progress in terms of real estate market reforms. One key legislative change is India’s REIT regulation. The Indian government recently pushed forward the introduction of REITs with the exemption of Dividend Distribution Tax, clearing a big hurdle for REIT investment. India REITs or I-REITs would provide much needed liquidity by providing an alternative source of finance to the real estate market.
Another change was the reduction of interest repayments for first-time buyers. This was announced by India’s government in its 2016/2017 Union Budget. The move will likely increase the demand for housing at the lower end of the market, benefitting buyers in tier-2 and tier-3 cities.
In Indonesia, a recently revised tax rate on the sales of property to REITs of 0.5% (down from 5%) could potentially see new funds being raised in the domestic market. REITs currently listed overseas may also consider re-listing on the domestic stock exchange or seek secondary listing. Further amendments to investment regulations drawing offshore funds through the recently announced tax amnesty program will increase the domestic capital pool. Moreover, Bank Indonesia has initiated plans to reduce required down payment for first-time home purchases and this may fuel demand in the housing market.
Taiwan’s new property capital gains tax regime took effect at the beginning of 2016 – a measure designed to curb speculation in the domestic housing market. Coupled with loosened credit control, property transactions have surged across six major cities in the country. Also, in Taiwan, the government has revised regulations to allow Taiwanese insurers to increase their overseas real estate allocations. This increased allowance for offshore real estate investment has led to more intense competition globally as Taiwanese insurance companies actively seek higher yields comparing to those that their domestic market can offer.
In China, the government’s new value-added tax scheme has given the economy a fiscal boost and stimulated growth in the service sector (including manufacturing, construction, property, consumer and finance). This shift from business tax to value-added tax will encourage upgrading and expansion, providing a boost to the absorption of office space in the long run.
In the broader market, effects from the OECD’s proposed action points for Base Erosion and Profit Shifting (BEPS) are expected to ripple through the real estate fund management industry. Fund managers will face significant challenges primarily structural issues surrounding transfer pricing, interest deductibility and tax treaty abuse, and more importantly protecting the interests of investors.
Elsewhere in the region, cooling measures in Singapore, Hong Kong, Beijing and Shanghai have led to falling prices of luxury residential properties. The market is down approximately 4% (year-on-year) and 1% respectively in Singapore and Hong Kong while prices in Beijing climbed 11%. In Shanghai, prices were up 20%. All the numbers are derived from JLL’s Residential Index.
How would you change the regulatory framework surrounding this area, if you had the power? Why?
In Asia, it is not uncommon to see multiple ownership of commercial buildings, subdivisions and strata titles. This could be reduced to help maintain institutional grade office and retail stock in core markets. Multiple ownership systems, if not well regulated, can have a tendency to degrade public space and reduce the quality of city life. More importantly, commercial assets under such structures often face the risk of mispricing between rents and capital values. I would encourage commercial real estate to be securitised at the building level and ban the sale of individual floors in commercial buildings over a certain height. Having multiple owners of buildings makes redevelopment exceptionally costly and leads to an aged building stock and poor urban environment.
What interests you the most about this practice area, particularly in the Asia-Pacific region?
Markets in Asia-Pacific are constantly moving at varying speeds with differing drivers and dynamics – understanding is key thus keeping research challenging. Despite global headwinds, Asia-Pacific as a whole is gaining traction through resilience and confidence. The IMF forecasts that India’s GDP will grow from 7.4% to 7.6% (for FY16F to FY18F). The middle income population in ASEAN will expand to approximately 200 million by 2020, leading to greater discretionary spending power, especially in emerging markets such as China and Indonesia.
The global economy often has its eyes set on Asia Pacific given two of the biggest emerging markets in the world sit in the region, not to mention Japan, Australia and the four Asian Tigers.
We have rising pools of capital in Asia to be deployed in commercial real estate; this includes SWF such those from Singapore; pension funds such as those from Korea and Malaysia and insurance companies from China and Taiwan. Big Japanese pension funds are expected to be the next pool of capital to deploy funds to real estate.
As a thought leader in this segment, how are you developing new strategies and ways to help your clients?
Accurate reporting and measuring of the real estate market is essential for investors and corporate occupiers who are involved in the decision-making process. At JLL we have over 170 researchers out in the field understanding the market and reporting on data such as space leased, vacancy rate, new stock coming to the market and deals transacted.
For equities and bonds, timely information typically comes via a trading platform. For real estate, other than REITs, online listings aren’t common in markets that we analyse. We still need to get out and about in cities and report what we find. That is what makes this job so interesting and so dynamic in a region where cities are growing and becoming wealthier places to live and work.