07.2016

NEWSShareholder Baoneng seeks to oust board in battle for the future of China Vanke

aNalySiSAmid the uncertainty, Brexit also offers investment opportunities in UK, roundtable panel concurs

profilEGlobal asset management giant TH Real Estate plans to become a top Asia Pacific player too

SurvEy: malaySiaSupply spike in office and retail sectors puts brake on market in Kuala Lumpur and beyond

SurvEy: rESidENtialChina struggles to keep lid on prices, while Japan’s multi-family sector attracts investors

rESEarchKey data on Asia’soccupational, non-listedand listed property markets

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Logistics specialist and Ping An in tie-up for Japanese projects as CLPH, Frasers, Blackstone finalise deals

E-Shang Redwood leads Asian logistics property bonanzaLogistics property continues to be the hottest sector in Asia Pacific, with a raft of major new investments agreed in recent months.

E-Shang Redwood announced last week that it had secured Ping An Real Estate as a co-investor for its Japanese development programme. The Chinese insurer will commit more than $300m to acquire up to 50% stakes in ESR’s development projects in Japan. Ping An RE has already committed to projects in Tokyo and Nagoya.

Charles de Portes, president of ESR, said: “Recent structural changes to the retail and logistics industries globally and within Asia have arguably put logistics real estate on a secular growth trend.

“Continued demand coupled with constrained supply of modern stock in Japan are predicted to lead to enduring returns for Ping An and others invested in the product in the country’s largest metropolitan areas.”

ESR also announced last week that it had acquired two land parcels in Tokyo Bay totalling 143,839m2. It will develop a “multi-billion” dollar logistics complex with three eight-storey warehouses.

Meanwhile, China Logistics Property Holdings, which is backed by Carlyle Group and Temasek, has clinched Anbang Insurance and Sino Ocean Group as cornerstone investors for its Hong Kong initial public offering.

Anbang will take a 4.99% stake and Sino Ocean 9.99%.

The developer, formerly known as Shanghai Yupei Group, is set to raise around $433m in an IPO which will be priced on 8 July, after AsiaProperty went to press. The bulk of the proceedings will be used to pay down debt, including convertible bonds issued to Carlyle.

CLPH owns 59 logistics facilities in 12 parks across China, as well as 57 facilities under development and seven development plots. The portfolio’s total value is RMB10.64bn ($159m), of which RMB4.84bn is attributable to completed facilities.

In Singapore, Frasers Logistics and Industrial Trust was the exchange’s biggest IPO in three years when it listed last month, raising S$903m ($670m). On 7 July it was trading at S$0.96, compared with an IPO price of S$0.89.

The REIT owns a S$1.6bn portfolio of Australian industrial assets.

Also in Australia, Blackstone Group bought a 530,000m2 portfolio of logistics assets from Goodman Group for A$640m ($480m). The private equity group is also buying logistics assets in South East Asia.

In Hong Kong, NWS Holdings sold NWS Kwai Chung Logistics Centre in Kwai Chung to a logistics subsidiary of China Resources Enterprise for HK$3.75bn ($48m). Savills acted for NWS.

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2 | AsiaProperty July 2016

News

Mitsubishi buys London stakeMitsubishi Estate has bought a 50% stake in a £275m ($357m) London office development from Legal & General Property (LGP). The partners will speculatively develop a 250,000 sq ft office scheme in Hammersmith, west London.

Philippines office for PartnersPartners Group plans to expand its Asian presence by opening an office in the Philippines in September. The office will be located in Manila’s Bonifacio Global City business district.

Hysan chief exec to step downHysan Development chief executive Lau Siu-chuen is to step down from his post in August but will remain as a non-executive director. He said he planned to devote more time to personal commitments. Chairman Irene Lee will lead the company while it searches for Lau’s successor.

Greentown raises HK$1.55bnGreentown Service Group, a property management spin-off from Hangzhou developer Greentown Holdings, has raised HK$1.55bn ($200m) in an initial public offering in Hong Kong. Several Mainland China developers are understood to be seeking listings for property management arms in Hong Kong.

Logistics parks planned in IndiaIndia’s government plans to create 15 logistics parks around major cities to lower the cost and improve the efficiency of transporting goods. In its paper Logistics Efficiency Enhancement Programme, the road transport ministry identified cities including Delhi, Mumbai and Chennai as potential locations.

Baoneng requests shareholder meeting as support from China Resources fades

China Vanke future unclear as shareholder unrest continues

Developers ignore Singapore home price drops

In brief

A battle is under way for the future of China Vanke, with the position of charismatic chairman Wang Shi under threat from rebel shareholders.

In late June, Chinese insurance group Baoneng, which owns 24.5% of Shenzhen and Hong Kong-listed Vanke, requested an extraordinary shareholder meeting seeking to oust the Vanke board, including chairman Wang Shi.

Baoneng, a small insurance group, is understood to have borrowed heavily to build up its stake in Vanke, which was announced last year. It criticised Wang for collecting RMB50m ($7.5m) in salary between 2011-2014 while studying overseas.

The proposal was rejected, but Baoneng can still propose an extraordinary general meeting, which could sack the management team if enough investors support the motion. Management’s position has been weakened by a loss of support from China Resources, which owns a 15% stake.

Speaking at Vanke’s annual general meeting last month, Wang, who has described Baoneng as “barbarians”, said he expected China’s regulators to step in to prevent Baoneng damaging the company.

“The majority shareholder cannot do whatever it wants, for example suddenly proposing to remove all the directors and advisers – we still have regulators,” he said.

Unlike with most China developers, Vanke’s management does not have a significant stake in the company, nor does it have a state-owned sponsor, although China Resources had been a strong supporter of management in the past.

Deal rejectedChina Resources has rejected Vanke’s plans to acquire a number of development sites from Shenzhen Metro in a RMB46.5bn deal.

The proposed deal would see Vanke acquire a parcel of prime development sites in return for new shares issued to Shenzhen Metro, which would give it a 20% stake and dilute the stakes of existing shareholders.

The move was seen as a means of weakening Baoneng’s influence, as well as gaining Vanke some prime development land in a time of rising prices for building plots.

In another twist, Vanke’s largest individual shareholder, Liu Yuansheng, last week filed a

letter to Chinese regulators asking for the possibility of insider trading between Baoneng and China Resources to be investigated, as the latter did not oppose Baoneng’s rapid build up of a stake in Vanke, but did oppose Vanke’s introduction of Shenzhen Metro as a major shareholder.

Furthermore, the South China Morning Post reported that market rumours said China Resources itself had planned to submit a restructuring plan to kick out Wang Shi and two other independent directors.

That plan was rejected by the State-owned Assets Supervision and Administration Commission, the state agency which oversees China Resources.

There have been a number of management changes at China Resources and it is thought that the new regime is more hostile to Vanke and its management.

Despite the upheaval, Vanke remains one of China’s largest and most successful developers, reporting a 13.1% rise in 2015 profits to a record RMB17.6bn in a year in which many other developers struggled.

Vanke’s Shenzhen shares had been suspended for six months until Monday 4 July, on which they immediately fell 10%.

Developers are still paying top prices for Singapore plots despite home prices falling for an 11th consecutive quarter.

The fall of 0.4% in the three months to the end of June means it is the longest losing streak in history for Singapore

residential prices. This did not deter GuocoLand,

which submitted a bid of S$595.1m ($440.7m) to secure a site at the junction of River Valley Close and Martin Place.

The site will house around 450 apartments in a prime

suburban location. Nicholas Mak, head of

research and consultancy at SLP International Property Consultants, said: “The developer would have to launch the new condominium at about S$2,100 per sq ft.”

News

July 2016 AsiaProperty | 3

US private equity giant closes in on deals for Mirae Asset’s Capital Tower and AIG AM’s Seoul IFC schemes

Blackstone set to splash $2.1bn in Seoul

Asia Square Tower 1 sale paves way for next round of deals in Singapore’s off ice market

Smith moves on from Colliers Japan to launch Cardinal

GIC gears up for $2bn US trailer parks acquisition

Blackstone Group is betting heavily on the Seoul office market and is in the running to acquire KRW2.5trn ($2.1bn) of assets there.

The US private equity group is understood to be close to sealing a deal to buy Capital Tower from Mirae Asset for KRW470bn.

The 650,000 sq ft office building is located in the Gangnam Business District.

Blackstone is also shortlisted alongside Brookfield and a consortium consisting of Invesco Asset Management and China

Investment Corporation in the battle to acquire Seoul International Finance Centre from AIG Asset Management.

The three-tower development in the Yeoido Business District is being sold by Eastdil Secured on behalf of AIG.

Seoul IFC, a 5.4m sq ft office, retail and hotel development, has transformed Yeoido since it was developed. The three office towers have brought a raft of multinationals to the area.

However, the third and largest office tower still has a significant

vacancy rate, which has affected the price investors are prepared to pay.

Brokers suggest a figure of close to $2bn is likely.

The Seoul office market has been notably subdued this year; in April, IGIS and Alpha Investment Partners bought Jongno Tower from Samsung Asset Management for KRW384bn, but there have been few other deals involving foreign investors.

The office occupier market has been similarly turgid, with

landlords offering rent-free periods of two to three months to lure tenants and maintain face rents.

However, with plans for domestic companies to realise value from their real estate or to move to decentralised office locations, more assets are expected to come to the market.

Plans by Samsung Group’s affiliates to relocate to the suburbs and sell some of their properties in the CBD are expected to boost the investment market.

Singapore’s office market is moving again after the S$3.4bn ($2.5bn) sale of Asia Square Tower 1.

Savills Investment Management has put 77 Robinson Road on the market through CBRE, with a S$575m guide price, equating to S$1,900 per sq ft and a net yield of 3.5%.

The 293,269 sq ft building is owned by a German open-ended fund, originally launched by SEB Investment Management, which Savills IM bought last year. The fund is being wound up and

capital returned to investors.SEB bought the building in

April 2007 for S$526m or S$1,783 per sq ft, from CLSA Capital Partners.

Meanwhile, ARA Asset Management is bidding for a 50% stake in Singapore’s Capital Square office tower, which has been on the market for more than a year.

The stake was put up for sale last year by Alpha Investment Partners, the investment arm of Keppel Land.

Alpha and insurer NTUC

Income bought the building in 2011 from Munich Re for S$889m, or about S$2,300 per sq ft. Brokers suggested ARA could pay as much as S$2,500 per sq ft for the asset.

Last month, Qatar Investment Authority agreed to buy BlackRock’s Asia Square Tower 1 for S$3.4bn, a record for a single asset in Singapore.

With substantial supply and falling rents, the office investment market had been static, but the sale of Asia Square was seen as a positive development.

GIC Real Estate is in talks to buy a US owner of manufactured housing communities, more pejoratively known as trailer parks.

The Singaporean sovereign fund is in talks to buy Denver-based Yes Communities from private equity firm Stockbridge Capital Group in a deal valuing the firm at $2bn. Yes owns or operates 178 such communities in 17 US states.

The purchase price reflects a 6% initial income yield from the Yes portfolio, which compares very favourably with commercial or multi-family real estate yields.

Manufactured housing communities featuring moveable and prefabricated homes have become a recognised property market sub-sector.

In May, NorthStar Realty Finance agreed to sell its 135 manufactured housing communities to a property fund managed by Brookfield Asset Management Inc in a deal valued at $2.04bn.

Douglas Smith has left Colliers International in Japan to form his own advisory company.

He joined Colliers at the beginning of 2015 as head of investment services for Japan. His new venture, Cardinal Capital, will take on a number of advisory roles.

Smith will advise a US senior lender on working with

Japanese capital and a US developer looking for equity partners.

“US dollar-denominated investments make sense to Japanese investors,” Smith said.

Smith is also set to join Green Generation Solutions, a global energy services provider, to expand its business in Japan and the rest of Asia.

Brad Dockser, chief executive of GGS, is a former managing director with private equity real estate company Starwood Capital.

Prior to joining Colliers International, Smith, a Japan real estate veteran, worked for Fortress Investments, Deutsche Bank, Shinsei Bank and Nomura.

4 | AsiaProperty July 2016

News

Ascendas to buy One@Changi Ascendas Real Estate Investment Trust said it will buy One@Changi business park in Singapore for S$420m ($311m). The REIT will acquire the property from a joint venture between Ascendas Development and Frasers Centrepoint. One@Changi City is a nine-storey, multi-tenanted business park property, which is 97.1% occupied.

Kougellis heads Savills VictoriaSavills has appointed Jason Kougellis as managing director of Savills Victoria. Kougellis spent 15 years at GE Capital Real Estate, where he was managing director, Australia, New Zealand and South East Asia. He has also previously worked for Fosun International, Paladin Funds Management, GIO Asset Management and in CBA’s property valuation services division.

Propertylink promotes DawesAustralian investment manager Propertylink has promoted chief operating officer Stuart Dawes to chief executive, with founder Stephen Day shifting to become vice-chairman of the group. It is planning a A$900m ($672m) listing on the Australian Securities Exchange later this year.

The Center top floor gets $64m Cheung Kong Property has sold the top floor at The Center in Hong Kong to a Chinese company for HK$500m ($64m) or HK$37,800 per sq ft. Analysts at DBS said, assuming an average value of HK$30,000 per sq ft for the floors still held by Cheung Kong, it could net HK$36bn from selling the remaining 1.2m sq ft of office space in the strata-titled building.

ULI Asia Pacific Summit: favoured countries, megacities and transport debated

Delegates cite US and Canada as f irst choice for investment

Global connectivity set to create megacities

In brief

North America was the overwhelming first choice outbound investment destination for delegates at the Urban Land Institute’s Asia Pacific Summit 2016.

At the conference, held in Shanghai last month, a survey of the audience revealed more than half (53%) preferred the US and Canada.

Despite the then-looming threat of the UK voting to leave the European Union, it was the next most favoured destination, picked by 15%. Germany lagged behind on 8%.

Asked which Asian market they favoured, 46% of the audience chose China, followed by South East Asia, with 19%, and India, with 15%.

But Japan was a buy for only 7% of the audience, contrasting with views expressed in a number of investor intentions surveys earlier this year.

The forthcoming US

presidential election was revealed to be the audience’s biggest near-term concern, with Donald Trump as US president cited by 26% and considered more worrying than a China slowdown (cited by 22%) or a bubble in developed real estate markets (20%).

A panel of investors and managers said outbound investment from Asia would grow strongly over the coming years, with Chinese retail investors and Japanese institutional investors potentially the major capital sources.

Goodwin Gaw, chairman of Gaw Capital Partners, said: “China developers are building assets for a burgeoning middle class that has an insatiable demand for real estate. The next wave of Chinese outbound investment will be retail money and we’re really only seeing the very beginning of it.”

The panel warned the

audience that government restrictions could slow outbound capital from China, although some developers are selling overseas assets in China and charging buyers in renminbi.

This means the proceeds from the sale stay onshore and circumvent restrictions on capital outflows. However, the developers might need to use capital already offshore to fund completion of overseas projects.

Loh Wai Keong, managing director and co-head Asia at GIC Real Estate, said huge Japanese institutions, such as Japan Post Bank and GPIF, could become major investors overseas if they allocated only a few percent of their assets to real estate.

But Francois Trausch, global CEO of Allianz Real Estate, pointed out that Japanese investors were extremely conservative and could take a long time to decide to invest overseas, if at all.

Interconnected megacities will be the defining factor in the next phase of urbanisation, the ULI Asia Pacific Summit 2016 heard.

Parag Khanna, founder of advisory firm Hybrid Reality, said global connectivity via oil pipelines, high-speed rail links

and telecommunications cables would be more important in linking cities than the nation states which separated them.

He described such links as “an exoskeleton we have been building around the planet”. This “functional geography” is as important as physical or

political geography, he argued.An important element to this

connected future will be the growth of megacities, with populations of more than 10m. Examples include the Pearl River Delta in China, while Tokyo and Osaka in Japan are gradually merging.

Transport is becoming the most important factor in real estate, Tishman Speyer president and chief executive Rob Speyer believes.

Speaking at the ULI Asia Pacific Summit 2016, Speyer

said: “In the past, sometimes we built transportation after real estate and sometimes we built it before real estate but now finally we are building transportation and real estate at the same time.”

He said Tishman Speyer

had sited new developments in China and Brazil to take advantage of new developments in public transit in both cities. He predicted that real estate and transit would become “a single deal” in the future.

‘Transport becoming biggest factor in real estate’

News

July 2016 AsiaProperty | 5

Former Prudential Asia Pacific chief is asset manager’s latest senior appointment

Sharpe to head Asia Pacific division for Deutsche AMDeutsche Asset Management has appointed Victoria Sharpe to run its Asia Pacific real estate business.

The former Prudential Real Estate Investors Asia Pacific CEO has joined DeAm in Singapore as managing director and head of real estate Asia Pacific. She will report to head of alternatives Pierre Cherki.

A 30-year real estate veteran, Sharpe was most recently head of the global client capital group at TH Real Estate, based in New York.

Prior to this role she was based in Singapore with PREI.

DeAm, the asset management

COFCO Property Investment Co has paid a premium of 235% for a residential plot of land in Shanghai’s Pudong New Area.

The real estate arm of state-owned China National Cereals, Oils and Foodstuffs Corp beat more than 20 rivals when it paid RMB2.44bn ($370m) for the 56,886m2 site in Xinchang.

COFCO’s bid was equivalent to about RMB35,744 per m2 of

gross floor area. On 1 June, Cinda Real Estate Co paid the city’s highest premium this year – 303% – for a housing plot in Gucun in Baoshan.

“Tight supply of parcels should be the major reason behind the city’s overheated land market,” Zhang Hongwei, director of research at Tospur, a Shanghai-based real estate consultancy service firm, told

local media. “As housing demand is expected to remain robust in the next three to five years, developers’ appetite for residential plots will continue to be strong.”

Other investors said China’s state-owned developers were keen to grow their businesses, even at low margins, to have a stronger position in an expected wave of consolidation.

Queensland Investment Corporation is set to sell its stake in a UK shopping mall for more than £400m ($518m).

The Australian fund is in talks with UK real estate investment trust Intu to sell a 50% stake in Merry Hill shopping centre near Birmingham for around £410m. Intu already owns the other 50% of the mall.

QIC bought its 50% interest from Westfield for £524m in 2007 and appointed CBRE last year to sell its stake. Merry Hill is located 10 miles west of Birmingham and has more than 1.6m sq ft of retail space.

Intu, previously known as Capital Shopping Centres, has a £4.2bn portfolio of British malls.

Greenland Group and Amare Investment Management Group have added to the pipeline of hotels for their forthcoming Singapore REIT in an effort to attract investors.

The partners have added Greenland’s Chinese five-star Primus Hotel on Pitt Street, Sydney, and its Metropolis project under construction in

Los Angeles, to a list of 19 hotels which could be acquired by the REIT.

However, the REIT will launch with the acquisition of six hotels in China valued at $1.3bn-$1.5bn.

Market rumours suggest investors have not been keen on a China-only portfolio and the overseas properties are

intended as a sweetener.Amare chief executive Alvin

Cheng said the six hotels slated for the REIT launch were all profitable and had average occupancy of 70%. They include properties managed by groups such as Marriott International, InterContinental Hotels Group and Starwood Hotels and Resorts Worldwide.

PAG has announced a further closing for its pan-Asian real estate fund, which has now raised a total of $1.3bn in capital commitments.

Hong Kong-based PAG said PAG Real Estate Partners Fund (PREP), had targeted a $1bn closing, but exceeded fund- raising expectations thanks to support from investors including Allianz and PGGM.

“We enjoy strong ongoing support from our investors,” said Broderick Storie, partner at PAG. “Our focus remains to ensure we continue to drive and maximise investment performance and maintain best-in-class fiduciary standards.”

PREP aims to generate income-driven returns from core-plus assets in nine gateway cities in Japan, China, Australia, South Korea and Hong Kong. The fund is already nearly 50% invested.

Greenland and Amare add hotels to new REIT

COFCO pays 235% premium for Shanghai land

QIC to sell 50% Merry Hill stake

PAG’s fundraising continues after hitting $1bn target

arm of Deutsche Bank, has also promoted Rahul Ghai to head of transactions, Asia Pacific, after fulfilling a similar role for South East Asia.

The German investment manager has made a number of senior appointments in the past two years, including Christopher Kimm, who joined as head of real estate, Korea, from Orion

Partners, first reported in AsiaProperty in April, and Koichiro Maeda, who joined from PREI as head of real estate, Japan, in 2000.

The senior team also includes Koichiro Obu, head of alternatives research, Asia Pacific; and Ronet Vanatta, chief operating officer, alternatives, Asia Pacific.

The investment manager is one of a number of Asian managers in the process of raising a pan-Asian core fund.

DeAm’s Asia Pacific real estate business had $2.6bn in assets under management as of March 2016, out of a worldwide total of $54bn.

Sharpe: heading to Singapore to lead Asia Pacific real estate arm for DeAm

World News

6 | AsiaProperty July 2016

SocGen is in frame to buy Hotel particulier de Suez, as Singapore fund continues to sell Parisian assets

GIC poised to make twin office complex next Paris disposal Singapore’s sovereign wealth fund is in talks with Société Générale’s insurance business to sell Hôtel particulier de Suez, which consists of two adjacent properties on Rue d’Astorg, for €503m ($559m).

The 215,000 sq ft complex houses law firm Clifford Chance’s French headquarters.

GIC is also in the process of seeking buyers for the Westin Paris hotel, which could fetch more than €600m.

The sovereign investor has been selling assets in Paris in recent years.

Last year, as part of a consortium with APG and Host Hotels and Resorts, it sold a $470m portfolio of hotels, including a Paris asset, to a joint venture between Benson Elliot, Walton Street Capital and Algonquin.

Investors’ interest in Paris has

been growing. Last year a total of €18.8bn of commercial property was sold in the city, up 7% from 2014 and making it the busiest year since 2007, according to JLL research.

Investment sales figures for the first quarter of this year were weaker than in the same period last year, but JLL said it expected total sales volumes this year to be €15bn-18bn.

JLL said: “The Parisian investment market still depends heavily on the level of product available on the market.

“At this time, there is a good level of renewal of investment opportunities in the major transactions segment, whereas we are seeing fewer products in the intermediate segment [€50m-100m].”

The broker expects office rents to be fairly flat across Paris’s major districts this year.

China’s Anbang Insurance considers luxury apartments plan for trophy Waldorf Astoria Hotel in New York CityChinese insurance company Anbang Insurance is planning to convert much of the Waldorf Astoria Hotel in New York to luxury apartments.

The company may be planning to convert as many as 1,000 of the 1,400 hotel rooms in the iconic Manhattan hotel to luxury apartments, local media reported.

Anbang bought the hotel from Blackstone in early 2015 for $1.95bn.

The acquisition was the first major real estate transaction for Anbang.

The insurance company filed papers reserving 70% of the hotel’s space for residential use last year.

However, a spokesman for Anbang said the filing was a part of the purchase process and the large scale conversion wasn’t a certainty.

“We continue to explore all options and no definitive plans

have been finalised at this time.”For Anbang to convert the

majority of the hotel into condos it would have to file plans with the state attorney general’s office.

Last year New York City Council banned hotels with more than 150 rooms from converting more than 20% of their space to residential use.

However, some deals, such as the Waldorf acquisition, were granted exemption.

Britain’s departure from the European Union will be positive for US real estate, analysts claim.

A CBRE research report said: “During the short term, US gateway markets are likely to be viewed with enhanced status as havens for global capital, but heightened uncertainty will carry risks for both investor sentiment and the real economy.

“Uncertainty surrounding the timescale and mechanics of Brexit will encourage investors, particularly Asian high-net- worth buyers, to plump for New York over London.”

Edward Mermelstein, a lawyer advising Asian investors, said: “In the very high end of the market in New York City we’re seeing a spill off from individuals and companies who were previously looking to move to London as a change of residence. Many have reconsidered over the past several months.”

David Scherer, principal of Origin Investments, said: “There is now going to be more pressure on people to enter the US. We’re just not as risky as other economies.” See Analysis, p8

Hong Kong tycoon William Cheng has bought a London hotel for £70.3m ($94.8m).

A group of three companies controlled by Cheng announced the acquisition of the Travelodge Royal Scot Hotel a few days after the UK voted to leave the European Union.

The property, in King’s Cross, has 408 rooms.

Cheng already owns hotels with more than 2,300 rooms in Hong Kong and Shanghai, including three Best Western and two Ramada hotels in Hong Kong.

Cheng said the transaction allowed him “to expand and diversify into property investment in the UK, which is one of the world’s biggest tourist destinations”.

He also said the acquisition, which was financed from his companies’ balance sheets, could be potentially expanded or refurbished.

Brokers suggested Cheng will already have benefitted from a fall of around 10% in the value of Sterling in the run-up to Britain’s referendum on UK membership.

UK’s European exit offers boost to US markets...

London’s Royal Scot is Cheng’s latest hotel buy

Malaysian developer SP Setia said the UK’s vote to leave the European Union would be no more than an “accounting effect” for its Battersea Power Station project in London.

SP Setia, which is developing the 39-acre site with Employees Provident Fund and the Sime Darby Group, told Bursa Malaysia that the joint venture partners had sold around 85% of the 1,661 units launched for Battersea in three phases so far.

...but no threat to Battersea project

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Analysis

Roundtable: Brexit

Analysis

Roundtable: Brexit

July 2016 AsiaProperty | 9 8 | AsiaProperty July 2016

Opportunists set to enter via BrexitWhile caution following the UK’s vote to quit the EU is likely to put the market on hold, in the longer term, Asian and dollar-based players stand to cash in on a fall in values, our panel of investors concurred

The UK leaving the European Union will create big investment opportunities in London and Europe for Asian and dollar-based investors – but only after an adjustment period during which vendors face up to a new reality.

That was one of several conclusions drawn by a group of senior global and European real estate investors at a round table event hosted by AsiaProperty less than a week after the UK voted in a referendum to leave the EU.

The event, in partnership with Colliers International, brought together value-added and opportunistic investors and examined the opportunities created by “Brexit”, as well as the threats, both explicit and subtle.

Government bond yields have hit record lows, real estate share prices have tumbled and property values face a sharp correction of 4.9% on average next year and up to 14.5% in the London office market, if UK research house Real Estate Strategies is correct.

UK investment volumes fell significantly in Q1 and Q2 2016, after record years in 2014 and 2015. Momentum slowed in the second half of last year, carrying on into 2016 and further affected by the referendum.

Sterling has depreciated by around 10% against most global currencies since the vote, providing an immediate discount to pricing for international buyers, regardless of yield.

AsiaProperty spoke to several Asian investors active in the UK and London. None would comment publicly, but most expressed caution and said they would wait to see what happened in the coming months before they made UK and European investment decisions. But private investors are expected to be less cautious and may see a buying opportunity.

The roundtable participants agreed that for investors with a long-term view, assets bought during the likely upcoming period of volatility should represent significant value,

even in London, which will be hit hard by the decision in the short term.

The problem with the execution of this strategy will be that vendors will need longer to adjust to the new reality, even if the market’s psychology is already being altered.

Open-ended fund manages are likely to be the first sellers out of the blocks. Six of these funds, with combined assets of £12bn ($15.5bn), have now closed their doors to investors looking to pull out cash.

The panel felt these funds would be a good source of sales, but not in the short term – the process of selling assets to raise liquidity can take months. And as the past fortnight has shown, when investors pull money out, they do so quickly and in large volumes.

A boost for Germany, Paris and DublinGermany, Paris and Dublin are likely to benefit most directly from the UK’s decision and with less money chasing riskier assets, opportunities to find value outside of safe havens will increase for the best investors.

The flip side is the fact that it is now virtually impossible to say what constitutes a safe haven, while liquidity in the debt markets is likely to be severely affected.

In terms of Asian investors’ attitude to the vote, there was a feeling that views were mixed, with plenty of caution, but London and Europe by no means off the agenda.

Richard Divall, Colliers International’s head of cross-border capital markets, EMEA said: “In the UK, we are seeing an immediate pause in the market. But we are receiving many enquiries to look at opportunities and even new entrants who perhaps felt priced out of the market are now investigating the UK.

“There is continued interest in core Western European markets, although many APAC and North American investors are pausing until there is more certainty about the political situation and whether there could be a second referendum.

“On our listings and particularly in Germany, there is evidence of encouraging demand from global investors wanting to continue to diversify portfolios and invest out of domestic markets. Long secure income still appeals to investors in the current volatility.”

Richard Choi, HSBC’s head of real estate and hospitality, EMEA and Americas, added: “We’ve had some overseas clients cancelling meetings saying they want to pause until there is more clarity, but some are seeing this as a moment to be opportunistic.”

There was a consensus that the uncertainty caused by Brexit could be positive for dollar-denominated investors, with sterling assets cheaper as the pound fell against the dollar.

“We see this as a potential opportunity for our business,” said Brian Niles, European head of Morgan Stanley Real Estate Investing. “In the US, it is harder to make opportunistic returns relative to Europe because of where that market is in the cycle and there is concern about some Asian economies, given some of the uncertainty in China.

“While pricing in certain European markets had made it more difficult to make opportunistic returns, we think this should take a bit of froth off the market and create more opportunities.”

Laurent Luccioni, PIMCO’s head of European commercial real estate, provided a counterpoint. “It will still be very hard to generate opportunistic returns in Europe,” he said. “Banks are well capitalised so this won’t create more distressed sales, but it will push up debt costs, so you won’t get that

momentum from debt becoming cheaper and more freely available. It will postpone growth, which you need to make good returns once distress is gone from the market.”

Any opportunities that arise as a result of dislocation from the Brexit vote will not be immediate. “As a rule buyers can quickly figure at what level they are willing to buy an asset, but it often takes sellers a lot longer to arrive at that point,” said Cameron Spry, head of investment at Tristan Capital Partners, while Noel Manns, founder and principal at Europa Capital added: “People are not as leveraged as they were last time around.”

Niles added: “The only people who would choose to sell during this period of uncertainty in the UK are those with a very negative view of the consequences, who want to get ahead of the curve. But I don’t see many people thinking that way today.”

Sellers become more realisticBut while sellers are unlikely to accept for some time that the market has fallen or will fall, there is a growing acceptance that the market will no longer rise. “What changes is the psychology,” said Zsolt Kohalmi, Starwood Capital partner and head of European acquisitions. “Before, people were holding on for a better price, knowing that things were going up; now, we are unlikely to see that, with people becoming more realistic.”

Pete Reilly, head of European real estate at JP Morgan Asset Management, said: “The possible outcomes are so wide ranging – it could be completely benign or cataclysmic. That makes it hard to navigate, so investors will turn away from risk and go back to buying

“We’ve had some overseas clients cancelling meetings saying they want to pause until there is more clarity, but some are seeing this as a moment to be opportunistic”Richard Choi, HSBC

“In the UK, we are seeing an immediate pause in the market. But we are receiving enquiries to look at opportunities and even new entrants who perhaps felt priced out of the market are now investigating the UK”Richard Divall, Colliers

“While pricing in certain European markets had made it more difficult to make opportunistic returns, we think this should take a bit of froth off the market and create more opportunities”Brian Niles, Morgan Stanley Real Estate Investing

“Before, people were holding on for a better price, knowing that things were going up; now, we are unlikely to see that, with people becoming more realistic’”Zsolt Kohalmi, Starwood Capital

“” “buyers can quickly figure at what level they are willing to buy an asset, but it often takes sellers a lot longer to arrive at that point”Cameron Spry, Tristan Capital Partners

“many apac and north american investors are pausing until there is more certainty about the political situation”Richard Divall, Colliers International

BRExIT lEAvES UK IN UNCHARTED WATERSOn June 23, the UK held a referendum on whether it should remain a member of the European Union or leave; by a margin of 52% to 48%, the vote was to leave.

At the time of going to press, nothing had changed; the UK remained a member of the EU and the UK government had not declared under Article 50 of the Lisbon Treaty that it intends to formally leave the EU.

There are legal arguments about whether formal notice to leave the EU requires the British parliament, members of which were overwhelmingly in favour of the status quo, to vote through a bill to quit. However, government lawyers have said this is not required.

Prime minister David Cameron has resigned and a leadership election is taking place among the ruling Conservative Party. The next prime minister will be expected to formally give notice of the UK’s intent to leave the EU, which will trigger a two-year process of negotiation.

It remains to be seen whether the UK will retain full access to the EU ‘single market’. Some EU governments, such as Germany, have appeared conciliatory and wish to retain good relations with the UK, especially over matters such as defence.

Other nations, such as France and Belgium, seem keen to strike a tough deal. French politicians have declared an intent to woo international financial services businesses from London to Paris.

Stock markets worldwide fell on the news but most have recovered some if not all of the early losses. However, Sterling remains weak against the major world currencies and the euro has fallen against the dollar.

A number of UK open-ended real estate funds catering to retail investors have been forced to close to redemptions, due to demand from investors seeking to withdraw capital. Brokers report that a number of real estate deals have been abandoned or put on hold.

Analysis

Roundtable: Brexit

10 | AsiaProperty July 2016

there is an election there next year. I could buy a core building in Madrid, but you have elections there and the government changes. You have to spend a lot of time figuring out what you think about the macro situation.”

Benson Elliot senior partner Joeseph de Leo added: “The question of how you play Germany is a really difficult one if more capital is going to flow there, given how high prices are already. Across Europe the question becomes, if Brexit affects the outlook for growth, the challenge will be to keep buildings occupied and how long will it take to let vacant space in the assets they’ve bought? It could trigger sales by geared players down the line.”

Many of the panellists felt that increased uncertainty would lead to reduced debt availability for investors. Choi said: “There will be less appetite for high LTV ratios, margins will be higher and anything with a development angle will be in the spotlight. That said, we’re still open for business.”

However, Lee pointed out: “For alternative lenders there will be opportunities. We had already seen a pullback from lenders in the past few months. For a business like ours, we may have somewhat higher-cost capital, but we are in the market, have appetite for higher LTV ratios and are able to execute. Some investors are already putting us ahead of banks in their list of preferred lenders for more challenging situations.”

Manns added: “We recently had a meeting with our mezzanine fund investors and there is a lot of interest in credit/debt strategies.”

However, Zac Vaughan, senior vice- president at Brookfield Property, said credit was still available for the best sponsors, even for London office projects. “We are finalising a financing for a major London office property, which has not slowed down despite the vote, so the idea that there is no liquidity in the banking market doesn’t seem to be the case.”

Spry summed up the panel’s attitude, and a good mantra for all investors in uncertain times: “Everyone should be trying to separate the cyclical effects from the structural.”

Those who can do that are likely to profit handsomely in the next few years.

“The possible outcomes are so wide ranging – it could be completely benign or cataclysmic. That makes it hard to navigate, so investors will turn away from risk and go back into buying super-core assets”Peter Reilly, JP Morgan AM

“Across Europe the question becomes, if Brexit affects the outlook for growth, the challenge will be to keep buildings occupied and how long will it take to let vacant space in the assets they’ve bought? It could trigger sales by geared players down the line”Joeseph de leo, Benson Elliot

“We are finalising a financing for a major London office property which has not slowed down despite the vote, so the idea that there is no liquidity in the banking market doesn’t seem to be the case”Zac vaughan, Brookfield Property

“”

Event sponsored by:

“we recently had a meeting with investors in our mezzanine fund and there is a lot of interest in credit/debt strategies” Noel Manns, Europa Capital

super-core assets. For opportunity funds, that’s good, as there will be less capital chasing the more risky assets we typically buy.”

The debate turned to whether London is still a safe haven and the impact on the city of the Brexit vote. “I think London will still be a safe haven for investors because of the potential repricing,” said Wilson Lee, founding partner at Cale Street Partners. “If you’re looking to invest for 10 or 15 years, then prime yields in London moving from 3.5% to 5% make it very attractive.”

Reilly added: “I think London offices had already repriced by 10% before Brexit. If it goes down another 10%, combined with the currency decline, you would be able to find 10 buyers for a good-quality asset. If it stays at the level it is at now, there are still buyers. The trouble is, at the moment, nothing is for sale.”

In terms of the impact on both values and occupancy levels, Choi said: “The listed markets are implying that London office values will fall about 20% – you have to work out whether that is overdone. On the occupancy side, negotiations on financial passporting are crucial, as that will determine how many jobs are moved from London.”

Office market looks resilientIt was agreed that while there would be short-term pressure on office occupancy levels, in the longer term it would remain resilient. “You are already hearing rumours of spec office development schemes being mothballed,” said John Ruane, Partner at Ares Management’s Real Estate Group.

“This comes at a time when you might expect some drop-off in demand, but the fundamentals in Greater London remain strong since there has not been overbuilding and the supply side, as well as London’s infrastructure, continue to look good. By infrastructure I don’t just mean real estate and transport, but the human capital that is already settled in this city, which is incredible.”

Tristan Capital Partners’ Spry added: “You could have a situation [in London] where when the demand side recovers you are in an undersupplied market.”

In terms of where will do well out of a Brexit vote in terms of increased occupier demand, on top of the obvious choices of Frankfurt and Paris, Dublin was cited as an English speaking city within the Eurozone.

But the participants in the event were less sure about what now represents a safe haven in the volatile European political climate.

“You have to ask what is safety today,” Kohalmi said. “Everyone says Germany, but

JLL’s Global Real Estate Transparency Index 2016 shows improvements across the board in Asia Pacific, often driven by the demands of cross-border investors. This comes at a time when market information and transparency are becoming increasingly important.

The index scores nations on a number of categories including market fundamentals such as availability of data, governance of listed vehicles, performance measurement, the transaction process and the legal and regulatory environment.

“There is widening recognition of the crucial role that a transparent real estate sector plays, not only as a facilitator of new investment and business activity but also, significantly, in community well-being and inclusiveness,” JLL says. “As capital allocations to real estate grow, investors are demanding further improvements in transparency, even among the world’s most transparent real estate markets.”

The report also notes that technology is driving the availability of information. Databases tracking buildings, investment transactions, tenants, leases and values continue to expand, providing more frequently updated and real-time information than ever before.

Australia (second behind the UK, the world’s most transparent market) and New Zealand (sixth) remain the most transparent markets in the region and the only markets in the global “Highly Transparent” category, which also includes the US, Canada, Germany and France.

Taiwan (23rd) features in the global top 10 improvers, while several other key markets – including the top-tier cities in China (33rd) and India (36th), as well as Japan (19th) and South Korea (40th) – have seen “moderate progress”, JLL says.

Taiwan is the region’s biggest improver – there has been marked progress on market fundamentals and the transaction process. “A more competitive landscape has elevated occupier service offerings, while policy changes, both new and old, are flowing

July 2016 AsiaProperty | 11

Analysis

Transparency Index

Cross-border investors drive clear improvements in the transparency of Asia Pacific real estate marketsAs demand for accurate data grows, Asia Pacific is becoming more transparent, with its developed markets now on a par with similar markets elsewhere, according to JLL’s latest transparency index.

Transparency level

2016 composite rank

Market 2016 composite score

High2 Australia 1.276 New Zealand 1.45

Transparent

11 Singapore 1.8215 Hong Kong 1.8919 Japan 2.0323 Taiwan 2.1428 Malaysia 2.35

Semi

33 China - Tier 1 2.5236 India - Tier 1 2.6138 Thailand 2.6539 India - Tier 2 2.6540 South Korea 2.6645 Indonesia 2.6946 Philippines 2.7849 China - Tier 1.5 2.9052 India - Tier 3 3.0055 China - Tier 2 3.1066 China - Tier 3 3.40

Low68 Vietnam 3.4969 Sri Lanka 3.4970 Macau 3.52

Opaque 95 Myanmar 4.17

Source: JLL, LaSalle Investment Management

real estate transparency in the asia pacific regionTaiwan is the region’s biggest improver

through to gains in information availability and accuracy,” JLL says.

In 2016, a consolidated housing and land tax was introduced in Taiwan, which brought the country in line with international standards and helped correct a flaw in the taxation system under which declared land values were often undervalued.

Singapore (11th), Hong Kong (15th), Japan, Taiwan and Malaysia (28th) make it into the second tier of markets rated “Transparent”, alongside countries such as Poland, Switzerland, Spain and Belgium. However, neither Singapore nor Hong Kong have shown significant improvement.

China’s first-tier cities (Shanghai and Beijing) have shown the greatest improvements in transparency in the country, where a strong occupier and investor interest in first-tier markets has underpinned a rise in demand for real estate data in recent years and these markets are on the cusp of the “Transparent” tier.

In North Asia, advances in market intelligence have contributed to moderate improvements in transparency for Japan and South Korea. Robust investor interest, both domestic and foreign, has led to higher demand for real estate information and encouraged more extensive tracking of property sectors by service providers.

Modest gains in India have mainly been driven by the Modi government’s aim to stimulate growth and reduce red tape. Some key real estate-related reforms have been passed while many processes have begun to be streamlined.

JLL notes that, with the exception of a few countries, governance of listed vehicles remains an area where the region lags behind developed markets elsewhere and says “no notable change” is evident since the previous survey.

On the positive side, many developing nations are seeking to improve the legal and regulatory framework for real estate.

Vietnam (68th) has proposed launching a national real estate database in a bid to improve the availability and accuracy of market information, while the recently passed Real Estate (Regulation and Development) Act in India should provide more buyer protection and an equitable platform to resolve disputes.

The index is also expanding its work on sustainability transparency. While sustainability considerations are becoming more widely established, “the pace of progress in creating new tools and regulations is slow”, JLL says.

However, the report notes that there are encouraging signs that two cornerstones of environmental performance transparency – minimum energy efficiency standards and green building certification schemes – are available in the majority of key markets.

In Asia Pacific, Japan has joined France, Australia and the UK in the highly transparent group for the first time this year through the introduction of several new sustainability tools.See comment, p36

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Comment

July 2016 AsiaProperty | 13

Risks abound after Brexit, but don’t write off UK

What does “Brexit” mean for Asian investors in the UK and Europe?

London has been perhaps the most favoured investment destination for Asian capital in the past five years. For a number of institutions and private investors, London was the first port of call.

And why not? London is the most transparent real estate market in the world, one of the largest and most liquid with a huge number of highly professional developers, investment managers and advisers. It is also one of the world’s most dynamic cities, boasting an incredible range of cultural and business opportunities.

The question is, was all this dependent on the UK’s membership of the European Union? To argue that was the case begs the question: if it was all about the EU, why didn’t investors plump for Paris, a similar-sized city that has the advantage of being in the euro?

A panel of European real estate experts discussed this with AsiaProperty recently (see p8-10). They broadly agreed that Brexit amplifies the risks for investors, but also the opportunities, which have been sweetened by sterling’s weakness against the dollar and other major currencies.

We also spoke to a number of Asian investors, none of whom were prepared to be quoted. However, they were rather more cautious about the long-term prospects and seemed determined to do nothing for the time being – which seems eminently sensible.

In a Preqin survey of more than 90 institutional investors with exposure to UK real estate, 57% stated that they were likely to invest less in the UK over the next 12 months, with just 11% expecting to invest more.

At present the UK is awaiting a new prime minister, has not formally declared it wishes to leave the EU and negotiations on the terms of withdrawal have not started.

Whether the UK will be damaged as an investment destination depends on those terms of withdrawal. Ideally, a sensible arrangement could be made to suit both the EU and the UK, which is a major trading and security partner of most EU nations. However, political decisions are rarely rational or even sensible – the front runner to be prime minister is refusing to confirm the right to remain for EU citizens currently living in Britain, while some EU politicians seem determined to punish the UK, even if it hurts their own nation.

Finally, it would be unwise to imagine that capital earmarked for the UK will now go to the EU. With the exception of Germany and a few smaller nations, most EU economies are fragile and are being hurt by Brexit more than the UK. And no EU city offers the scale and depth of investment and living opportunities as London.

Asian investment is more likely to head to the US, where gateway cities offer most of London’s advantages, in many cases higher yields (for now) and the security of dollar-denominated investments.

Mark Cooper, editor

AsiaProperty Editor: Mark Cooper

+852 9727 0158

mark.cooper@asiapropertypublishing.com

Commercial director: Stefan Didora

+46 854 546 913

Stefan.didora@asiapropertypublishing.com

Contributors: Mike Philips, Helen Roxburgh,

Lauren Parr

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Moves

14 | AsiaProperty July 2016

coMPAnies & PeoPle

shu in at TH Real estate in singapore TH Real Estate has appointed Shusaku (Shu) Watanabe as director of capital transactions, Asia.

Shu joins from JP Morgan Asset Management’s Singapore office, where he was fund manager for its Tokyo Recovery Fund. He will be based in TH Real Estate’s Singapore office, reporting to Chris Reilly, managing director, Asia Pacific.

Shu has previously worked for Aviva Investors, Macquarie Capital Securities and Morgan Stanley Japan Securities.

Reilly said: “I am delighted to welcome Shu to our team. We are particularly excited about leveraging his experience across Japan, a region that we believe holds strong investment potential.”

Shu’s arrival follows other recent appointments including Harry Tan as head of research, Asia Pacific, and William Keaveney, senior analyst, based in TH Real Estate’s Sydney office.

Hawkins takes helm of logosLogos Property has appointed Stephen Hawkins as managing director of Logos Southeast Asia, based in Singapore.

He was development director at Boustead Singapore until February this year and was chief executive of Macquarie Goodman Asia from 2005 to 2007, after which he was head of real estate for Guidance Investments.

Logos has bought two logistics facilities in Singapore and said it will expand in South East Asia.

colliers bolsters Hong Kong retail teamColliers International has recruited four new staff to its Hong Kong retail team, with Cynthia Ng joining from CBRE as director, retail services Hong Kong, reporting to Sebastian Skiff, who joined Colliers last year as director of retail development and asset management.

Colliers also hired Colly Tu from CBRE China, as well as retail research analyst Mervin Ling from DTZ Cushman & Wakefield and Kinson Wong from Savills.

Klebes heads Greenoak’s Japan branch GreenOak Real Estate has appointed Daniel Klebes as representative director and president of its Japanese business, GreenOak Investment Management.

He joins from GTO Capital Management, a consulting firm he set up in 2010. He was also an adviser to TPG Capital. From 2004 to 2010 he was chief investment officer for Aetos Japan and previously worked for Goldman Sachs.

Former GreenOak Japan head Fred Schmidt is now chairman of GreenOak Investment Management, while also maintaining a representative director role.

carrier takes international role at cPPiBCanada Pension Plan Investment Board has made a number of senior appointments. Alain Carrier has been appointed international head, responsible for CPPIB’s international investment activities, and will also continue as head of Europe.

Suyi Kim has been promoted to head of Asia, having previously run CPPIB’s private equity investments in the region. He will be replaced as head of private equity for the region by Deborah Orida, who has been with CPPIB since 2009.

seek takes Asia Pacific chair at UliDr Seek Ngee Huat, chairman of Global Logistic Properties and former president of GIC Real Estate, has been named Asia Pacific chairman for the Urban Land Institute.

The ULI recently opted to appoint a global chairman and regional chairmen for the first time. Seek will serve a two-year term.

low moves on from MapletreeJean Low Su-Im has resigned as chief financial officer of Mapletree Greater China Commercial Trust Management with effect from August 19, to “pursue personal interests”, the Singapore REIT said.

Lawrence Ng Tzu Ann, a vice president in the REIT’s finance department, will take over Low’s duties until a replacement is found.

edMUnd Tie & co BUys oUT c&W sTAKe To ReGAin indePendence edmund Tie & co has emerged as an independent real estate adviser after management bought out majority stakeholder cushman & Wakefield.

The management of dTZ debenham Tie leung (seA) bought out the majority stake of over 60% held by cushman & Wakefield for an undisclosed sum and relaunched the firm with its original name.

A total of 500 staff in singapore, Thailand and Malaysia will move to the newly independent firm. edmund Tie continues to lead the company as chairman, supported by chief executive ong choon Fah, who also heads the research and consulting arms.

“The strategic decision to again operate under the edmund Tie & company brand is motivated by our longstanding commitment to form a firm driven by a distinctly Asian business philosophy, yet offering international standards of expertise,” Tie said.

Tie joined forces with dTZ, then a UK-listed company, 16 years ago. But dTZ has been through a number owners in recent years, culminating in last year’s merger with c&W.

Following the sale, c&W will continue its singapore operations under the leadership of managing director stephen saul.

Asia Pacific ceo stuart Roberts said: “singapore is a key market for many of our core services and remains a critical regional hub for our Asia Pacific and global business.”

c&W did not reply to a request for details of singapore staff numbers following the deal.

dutt leads Ascendas-singbridge in indiaAscendas-Singbridge has appointed former Cushman & Wakefield executive Sanjay Dutt as its new CEO for India.

Dutt was head of Cushman & Wakefield India until the merger with DTZ last year.

He will join on August 1, taking over from Lee Fu Nyap, who is returning to the company’s Singapore head office to assume a new role as executive vice-president for real estate investment and funds.

Comment

DIARY Tokyo expats will use jingle mail if resi investments don’t deliverOur survey this month includes a look at Japanese residential investment, which offers better opportunities than you might think – and even better ones for the unscrupulous.

Some Tokyo expats have taken advantage of the very favourable borrowing environment to buy high-yielding apartments in secondary cities with 100% debt.

This offers a nice ‘free’ cash return and the expats have a plan B in the case of problems reletting or selling properties. That plan is to have returned home by then and to send the bank some “jingle mail”.

Virtual sales techniques get a reality check at ULI summitThe audience at the ULI Asia Pacific Summit, held in Shanghai last month, heard that virtual reality headsets and “augmented reality”, where VR users interact with a physical space, will be increasingly used to sell real estate.

A cynic in the audience was heard to comment: “This just increases the scope for brokers and developers to lie to their customers…”

Great Eagle takes flight of fancy with its Central attraction in HK Hong Kong’s Champion REIT has rebranded its flagship Citibank Plaza property as

Three Garden Road Central, as the naming rights to the building were due to expire next year.

A release trumpeting the change says: “We created the whole identity system around the actual address of the building, reinforcing its location as being firmly Central.”

Hmm… We feel obliged to point out that the location is in fact rather on the Admiralty side of Central and indeed wonder if the sponsor of the development, Great Eagle Holdings, would have been so keen to spin the asset off into a REIT if it is was as central as it claimed.

“In the pAst, not mAnY

plAYeRs In the mARket

coulD wRIte A bIg

cheque foR $1bn. now

theRe ARe A lot moRe

pensIon funDs, even

pRIvAte equItY funDs,

whIch cAn wRIte A

multI-bIllIon DollAR

cheque”

Loh Wai Keong ,co-head

of Asia at gIc Real estate,

bemoans increased

competition

mARket tAlk: ulI summIt specIAl

“the tIme mAY be comIng

when tRAnspoRtAtIon

hAs A gReAteR effect

on ReAl estAte thAn

InteRest RAtes. so move

oveR bAnks, heRe comes

the bus!”

Rob Speyer, ceo of tishman

speyer, demonstrates more

real estate acuity but perhaps

less catchphrase savvy…

“LOOK AT HOW CHInESE

CITIES HAVE dEVELOPEd

OVER THE PAST 30 yEARS

And APPLy THAT TO

THE BELT And ROAd

EmERGInG CITIES”

Vincent Lo, Chairman of

Shui On Land, said China’s

“One Belt, One Road” policy

to encourage development

along old Silk Road trade

routes could create significant

real estate opportunities

“dEmOCRACy IS IndIA’S

ACHILLES HEEL. In 1990

CHInA And IndIA WERE

WITHIn 5% Of EACH

OTHER In TERmS Of

GdP; nOW CHInA’S GdP

IS fIVE TImES THAT Of

IndIA”

Goodwin Gaw, chairman

of Gaw Capital, blames

democracy for India’s poor

performance relative to China

”“ July 2016 AsiaProperty | 15

Company profilesCompany profiles

16 | AsiaProperty July 2016 July 2016 AsiaProperty | 17

www.threalestate.com

th real estateWith $96.3bn of assets under management globally and just 2% in asia Pacific, th real estate sees growth potential in this region and has an ambition to become a top 10 manager here

TH Real Estate last month took a major step towards its ambition of becoming a top 10 investment manager in Asia Pacific, a desire which will see it deploy billions of dollars of equity in the region over the coming years.

The New York-based fund manager has teamed up with Gaw Capital to raise equity to buy Chinese outlet malls it has been developing in recent years, in a strategy that will see it invest up to $2bn in the sector, making it the largest player in the region.

It will also continue to invest in core and core-plus assets in Australia and Tokyo, as well as looking to Hong Kong, to build a business that it hopes will one day reach parity with its European and US businesses.

That may take a while – TH Real Estate manages $96.3bn of assets globally, with just 2% in Asia Pacific as of March this year. However, it has ambitions to be a top 10 manager in Asia Pacific and would need at least $5bn of assets under management to break into the top 10.

The firm also provides an insight into the attitudes of Asia Pacific investors on outbound investment, having advised clients such as Australia Super on its

thre’s global reachTH Real Estate is owned by TIAA, a US financial services giant which manages pensions for people who work in the academic, research, medical and cultural fields.

TIAA manages its $65.6bn of Americas assets separately and contributes capital to THRE funds.

THRE has $29bn of assets under management in Europe, where it has a growing real estate debt business. It was recently awarded mandates by Korean funds Dongbu Insurance Company and Dongbu Life Insurance Company to invest in UK real estate debt.

acquisition of a 20% stake in the regeneration scheme around London’s King’s Cross in February 2015 for around £200m ($258.5m). Brexit will have an impact, but it is by no means putting its clients off London entirely.

TH, which is owned by giant US pension scheme TIAA, has around $2bn invested in Asia Pacific, and around $750m is in Australia. In June it hired Shusaku Watanabe as director of capital transactions for the region, and is looking to open further offices in the region on top of those it has in Singapore, Shanghai and Sydney.

“In Asia we’re keen to invest across the risk spectrum in core and core-plus assets, the opportunistic space, and we continue to advise on designer outlets in China,” Chris Reilly, managing director for Asia Pacific, says.

“We retain a small exposure to retail in Singapore, and we are looking to build our exposure to Tokyo, both in office and retail. We’re looking at assets where we see the potential for growth in rental values.

“That will come as a result of the point we are at in the rental cycle, but we are also looking for assets with lease structures that allow for growth, which we are seeing in

spite of the economic stasis. Retail assets are not universally cheap, but we still see some potential for rental growth, particularly in Ginza.

“In terms of the clients we are working with or keen to work with, this includes US clients like our parent TIAA and other institutional clients with a global and Asian interest, as well as domestic investors.”

Outlet mall platformA major pillar of TH’s Asian business is its outlet mall platform, part of a global outlet mall platform, which totals $4.4bn.

Last month it set up a new vehicle called the China Outlet Mall Fund. Over the next five to six years this will buy the stabilised assets of Silk Road Holdings, the outlet mall development company backed by TH with an initial $200m in 2012.

The malls are being developed by Italian company RDM, which TH has previously partnered with in Europe. The fund will be seeded with two assets: Florentia Village Jingjin and Florentia Village, Shanghai

Gaw Capital will work with TH to bring in equity for the vehicle and once the Silk Road portfolio is built, stabilised and purchased,

the fund’s value could reach $2bn.“We’ve got a large global portfolio and we

know the sector very well,” Reilly says. “The assets we’re developing in China are really very different from anything else that is out there. There is an incredible line up of tenants, including multiple luxury brands like Gucci and Prada, a successful and committed operator in RDM Asia, in dominant schemes which are architecturally and aesthetically attractive, being very Italianate and beautiful.

“It is still early days for designer outlets in China, and we have seen great success in the Silk Road portfolio. Growth rates have moderated slightly of late with China’s economic slowdown, but it is still very early in the evolution of the sector.”

In Australia, TH has been concentrating on core office and retail properties in major east coast cities. It has bought five since the business was established two years ago and is in the process of adding a sixth – Myer Melbourne, a department store in the centre of the city – for around A$450m.

Nick Evans, head of Australia, says: “We have an ASIC-regulated business, which is important as it gives us a local platform and

the ability to invest for third-party clients. We’ve been working with domestic investors as well as global clients from places like South Korea, Malaysia, the Netherlands and Germany, and investing on behalf of our parent company, TIAA.

“They’re attracted by the relative value on a total return basis. It helps that this comes from a market that is stable and sophisticated, has an anglicised legal system and a positive macro situation with low unemployment and positive GDP growth.”

East coast acquisitionsEvans says TH will continue to buy in the core office and retail sectors of the east coast, avoiding the more volatile west coast markets, which are tied to Chinese demand for commodities.

“In the retail sector you are seeing positive sales growth and the planning regulations make it incredibly difficult to build new retail centres – Australia is very under-shopped compared to the US, say.

“In offices the appeal comes from the lease structure, which has fixed uplifts compared to CPI. The one worry is that the market can be very incentive focused,

and as these have come down, you may see a supply increase, especially in Sydney.”

In terms of outbound capital from Asia Pacific, as well as direct investments such as King’s Cross, TH has also won a mandate to invest in UK real estate debt from Korean insurance company Dongbu.

Both Reilly and Evans anticipate that Asia-Pacific investors will pause on investments in the UK following the decision to leave the EU, but will not steer clear of it entirely.

“Australian superannuation funds are sophisticated investors – they will digest and monitor the situation to make sure they are well-informed, but the UK is somewhere they have done business and will continue to do so,” Evans says.

“Most investors will wait and see, but they also recognise when value has become evident and the fact that the pound has taken such a dive is a significant factor,” says Reilly. “You’ve seen some areas of the capital markets start to stabilise and there could be some interesting opportunities arising.”

Whether outbound or inbound, TH is putting huge amounts of capital to work.

Pension funds (39%)Insurance/financial (26%)

Retail (19%)Sovereign wealth (14%)

Other (2%)

TH Real Estate AUM by client type Retail will feature strongly in its Asia Pacific push

“We’re looking at assets where we see the potential for growth in rental values. that will come as a result of the point we are at in the rental cycle, but we are also looking for assets with lease structures that allow for growth”chris reilly, th real estate

Source: THRE

Americas (68%)Europe (30%)

Asia Pacific (2%)

TH Real Estate AUM by region Asia Pacific is only a tiny proportion so far

Office (34%)Retail (33%)

Residential (12%)Industrial (10%)

Other (11%)

TH Real Estate AUM by sector Offices and retail make up two thirds of total

Source: THRE Source: THRE

0 20 40 60 80 100 120 140 160$(bn)

Brookfield Asset Management

The Blackstone Group

TH Real Estate & TIAA

CBRE Global Investors

UBS Asset Management

AXA Investment Managers - Real Assets

JP Morgan Asset Management

Invesco Real Estate

Pramerica Real Estate Investors

LaSalle Investment Management

Top 10 real estate fund managers by total AUM 2015 TH Real Estate now plans to break into the top 10 in Asia Pacific

Source: ANREV, THRE

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Survey

July 2016 AsiaProperty | 21

mAlAySiA

The next few years promise great change for Malaysia.

The South East Asian country’s government has implemented an economic transition plan that outlines proposals to make it a high-income nation by 2020, targeting high-value industries. By that date, the aspiration is to no longer be a developing nation, but an international financial centre and key Asian base.

The plan has come amid troubling times for South-East Asia’s third-largest economy. The country has been facing depreciating currency, falling oil prices, a slowing Chinese economy and a series of political scandals. Central to this is the highly controversial 1Malaysia Development (known as 1MDB), and negative impressions of the country’s economy.

Malaysian stocks have performed poorly so far this year, in comparison to its neighbours in South-East Asia. The FTSE KLCI index has already lost 4%, compared

with a 10% gain in neighbouring Thailand, a 5% gain in Indonesia and a 4.3% gain in the MSCI South East Asia index overall.

On top of this, the Malaysian Ringgit was Asia’s worst-performing currency in 2015, falling 19% against the US dollar this year. Overseas investors pulled more than MYR19.2bn ($4.8bn) from local stocks in 2015, more than double the MYR6.9bn of outflows for all of 2014. Concerns remain about the effect of higher US interest rates on Malaysia and other emerging markets.

But Prime Minister Najib Razak insists that investor confidence in Malaysia is high, with foreign direct investment up 22% annually and plenty of opportunity for growth.

He told political leaders who gathered in Kuala Lumpur for the World Economic Forum on ASEAN 2016 that “noise levels” were to blame for a negative perception of the country. Malaysia’s fans argue strong market fundamentals mean there are still huge economic potentials.

A depreciating currency and political scandals have shaken the economy, but plans to target high-value industries and become a major Asian financial centre could create real estate opportunities

introduction

reSidentiAl Rising prices have led to new cooling measures in China’s housing market, making investors cautious and some developers distressed, while in Japan, the multi-family housing market is attracting investors

A roller coaster ride is the standard means or carriage for China’s residential market, where rising overall prices mask a wide range of circumstances across the country.

In May, the most recent month for which data are available, 60 out of 70 major cities in China recorded increases in first-hand commodity residential prices, while average prices are up 5.15% year-on-year.

Prices have risen sharply in first-tier cities despite slowing economic growth and market-cooling measures have been introduced once more.

Foreign investors’ interest in the sector is muted and selective; many are put off by high land prices, but also see those prices leading to future opportunities as developers become over stretched.

State-owned developers are set for a wave of enforced consolidation at some point in

the near future, so are keen to grow wherever possible, even if this means margins are squeezed. Larger firms are expected to be the winners.

Japan, meanwhile, has a unique residential market, which makes it attractive despite an ageing and shrinking population. Unlike the rest of Asia, the multi-family residential investment market is significant in Japan.

Tokyo is the largest market in the world outside of the US, with transaction volumes exceeding ¥2.1trn ($20bn) in total over the 2010-2014 period, according to JLL data. Tokyo’s multi-family housing sector is also unique in Asia Pacific in that yield pricing is at a premium relative to grade A offices.

A number of private equity investors are targeting the sector, which is also popular with domestic REITs – something else that is unique to Japan in Asia.

SeptemberLogiSticS

octoberaSian outbound

novemberRetaiL

augusthong kong

Septembervietnam

octoberthe PhiLiPPineS

Survey Survey

22 | AsiaProperty July 2016 July 2016 AsiaProperty | 23

In real estate terms, the past decade has been a time of enormous growth for Malaysia, heralding new megamalls, prime office buildings and infrastructure construction.

The country’s business sector is centred on capital city Kuala Lumpur, divided roughly into the Kuala Lumpur City, KL suburban and Selangor districts. Together, Greater KL has more than 100m sq ft of office supply and recent years have seen a boom in development.

But these waves of new supply have put pressure on the city’s rental and occupancy levels. New projects launched last year included the 394,000 sq ft IB Tower, the 464,000 sq ft Menara Bangkok Bank and the 1.5m sq ft Q Sentral, contributing to 6m sq ft of new space in 2015.

“In a good year, the market absorbs 2m-3m sq ft,” says Christopher Boyd, executive chairman of Savills Malaysia. “This year, 8.67m sq ft is set to come on board.

“So we have more space coming on stream than we need and the demand side is subdued because a lot of oil and gas companies are out of the market – and they represent about 50% of the market. Now, they are retrenching. So far this year the biggest letting was about only 60,000 sq ft.”

Office occupancy rates stand at about 80% – the highest vacancy level in more than a decade – and most expect them to sink further. The influx of new space has caused a flight to quality, with many tenants moving from older buildings into new ones where they can get good prices for rents.

White collar drive will boost take-up As the government works to increase the number of white collar workers in cities – Kuala Lumpur’s average age is only about 28 – Boyd believes this extra office space will be absorbed.

A new high-speed rail link between Singapore and KL is also seen as a future catalyst for growth – the lower cost of real estate has already lured international oil companies McDermott, Technip and Subsea 7 from Singapore to Malaysia.

It is not only KL’s office sector where supply has been booming. The retail sector has also witnessed huge growth, with rents soaring 80% in the past 10 years. As of Q1 2016, the total supply of hypermarket and mall space in Greater KL stood at 57.53m sq ft, with another 17.2m sq ft scheduled for completion by 2018.

“Competition in the retail market is expected to heighten with the scheduled completion of some 3.36m sq ft of new space by the second half of this year, diluting the retail market further, while retailers continue to be spoilt for choice,” says Judy Ong, executive director, research and consultancy, Knight Frank Malaysia.

However, much of the retail space is unsuitable or out of date. “The Malaysian market is fundamentally made up of lots of individual operators and developers,” says Andrew Neary, executive director of AsiaMalls, a property manager wholly-owned by Asia Retail Fund. The fund, which is managed by PGIM Real Estate, invests in shopping malls in Singapore and Malaysia.

“Often, what we see is malls built as part of a residential or mixed-use development, almost as an add-on, and I think that’s part of the reason for the overhang of retail space.”

with tenants,” says Neary. “But the new ones have little chance of competing; I think they will end up giving away much of their space at very low rents, just to get occupancy.

“Retailers are getting smarter and I suspect the banks are getting a lot fussier, so the market is more difficult for developers and buyers. But even so, still we see no open

MalaysiaMalaysia

Oversupply cools property climate in Kuala LumpurA supply spike in Kuala Lumpur’s office market is putting pressure on rents and vacancy rates, while a glut of retail space is also building. Foreign investors, meanwhile, are wary due to political instability

Allan Soo, managing director at Savills Malaysia, says rents at new malls are at least 30% below those at established malls. To add further pressure, many tenants are grouping together to negotiate extremely favourable deals. Developers are agreeing to percentage rent agreements, rent-free periods, or even cash contributions – reportedly up to MYR4m ($993,567) to secure the best retailers.

Some megamalls “have to be destroyed”“Some of these malls have got to be destroyed,” says Soo. “You could maybe reconfigure some of the tenancies, layouts and themes, but I think more important is to recognise how the times are changing.

“We’ll probably have a landscape in the future where we have huge megamalls fighting themselves and then smaller ones that will survive better, because they are in affluent neighbourhoods and it’s easier for them to cater to their local needs.”

Most market analysts expect some of the planned malls to put back their completion dates, slowing the amount of new supply coming to market.

“Good malls that are well let and popular will still have pretty good negotiating power

Greater Kuala Lumpur office vacancy rate 2005-Q1 2016Savills believes vacancy rates peaked in most areas of Greater KL last year

-Selangor -KL suburban -KL City -Greater KL30

25

20

15

10

5

0

%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Q1

2016

Source: Savills

One region of Malaysia that has attracted major international investment is Johor Bahru, especially around the Iskandar Malaysia special economic zone, bordering Singapore.

Much of this investment has come from China. Guangzhou R&F Properties is investing MYR4.5bn ($1.1bn) to build condominiums in Iskandar; Guangdong-based Country Garden is investing MYR900m in 45 condominium towers; Greenland is putting MYR2.4bn into Iskandar property; and Guangxi Beibu Gulf International Port is spending MYR8bn to expand the provincial capital’s Kuantan port and build the Kuantan industrial park.

In January, China Vanke announced that it too would be investing in ‘JB’, putting MYR4bn into a 60ha seafront site.

“It’s a worrying time for established developers, you have to really fight to hold your market share,” says Royce Tan Tiong Ghim, assistant manager at Malaysian developer Tropicana Group.

“Chinese developers have the budget and power to release nearly 10,000 units at once, whereas most developers just release one tower at a time. We experienced this in Johor, where we finished a project just as a Chinese developer released 10 blocks at once and offered record-high discounts.

“We had never seen something like that before – they have the cashflow and the ability to sustain even if they don’t sell. Malaysian developers are aware that the market is changing and that Chinese

developers can be real game changers.”But a series of projects have been recently

delayed or put on hold and developments have “gone very quiet”, according to one Malaysian expert, who says development in the region had “not been thought through very well”.

Malaysia’s champions say Johor Bahru is a special case that operates as a very different market to Kuala Lumpur. In the capital city, development is still rapid, but oversupply is prompting a more cautious property market and a chance to draw in new tenants by offering cost savings and new buildings.

With the government focused on building KL’s global standing as a financial hub, the next five years look set to be transformative for Malaysia.

Chinese LeAd investment ChArge into Johor bAhru

distress in the market in Malaysia, not as we might see it in other markets.”

Retail sales have also slowed in Malaysia, hit by slower luxury sales and a slowdown in the economy. Retail sales grew by only 1.4% in 2015 compared to a 3.4% in 2014.

“Looking ahead, the retail market is expected to embrace more challenges as

external and domestic headwinds continue to dampen consumer sentiment,” says Knight Frank’s Ong. “However, there are still opportunities in the retail market, particularly in selected and upcoming locations that are well populated and have low retail space per capita.”

Malls also haven’t had to compete too hard yet with online commerce. Shoppers haven’t really embraced online shopping, put off by poor infrastructure, comparatively low smartphone use and the strong social draw of shopping.

However, online retail is gathering pace. A PwC study found that although new to the market, half of Malaysian consumers make online purchases at least once a month.

No curbs on foreign investmentThe weak local currency has created attractive pricing and acquisition costs for investors and there are no restrictions on foreigners investing in real estate. However, there are fewer international funds invested in Malaysia than might be expected. Much of the nervousness about the market can be attributed to corruption scandals hitting sentiment (see panel overpage).

Greater Kuala Lumpur cumulative office supply 2005-2018The rapid increase in office supply seen over the past 10 years is set to continue up until 2018

•Selangor •KL suburban •KL City140

120

100

80

60

40

20

0

Sq ft (millions)20

05

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Q1

2016

2016

e

2017

e

2018

e

Source: Savills

24 | AsiaProperty July 2016

Survey

Malaysia

property values. Here in KL, private consumption is strong, underpinned by a healthy labour market. These will be driving forces for Malaysia for a long time to come.”

BlackRock cashes in on Intermark MallOther international investors in Malaysia include BlackRock, which sold its Intermark Mall in December to Malaysia’s Pavilion REIT for MYR160m ($40m). BlackRock bought the Intermark Mall along with two corporate office towers and a hotel for $600m in 2007.

“We have dozens of Malaysian REITs and funds that are cashed up and ready to take

advantage of opportunities,” says Savills’ Boyd. “However, buying opportunities are few and far between and there’s just not enough product to go round. It’s still very much a seller’s market in terms of assets.”

Part of the problem for investors is the country’s lack of a broader planning structure or clear masterplan. Travelling around KL by car often involves being stuck in traffic jams, business hubs are scattered and infrastructure is slow to be completed.

“With such weak planning restrictions, you have no guarantee that an empty field won’t be turned into a shopping mall right next to yours,” says one developer.

“Government and political scandals don’t have too much direct impact on our business,” says AsiaMalls’ Neary. “For us on the ground, the difficulty is convincing investors that Malaysia is still a good place to invest, with reliable fundamentals and a legal system built on the British system, and not the Wild West. Many investors get cautious when they read a series of bad articles.”

Other brands moving into the Malaysian market include luxury hotel chain Kempinski, with 8 Conlay Place, a development by KSK Group that involves two towers of branded serviced residences, a Kempinski hotel and a retail podium.

“There isn’t any luxury development like 8 Conlay yet in Malaysia,” according to Joanne Kua, managing director of KSK Land. “Kempinski maintains extremely stringent service standards and is notoriously selective about the projects its gets involved in, choosing prized properties at prime locations globally. We believe this will raise the bar in luxury living in KL.”

KSK points to the strong fundamentals and resilience of Kuala Lumpur’s market as a reason to invest. “We like markets where the economies are supported by strong fundamentals,” says Mark Ho, head of research and business development at KSK Land.

“A proven track record of delivering on structural economic reforms from governments and major infrastructure improvements provide further impetus for

It’s been a tumultuous few years politically

for Malaysia. Rocked by two air disasters,

the country has also been at the centre of a

corruption scandal involving prime minister

Najib Razak.

The premier was accused of transferring

$700m from the troubled fund 1Malaysia

Development Bhd (known as 1MDB) to his

personal bank accounts. Malaysia’s anti-

corruption commission said the money was

a donation from Saudi donors in the Middle

East and that it had mostly been paid back.

But many observers remain sceptical,

especially since discussion of the affair

has been banned in the country’s media.

The controversy continues to rumble on

and in January, Swiss authorities said an

investigation into bribery allegations linked

to the 1MDB investment fund had thrown up

“serious indications” that $4bn had been

misappropriated from government

businesses.

This has had some impact on the country’s

outbound investment, with a government call

to repatriate funds to prop up the country’s

ailing stock and currency markets. As a

result, state pension funds and sovereign

funds have been making a wave of sales.

Malaysia’s second-largest pension fund,

Kumpulan Wang Persaraan, sold 88 Wood

Street in the City of London for $402m in

February, while other sales include the

disposal of an office building on Buckingham

Palace Road by Lembaga Tabung Haji, the

government fund for Muslim pilgrims, sold

last October for about £250m ($331.2m) –

22% more than it paid two years earlier.

Malaysian institutions invested

particularly heavily in London property from

2010 to 2012, highlighting both the market’s

attractiveness and the ties between Malaysia

and the former colonial power. Malaysian

funds have spent £2.4bn on London

commercial property since 2011, according

to Real Capital Analytics.

The prime minister said that during 2015,

government-linked companies were going to

bring home assets worth a total of MYR627m.

But in a sign that Malaysian funds are still

investing outwards, the state pension

scheme Employees Provident Fund (EPF)

bought a £200m portfolio of industrial

properties from Midlands-based developer

IM Properties in April. The company also

invested around €250m ($278.3m) in assets

in Germany last year and is known to be

seeking further European investments.

Greater Kuala Lumpur cumulative retail supply, 2004-2018 Retail supply has grown rapidly since 2004 and a further increase will put pressure on rents

80

70

60

50

40

30

20

10

0

Sq ft (millions)

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Q1

2016

2016

e

2017

e

2018

e

•Selangor •KL suburban •KL City

Source: Savills

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Survey Survey

July 2016 AsiaProperty | 27 26 | AsiaProperty July 2016

The residential market in China is almost permanently volatile in nature, swinging through an extreme of government-fuelled cycles. A number of key fundamentals make China’s housing market stand out from others; namely tight government controls, high levels of state ownership and the prevalence of cash-heavy purchasers.

While China has one of the world’s highest home ownership rates, only 18% of the country’s households have mortgages. Lending for home purchases is tightly controlled by both central and municipal governments, as are land sales and pricing.

Data for May, the most recent available, shows that 60 out of 70 cities in China recorded increases in first-hand commodity residential prices. Average prices are up 5.15% year-on-year, but these figures hide huge regional variations.

After the government introduced buying restrictions in first-tier cities, official figures show that growth rates are now slowing. Overall, house prices in these top cities have grown by 32.05% in the past year – and a huge 68.7% since December 2010, according to Savills’ figures.

In Shanghai, prices have increased 33.8% year on year, surpassed only by the booming industrial city of Shenzhen, which recorded 54% annual growth. First-tier cities also have some of the lowest unsold inventory levels, attract wealth from the rest of the country, as well as offering wage growth, a centre for migration and job creation.

“At the start of the year the government put in place measures to curb the prices in tier-one cities and we are seeing the impact start to show now,” says Albert Lau, CEO of Savills China. “Anyone buying in Shanghai now has to have paid social security for five years and down payments have gone up. These measures make it harder to buy now and so the numbers have dropped.”

However, prices in select second-tier cities, such as Nanjing and Hefei, also rose more than 20%, surpassing the 19.5% rise in first-tier city Beijing. The spillover of higher prices to major second-tier cities is

fuelling speculation that local governments there may also tighten restrictions on home purchases soon. This in turn could prompt price rises in well-connected and growing third-tier cities.

Foreign investors stick to top tiers“Foreign investors are certainly more cautious now and in the short term they are predominantly looking at tier-one and tier- two cities,” says Lau. “They largely want to focus on the established, top-tier cities.

“If they are making a longer-term investment they can look at other cities in the west of China – if you’re looking at a longer-term approach, there are opportunities here. In areas with new industry and new transport links, the housing market and local economy will grow, which can offer longer-term investment opportunities.”

Nonetheless, times are tight for many residential developers in China, especially

increasingly moving towards asset-light models by partnering with domestic capital providers, such as insurance companies and asset management companies.

“Smaller, over-leveraged developers with poorly conceived projects in less established locations may fail, but many are likely to avoid high-profile failures through asset sales.”

Chinese developers are also increasingly favouring domestic institutional investors, who have invested more than RMB100bn

“i don’t anticipate many failures among china’s well-established and larger residential developers, because these developers have reasonably healthy balance sheets and are increasingly moving towards asset-light models”Brian Chinappi, Standard Chartered

Residential: ChinaResidential: China

State’s firm hand aims to hold lid on heated resi sector Residential prices continue to shoot up in many Chinese cities, but as government market-cooling measures start to bite, cautious investors and developers are sticking to safe, top-tier locations

those without a government-backed arm to shore up their balance sheets. Many are sitting on large amounts of unsold stock.

According to the National Bureau of Statistics of China, there is 441m m2 in completed new homes that have not been sold, while the total gross floor area of homes with a permit to sell but deals not completed yet is estimated at 3.6bn m2, according to estimates from the Chinese Academy of Social Sciences. Nationally, that would equate to at least four years worth of unsold inventory.

However, analysts point out that new housing starts were down in 2014 and 2015, while land supply has also been limited, suggesting that the first steps to sorting out the problems are already being taken.

Some provincial governments have taken a proactive approach to this challenge, with areas such as Shandong and Liaoning allowing local governments to purchase residential inventory from developers for local affordable housing projects.

Brian Chinappi, global head of principal finance, real estate, at Standard Chartered says: “I don’t anticipate many failures among China’s well-established and larger residential developers, because these developers have reasonably healthy balance sheets and are

First and second-tier city first-hand commodity residential price indices Shenzhen has experienced the sharpest price rises, followed by Shanghai and Xiamen

%

Gua

ngzh

ou

Bei

jing

Shan

ghai

Shen

zhen

Xiam

en

Nan

jing

Han

gzho

u

Tian

jin

Wuh

an

Wux

i

Zha

ngzh

ou

Nin

gbo

Qin

gdao

Cha

ngah

a

Xi’a

n

Cho

ngjin

g

Shen

yang

Dal

lian

Cha

ngdu

•Dec 10 (left axis)

140

120

100

80

60

40

20

0

70

60

50

40

30

20

10

0

- Month on month -Year on year (right axis) %

Source: National Bureau of Statistics

($15bn) in residential projects since 2014, according to Standard Chartered figures.

Land values have also rocketed in the past year, with the Wall Street Journal calculating that average land prices per square metre for the top 100 Chinese cities in the first five months of 2016 jumped nearly 50% from the same period last year.

In June, Chinese developer Logan Property Holdings agreed to pay RMB14.1bn for a piece of land in Shenzhen’s Guangming

district – the highest-ever price paid for land in the southern Chinese city.

Such frothy prices raise alarms over developers’ liquidity and put pressure on balance sheets. Local governments in Nanjing and Suzhou have already put limits on prices paid in land auctions.

Distressed projects offer opportunities“The most attractive potential residential opportunities for international investors are to partner with established and well-capitalised local developers to seek value from stressed or distressed projects and sellers,” says Chinappi.

“Land price appreciation, partially fuelled by cheap credit, over the past year has squeezed gross margins of residential projects to historically low levels. Residential development on land acquired through public auction is no longer attractive for opportunistic investors.

“But there could be value in partnering with established, well-capitalised local developers to acquire projects from stressed and distressed developers.”

Partnering with distressed developers is a high-risk strategy for international investors, however, especially if there isn’t an established domestic group involved in the deal too. Many international investors are

Leading second-tier city residential price movements, Jan 2011-Jan 2016 Prices rose steadily in 2015, with a sudden spike towards the end of they year, led by Xiamen

%

Jan

11

Jul 1

1

Jan

12

Jul 1

2

Jan

13

Jul 1

3

Jan

14

Jul 1

4

Jan

15

Jul 1

5

Jan

16

-Xiamen -Hangzhou -Nanjing -Wuhan6

4

2

0

-2

-4

-6

Source: National Bureau of Statistics

XiamenRecording monthly growth of 5.5%, Xiamen is an increasingly popular port city and holiday destination in south-east Fujian province.

In recent years, new rail links have connected the city to Shenzhen in just three hours and a high-speed link to connect it to Beijing is planned.

The city’s 28% annual house price growth surpassed levels seen in most top-tier cities.

Nanjing Nanjing’s annual house price growth stands at a staggering 27.1%.

Only a couple of hours by fast train from Shanghai, Nanjing also presents its own opportunities, being the capital city of the most affluent provinces in China, along with universities and a new development zone in the making.

HefeiIn May alone, house prices grew by 5.1% in the eastern city of Hefei, prompting an expectation that the municipal government will move to place restrictions on house buying in the city soon.

The capital city of Anhui province,

neighbouring Shanghai, has seen enormous infrastructure and development over recent years and it has the second fastest house price growth in East China.

Average new home prices increased by more than 20% from a year earlier and local media reports queues of thousands of potential buyers at the launches of new projects.

For developers, part of the attraction of Hefei is the low levels of stock – according to data provider CRIC, the city only has unsold inventory for 2.3 months at the current rate of sales.

fiRSt-Rate oppoRtunitieS in SeCond-tieR hot SpotS

28 | AsiaProperty July 2016

Survey

Residential: China

understood to be looking into these types of distressed deals, but none have yet gone public with details.

Collaborations are an emerging trend; for example, a “strategic partnership” was agreed between Chinese real estate giants Vanke and Dalian Wanda last year.

Critics said the move was a response to slowing sales growth and reduced profit margins in China’s property sector over the past two years. However, Dalian Wanda founder Wang Jianlin said in a statement that with demand slowing, Chinese developers needed a “new line of thinking and a new model.”

While this team-up isn’t a merger, it is understood that the two developers may bring some existing projects together.

Vanke is also working on proposals to acquire Shenzhen Metro’s property projects, a deal that is proving divisive among its shareholders, but would give it access to land above subway stations in the tier-one city.

“We think the collaboration with Shenzhen Metro, if successful, would provide Vanke with a new acquisition channel of land in a prime location at a lower price than the public auction market, due to more limited competition,” said Morgan Stanley in a research note.

Developers avoid third-tier citiesAs auction prices continue to soar, more developers are looking at more creative ways to access land. Savills’ Lau says: “Developers are still quite keen to buy land but are more selective now; they are not going to third-tier cities to invest, they are focussing their capital on tier one, where the economy is still moving and people still have jobs.

“However, in these cities, getting land is very difficult – it’s like fighting a war. It’s hard for foreign developers to get in, but they do have some advantages, as they often have more expertise and that might give them an advantage in competing for land.”

The changing market and tightening margins on residential property have prompted many foreign investors to seek acquisitions in other, non-residential sectors, particularly logistics.

“We noticed that many international developers, or even private ones, are leaving the market, with the highest-priced land auctioned entirely by state owned enterprises,” says Zhu Ning, professor of finance at Shanghai Advanced Institute of Finance.

“This is a bit concerning, as it reminds one of the ‘kiertsu’ [groups of interlinked

companies] during the Japanese bubble, when enterprises and banks pretty much created a ‘colluded’ land market to push up land prices and property prices.

“It is primarily the subsidiaries of the large national state-owned enterprises that are still very bullish and pushing the market further up. Because of their bank and government backing, such companies can still keep playing the game, maybe even for some protracted period.”

New rail links have become a central indicator in understanding where prices will rise. In Shanghai, for example, where demand is high and prices even higher, many buyers are looking to nearby cities with excellent high-speed rail links to the city.

“There are three primary challenges facing China’s residential market,” Zhu concludes. “Firstly, there is a lot of over-supply in many parts of the country, which would take years, if not decades to sell. Secondly, the market has turned into a complex, panicky, expectation-driven market. Investors only buy apartments feverishly when prices rise and when they expect the prices to rise again.

“And thirdly, housing prices have become so high that they are not relevant to new migrants anymore, whereas urbanisation has been used as the major force for future housing market development. When prices reach a tipping point, all bets are off and we really do not know what will happen.”

Shenzhen house price increase, March 2011-Mar 2016Prices in Shenzhen have bounced back from a fall in 2014 to rocket again since June 2015

Mar

201

1

Jun

2011

Sep

2011

Dec

201

1

Mar

201

2

Jun

2012

Sep

2012

Dec

201

2

Mar

201

3

Jun

2013

Sep

2013

Dec

201

3

Mar

201

4

Jun

2014

Sep

2014

Dec

201

4

Mar

201

5

Jun

2015

Sep

2015

Dec

201

5

Mar

201

6

60

50

40

30

20

10

0

-10

%

Source: Bloomberg

House price changes in 70 major Chinese cities, May 2011- May 2016 Prices have been rising since mid 2015 and this May increased in 60 out of the 70 cities tracked

%

May

201

1

Aug

201

1

Nov

201

1

Feb

2012

May

201

2

Aug

201

2

Nov

201

2

Feb

2013

May

201

3

Aug

201

3

Nov

201

3

Feb

2014

May

201

4

Aug

201

4

Nov

201

4

Feb

2015

May

201

5

Aug

201

5

Nov

201

5

Feb

2016

May

201

6

•MoM decrease •MoM no change •MoM increase100

80

60

40

20

0

Source: National Bureau of Statistics

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Survey Survey

July 2016 AsiaProperty | 31 30 | AsiaProperty July 2016

Residential investment in a nation with a shrinking population seems counter-intuitive, but Japan offers a number of opportunities in the housing sector.

Residential assets are already popular with Japanese REITs and a small number of foreign investors have dipped a toe in the sector. Blackstone Group has been the major overseas player in the market so far.

Koichiru Obu, head of alternatives research, Asia Pacific, at Deutsche Asset Management, says: “Japan’s residential sector is unique in Asia in a number of ways. It is the only country to have an active multi-family investment sector, with a number of active REITs, which gives investors a potential exit and encourages liquidity.

“Multi-family residential assets also tend to be higher-yielding than commercial ones, which contrasts with the circumstances in other major global cities.”

JLL data show that prime Tokyo multi-family housing assets trade at 4.5%, a 120bps premium over grade A offices, while multi-family/residential assets elsewhere offer a yield spread to offices ranging from +25bps in New York to -239bps in Shanghai.

Japan’s residential market is not volatile: JLL says the 10-year standard deviation of rents is just 2.7%, compared with 7.7% for offices. Thanks to the sector’s ‘safe haven’ reputation, rental growth expectations,

expected wage increases and cheap debt costs, JLL predicts investor interest to continue and claims yields could fall to 4%.

Tokyo is also the world’s largest residential market outside of the US, with transaction volumes exceeding ¥2.1trn ($20.7bn) over the 2010-2014 period, JLL says.

Japan’s ageing and shrinking population is a negative factor for the nation’s residential market overall; the 127m population is predicted to shrink to 87m by 2060, although the government hopes to be able to stabilise the population at 90-100m.

Population still growing in key citiesBut Obu says: “Despite Japan’s overall demographic picture, Tokyo and a few other major cities are seeing population growth, which will support the residential market.”

Statistics from Tokyo Metropolitan Government show the population of Tokyo Prefecture as of March 2016 was 13.5m, up 12% since 2000. Notably, the population of Tokyo’s 23 wards was 9.3m, or about 68% of the total population in the prefecture. This reflects a 14% rise over the past 16 years.

Urbanisation is one of the largest factors contributing to this trend. The population in the central five wards grew to 1m in March, up around 34% over the past 16 years.

Savills has analysed how rents in different Tokyo districts compare with the city average.

have much scope to improve the leasing profile of their properties.”

A significant factor in the sector’s popularity is the cost and availability of debt. Private equity buyers such as Blackstone have been able to borrow 80% of asset value at a low all-in cost compared with other markets, leading to an attractive cash on cash yield for their investment.

Blackstone made its big splash into Japan residential in 2014, first reported in AsiaProperty, buying GE Japan Corporation’s 100% owned residential real estate business for more than ¥190bn. The business owned and operated more than 200 residential properties, consisting of over 10,000 units mainly in Tokyo, Osaka, Nagoya and Fukuoka.

Blackstone a strong believer in resi“We continue to believe strongly in the residential sector’s fundamentals, especially in Japan’s major cities,” Alan Miyasaki, senior managing director at Blackstone, said at the time of the deal.

The private equity firm followed the GE deal in 2015 with the $450m acquisition of Japan Residential Investment Company, a fund listed on the London AIM market. JRIC owned 59 residential properties worth ¥46bn in Tokyo, Osaka and Nagoya.

It has been rumoured that Blackstone plans to exit its Japanese residential investments

Residential: JapanResidential: Japan

Investors adhere to Japan’s strong multi-family values Overseas players are being drawn to invest in Japanese apartment blocks by yields that, In Tokyo, outstrip those offered by offices, with urbanisation and cheap debt underpinning the sector’s appeal

In Q1 206, the central five wards had the highest premium rate, at 15.2%.

The South and the Inner North recorded 4.4% and 1.8% premiums respectively. The outer areas, meanwhile, had the lowest premiums, the lowest figure being in the Outer East, at -22.0%, followed by the Outer North, at -13.3%, and West, at -7.4%.

Tetsuya Kaneko, head of research and consultancy, says: “Notably, the Inner East, consisting of Koto, Sumida and Taito Ward, has a low premium of around 5.1%, but [this] is gradually increasing and is projected to keep improving, amid expectations with regard to several plans to transform the area before the Olympic Games in 2020.

“We expect further urbanisation to drive strong demand in Tokyo’s central five wards, especially for smaller household sizes. The residential sector should remain stable for the foreseeable future. We expect occupancy rates to continue their strong trend, driving stable rent revenues in this core sector.”

Landlords need to note that the leasing market is weighed very heavily to tenants. Most Japanese people who have lived in the same apartment for a decade would have not experienced a rent rise, although this is in the context of an economy battling deflation. Rent increases come from new tenancies.

Obu says: “Tenancy terms are very favourable to the tenant, so investors do not

Japanese urbanisation rateThe rate is expected to near 75% by 2030%

1980

1985

1990

1995

2000

2005

2010

2015

e

2020

e

2025

e

2030

e

50

75

70

65

60

55

Source: Statistics Japan, Demographia, Deutsche Asset Man.

Tokyo rent index v Tokyo condo price index, Jan 2010-Jan 2016Condominium price rises have outpaced a more steady increase in Tokyo rents

Jan 2001 = 100

Jan

2010

Jul 2

010

Jan

2011

Jul 2

011

Jan

2012

Jul 2

012

Jan

2013

Jul 2

0103

Jan

2010

4

Jul 2

014

Jan

2015

Jul 2

015

Jan

2016

90

120

120

120

-Rent index in Tokyo 5 ku -Condo price index in Tokyo (12m rolling)

Source: Real Estate Economic Institute, LMC, Deutsche Asset Management

Migration inf low to key Japanese citiesMigration has peaked in Osaka, Nagoya and Fukuoka but has continued in the capital

0000s•Tokyo (l axis) -Osaka -Nagoya -Fukuoka (r axis)

0000s

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

0

80

60

40

20

0

12

9

6

3

Source: Statistics Japan, Demographia, Deutsche Asset Man.

through a J-REIT flotation. However, the firm has begun to sell some of its residential holdings. For example, it recently agreed a deal with Comforia Residential REIT to sell a 42-unit block in Sapporo for ¥1.25bn.

In October, Lone Star Funds bought Singapore REIT Saizen for S$517m ($383.3m) and with it acquired a portfolio of 136 Japanese residential assets. Other private equity players are understood to have picked up individual multi-family buildings for highly-leveraged opportunistic strategies.

Last month Singapore’s Straits Trading bought an Osaka apartments portfolio from Chinju for ¥6.2bn – the listed group’s first investment in Japanese residential property. “The acquisition will complement Straits Real Estate’s existing investments in Asia Pacific and is in line with its strategy of tapping into higher-returning real estate investment opportunities,” says Desmond Tang, CEO of Straits Real Estate.

“We are very pleased to enter the Japan residential market and will look to add similar assets in Tokyo and Osaka to the portfolio. The strategy takes advantage of continuing urbanisation led by young workers and professionals. We expect this trend to continue in the foreseeable future, sustaining demand for good-quality, affordable rental housing at convenient city-centre locations.”

Hong Kong-based Look’s Asset

Management is taking a different approach to Tokyo residential investment, hoping to capitalise on rising residential prices and increased tourism in what might be termed a hybrid hospitality/residential strategy. It plans to raise $50m-100m to invest in Tokyo residential properties to be rented out on a short-term basis up until the 2020 Tokyo Olympics, after which the assets will be sold.

Grosvenor backs “the London of Asia”UK private real estate group Grosvenor has been a long-term investor in Japanese residential and believes Tokyo will become “the London of Asia” due to its status as a centre of both business and culture.

Its latest Tokyo residential project, The Westminster Nanpeidai, a 52-unit refurbished apartment building in Shibuya, was recently launched for sale in international markets including Hong Kong, Taiwan and Singapore – cities where wealthy investors are keen to acquire Japanese residential assets due to a favourable exchange rate and the popularity of Japan as a tourist destination. Grosvenor has also developed high-end residential properties for rent.

Japan has also become more popular with wealthy Chinese private investors, which is expected to provide a further outlet for sellers of residential in major cities, particularly Tokyo and Osaka.

Japanese REITs’ residential assets under management by region Tokyo accounts for around two thirds of J-REITs’ investments in the domestic residential sector

Tokyo 5-ku (32.3%)Tokyo 23-ku (36.1%)

Greater Tokyo (9.5%)Greater Osaka (8.9%)

Greater Nagoya (5.1%)Others (8.1%)

Japanese REITs’ assets under management by sector Japanese REITs have invested strongly in the country’s multi-family housing sector

Retail (18.5%)Apartment (16.1%)Industrial (10.7%)

Hotel (3.6%)Other (0.5%)

Office (50.6%)

Source: Association for Real Estate Securitizaton in Japan, Deutsche Asset Management

Source: Association for Real Estate Securitizaton in Japan, Deutsche Asset Management

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July 2016 AsiaProperty | 33

Research

Key data: occupiers

Fintech firms drive demand for flexible workspace in Hong Kong Tianjin’s logistics sector grows rapidly

Hong Kong offices will ride fintech waveThe growth of the financial technology (fintech) industry will create opportunities for both core and secondary office locations in Hong Kong, Colliers International claims.

Its Fintech: Strategies for the Surge report also suggests fintech firms will be more inclined to seek flexible workspace rather than conventional offices.

Fintech has emerged as a way of using technological innovations to enhance or replace traditional banking operations. The industry is growing rapidly with increasing interest from private investors

and established financial institutions.

Hong Kong lags behind in financial technology innovation compared to other global financial hubs; only 11 of the top 20 fintech companies have offices in Hong Kong. Singapore has 15 such offices, while London and New York have 19 offices each.

However, Hong Kong’s government is taking significant steps to increase Hong Kong’s fintech competitiveness. Last year it outlined a plan to establish an Innovation and Technological Bureau and set up a HK$2bn

($257.7m) fund to encourage technology and innovation.

Yasas Wickramasinghe, a Colliers analyst, research and advisory, said: “The rise of fintech companies will create demand for office space in core and fringe central business district (CBD) areas and decentralised locations.

“While we expect companies that mainly service Hong Kong’s finance industry to attempt to locate in the core or fringe CBD, the demand for decentralised locations is likely to come from regional operators.

“Fintech start-ups rely mainly

on flexible workspace and other low-cost office solutions.

“Therefore, with growing interest in promoting fintech innovations, fintech start-ups could well become a primary demand driver for coworking spaces and non-prime buildings in the core and fringe CBD in coming years.”

Jonathan Wright, associate director, office services added: “We certainly expect fintech companies to drive some of the demand for flexible workspace and serviced offices, which are growing exponentially in footprint in Hong Kong.”

OFFICE RETAIL

City Currency Measurement/period Rent Yield (%) City Currency Measurement/period Rent Yield (%)

Sydney A$ m2/year 1,091 5.13 Sydney (high-street shops) A$ m2/year 13,975 4.75Hong Kong (core Central) HK$ sq ft/month 166.00 2.80 Hong Kong (high-street shops) HK$ m2/month 1,200.00 3.30New Delhi (CBD) INR sq ft/month 400.00 8.23 Delhi (shopping centre) INR sq ft/month 1,250.00 10.50 Mumbai (BKC) INR sq ft/month 308.00 9.43 Mumbai (shopping centre) INR sq ft/month 700.00 12.50 Singapore (Raffles Place) S$ sq ft/month 11.00 3.50 Singapore (shopping centre) S$ sq ft/month 52.00 4.95Kuala Lumpur MYR sq ft/month 14 6.00 Kuala Lumpur MYR sq ft/month 150.00 6.00Beijing (CBD) RMB m2/month 700.00 4.80 Beijing (shopping centre) RMB m2/month 4,100.00 4.75Shanghai (Puxi) RMB m2/month 395.00 4.25 Shanghai (shopping centre) RMB m2/month 2,890.00 4.45 Shanghai (Pudong) RMB m2/month 510.00 4.25 Tokyo (high-street shops) ¥ tsubo/month 400,000 3.00Tokyo ¥ tsubo/month 45,100.00 3.25 Taipei (high-street shops) NTD ping/month 11,338 2.90Taipei (XinYi) TW$ ping/month 3,350.00 2.35

prime asian rents and yields, q1 2016Office rents rose quarter on quarter in Hong Kong Central and Sydney, with the latter also seeing an increase in high-street shop rents

Source: CBRE

Growing Tianjin logistics market now China’s second biggestE-commerce is driving Tianjin’s logistics market, which is now the second largest in China.

JLL research shows Tianjin, a major seaport, has moved up the rankings as a modern logistics hub in recent years. In 2015, the city increased its supply by more than half of the 2014 level to reach 2.9m m2 of total stock, making it the nation’s second-largest logistics market, behind Shanghai.

A steady stream of new supply will enable it to retain its place.

“The huge amount of new supply caused Tianjin’s vacancy rate to jump to 21.3% at the end of 2015 and subsequently 20.6% by the end of Q1 2016, but a sizeable proportion of the supply was in emerging Wuqing, doubling the stock total for the city’s most strategic and promising logistics submarket,” said Chelsea Cai, JLL’s head of Tianjin research.

Wuqing, 80km from Beijing, has been hugely popular with e-commerce firms and

traditional retailers, Cai added. “While traditional manufacturing demand remains a significant part of the market, the e-commerce boom has been a boon for Tianjin logistics.

“E-commerce firms, retailers and third-party logistics service providers have eagerly entered warehouses, using the city as a base to streamline distribution channels, and move goods to and from factories and retail stores across the region and country, or even abroad.

“Online sales for Tianjin and Beijing together totalled RMB226bn [$33.9bn] in 2015, 40%-plus higher than in 2014.”

She said a growing middle class – half the 40m population of Beijing and Tianjin earn more than RMB30,000 a year – would support future growth.

Fashion retailer Bestseller and Chinese supermarket Renrenle were among the latest to set up North China distribution centres in Tianjin, joining earlier arrivals such as Amazon and Alibaba.

34 | AsiaProperty July 2016

Research

Key data: Non-listed sector

asiaproperty capital raising update: live fundsStarcrest Capital Partners has launched its second China Real Estate Fund, with target equity of $300m

Vehicle Manager Type Target equity

($m)

Target sector Geographical focus

JUNE 2016

Starcrest China Real Estate Fund ll Starcrest Capital Partners Not known 300 Diversified Asia

MAY 2016

Trinity Asia Fund III Trinity Investments Not known 500 Diversified JapanLaSalle Asia Opportunity Fund V LaSalle Investment Management Limited partnership 750 Diversified Asia

APRIL 2016

Gaw Capital Asia Hotel Fund Gaw Capital Partners Limited partnership 250 Hotel Asia

MARCH 2016

Godrej Residential Investment Program II Godrej Fund Management Not known 250 Residential IndiaGaw Capital Real Estate Gateway Fund V Gaw Capital Partners Limited partnership 1,300 Diversified AsiaDREAM Mezzanine Debt Fund IV Diamond Realty Management GK 147 Debt Japan

JANUARY 2016

SC Capital Core Fund SC Capital Partners Limited partnership 400 Diversified Asia

NOVEMBER 2015

AREA Industrial Development l AREA Management Not known 154 Industrial Malaysia

SEPTEMBER 2015

EW Special Opportunities Fund ll Edelweiss Alternative Asset Advisors Limited partnership 1,000 Debt India

JULY 2015

GLP China Logistics Fund II Global Logistics Partners Limited partnership 3,000 Industrial ChinaPramerica Asia Property Fund III Pramerica Real Estate Investors Limited partnership 2,000 Diversified AsiaStar Fund II ArthVeda Fund Management Not known 250 Residential IndiaASHA Fund ArthVeda Fund Management AIF CAT II 300 Residential India

Source: Property Funds Research

To have funds included in this table, please email information to Jane Fear: jf@propertyfundsresearch.com

asiaproperty capital raising update: pending fundsPAG’s Secured Capital Real Estate Partners VI and Ascendas’s core office vehicle are the biggest pending funds, targeting $1.5bn and $1.4bn respectively Vehicle Manager Type Target equity $m Sector Geographical focus

PAG Secured Capital Real Estate Partners VI PAG Investment Management Limited partnership 1,500 Debt AsiaAscendas Asia-Pacific Core Office Fund Ascendas Limited partnership 1,440 Office AsiaOrange Grove Japan Real Estate I Orange Grove Capital Management Not known 1,000 Diversified AsiaSavills IM Asia Fund III Savills Investment Management Not Known 1,000 Diversified AsiaRedwood Japan Logistics Fund ll Redwood Group Limited partnership 1,000 Industrial JapanBlackrock Asia Fund IV Blackrock Limited partnership 1,000 Diversified AsiaAlpha Asia Macro Trends Fund III Alpha Investment Partners Investment company 1,000 Diversified AsiaAetos Capital Asia V Aetos Capital Limited partnership 999 Diversified AsiaForum Asia Realty Investments IV Forum Partners Limited partnership 500 Debt AsiaHeitman Asia-Pacific Property Investors Heitman International Limited partnership 500 Diversified AsiaCITIC Residential Development Fund CITIC Capital Limited partnership 394 Residential AsiaIndia Debt & Yield Opportunity Fund RootCorp Investment Management Not known 250 Diversified AsiaNARA Japan Hotel Fund Swiss-Asia Asset Management Not known 200 Hotel JapanIndia Realty Excellence Fund III Motilal Oswal Real Estate Limited partnership 158 Debt AsiaTCM Tokyo Office Fund Tokyo Capital Management Not known 35 Office AsiaGreater Tokyo Office Fund II Savills Investment Management Limited partnership n.a. Office Japan

Research

July 2016 AsiaProperty | 35

Asia outpaced Europe but lagged behind N America last month Japan led in local currency terms

• The FTSE EPRA/NAREIT Developed Asia Index rose 3.6% in June, overshadowed by the North American index’s strong 7.1% rise but way ahead of the Europe index, which fell 6%.

• Japan was the top regional performer in local currency terms, rising 6.7%. The Hong Kong Index rose 4.3%, while the Australia Index added 3.7% and Singapore increased 2.7%.

• Japan Real Estate Investment Corp plans to draw down loans of ¥5bn ($48.7m) each from Mizuho Bank, The Bank of Tokyo- Mitsubishi UFH, Sumitomo Mitsui Trust Bank and Mitsubishi UFJ Trust and Banking Corp. Some of the funds will repay ¥24bn of loans from 2011 and due this December, with a one-month Libor plus 0.04% interest rate.

• Australia’s Scentre Group has agreed to redeem around A$600m ($451.8m) of A$1.2bn Property Linked Notes held by Dutch fund PGGM Private Real Estate Fund. The notes give income and capital returns based on shopping malls’ economic performance. Notes linked to Westfield Tea Tree Plaza, Belconnen, Burwood and Hornsby will be redeemed on December 31, increasing Scentre’s interest by 25% for the first three malls and 5% for Hornsby.

• Stockland is buying 95ha of land with potential for 1,500 homes next to its 198ha Elara community at Marsden Park in North West Sydney, from Winten Property Group, for A$290m ($218.2m).

• Following its June quarterly review, FTSE EPRA/NAREIT indices have added Singapore’s City Developments, with a 65% free float percentage and 9.09m shares, and Japan’s Kenedix Retail REIT, with a free float percentage of 98% and 419,250 units in issue.

Source: EPRA Monthly Statistical Bulletin

0

1000

2000

3000

40005000

6000

7000 Asia N America Global Europe

Dec 99

Jun 00

Dec 00

Jun 01

Dec 01

Jun 02

Dec 02

Jun 03

Dec 03

Jun 04

Dec 04

Jun05

Dec 05

Jun 06

Dec 06

Jun 07

Dec 07

Jun 08

Dec 08

Jun 09

Dec 09

Jun 10

Dec 10

Jun 11

Dec11

Jun 12

Dec12

Jun 13

Dec 13

Jun 14

Dec 14

Jun 15

Dec15

Jun 16

50

70

90

110

130

150

170 EPRA Asia FTSE Asia JP Morgan Bonds

Feb 06

Jun 06

Oct 06

Feb 07

Jun 07

Oct 07

Feb 08

Jun 08

Oct 08

Feb 09

Jun 09

Oct 09

Feb 10

Jun 10

Oct 10

Feb 11

Jun 11

Oct11

Feb12

Jun 12

Oct 12

Feb 13

Jun13

Oct 13

Feb 14

Jun14

Oct 14

Feb 15

Jun 15

Oct15

Jun16

Asia property performance v equities and bondsEPRA Asia’s June gains defied a downturn for the FTSE Asia index

Source:EPRA Monthly Statistical Bulletin

EPRA global real estate performanceThe Asia index rose last month but underperformed the N. America index

Source: EPRA, FTSE, JP Morgan

36 months 36 months 36 months

Property (%) Equities (%) Bonds (%) Property (%) Property Equities Equities Bonds Bonds

June 2016 June 2016 June 2016 YTD Volatility (%) YTD (%) Volatility (%) YTD (%) Volatility (%)

Australia 3.66 -2.47 1.75 16.72 11.38 0.81 12.96 6.07 3.15New Zealand 0.34 -1.73 0.82 13.06 10.64 10.84 11.01 6.05 2.62Hong Kong 4.34 0.76 1.44 3.02 18.08 0.56 15.45 2.51 2.39Singapore 2.66 1.71 2.09 5.54 12.84 0.15 12.92 5.16 4.04Japan -6.67 -9.82 1.59 -7.32 15.01 -19.46 18.61 7.74 2.08Asia 3.61 -3.23 n.a. 7.03 12.82 -3.93 11.51 n.a. n.a.

listed property performance v bonds and equities, june 2016Australia topped the table in June, although Japan performed best in local currency terms

ToP FIVEStock Country Sector Total return (%) June 2016

Wharf Holdings Hong Kong Diversified 13.27Link REIT Hong Kong Retail 12.70Champion REIT Hong Kong Diversified 9.23Sino Land Hong Kong Diversified 8.02Fortune Real Estate Investment Trust Hong Kong Retail 7.93

BoTToM FIVEStock Country Sector Total return (%) June 2016

AEON REIT Investment Japan Retail -16.84Mitsui Fudosan Japan Diversified -12.15Invincible Investment Corporation Japan Diversified -11.85Mitsubishi Estate Company Japan Diversified -10.51Sumitomo Realty & Development Japan Diversified -9.63

top and bottom five asian stocks, june 2016Hong Kong companies filled the top five while all the bottom five stocks were Japanese

Source: EPRA Monthly Statistical Bulletin

It’s clear that transparency matters

Comment

Why is transparency important?It’s not always obvious that it is

and some real estate investors like to say that opacity leads to more opportunities for smart investors. However, recent events show how important it is to work towards more transparent real estate markets.

At the London launch of JLL’s 2016 Global Real Estate Transparency Index, the mood of the audience was somewhat sober, with Brexit, and its effect on the global property industry, weighing on proceedings.

The UK is ranked as the world’s most transparent real estate market, followed by Australia, Canada and the US. In the wake of Brexit and, at the time of writing, no resolution of the elections in Australia, not to mention a forthcoming US presidential election, we should consider whether transparency will continue to aid real estate allocations and capital flows. Will Asian capital still flow to these markets? Or do political and economic uncertainty outweigh the benefits of increasing transparency?

The straight question is: if JLL’s transparency survey was conducted now, post-Brexit and the loss of the UK’s triple A credit rating, and with a hung parliament in Australia, would the UK and Australia still be one and two on the list? The short answer is yes. From an institutional real estate perspective the rules and regulations around real estate and their enforcement still provide a clear set of procedures for running markets.

The markets that hold the top positions are taking real estate transparency to a new level, making improvements that go beyond other transparent markets, particularly in the granularity, quality, frequency and

Megan Walters

is head of capital

markets research,

Asia Pacific, at JLL

geographical spread of performance measurement, valuations and market fundamentals data, which now also extend to niche property sectors.

How commercial property is owned and developed has an effect on communities, both positive and negative. I have written previously (AsiaProperty, February 2013) about the negative externalities generated in communities by poor upkeep of multiple ownership commercial property. This comes about through obscure ownership and the regulatory difficulty of enforcement of sinking funds and repairs.

Quality of lifeThere is a growing recognition that transparent real estate practices play a significant role in capital formation, municipal finance, and as a foundation to improve quality of life in many communities. This includes security of property ownership, safe housing and workplaces and the ability to trust participants to act honestly and professionally.

Real estate also affects families’ savings. Real estate is one of the few asset classes with a positive yield; that means as an industry we have a duty to explain and educate retail investors about the pitfalls, as well as the benefits of the asset class. If that means more consumer protection for investors into commercial real estate, it is something we should embrace.

One of the highlights of this year’s launch was the recognition that the revelations of the Panama Papers in early 2016 led to mounting pressures for greater real estate transparency and put the fight against corruption decisively on

the international political agenda. Beneficial ownership disclosure and anti-money laundering procedures will be embraced more widely and rigorously – we expect to see material progress in the coming years by many countries in their drive for greater transparency in corporate and real estate ownership.

The mounting intolerance of corruption within the world’s growing middle classes will force the pace of change, especially among the semi-transparent countries, and social media will help people mobilise around this issue. Given president Xi Jinping’s clampdown on corruption throughout China and prime minister Modi’s reforms in India, promoting transparency in the real estate industry in Asia is firmly on the agenda.

The 2016 index shows improvement from a number of Asian markets, notably Taiwan, Japan and first-tier cities in China. Transparency helps investors make better-informed decisions, which naturally investors like. We know capital allocations to real estate are growing and our forecast is that within the next decade in excess of $1trn will be targeting the sector, compared to $700bn now.

We also know that the 10 countries identified as highly transparent by the Global Real Estate Transparency Index account for 75% of global real estate investment. That should be a pretty obvious indicator of why transparency matters.

Asian markets that want to attract this coming wave of real estate investors need to address transparency concerns and boost their rating if they want to succeed.

36 | Asia Property July 2016

JLL’s latest Transparency Index shows that the 10 ‘highly transparent’ countries account for 75% of global real estate investment – so it’s no wonder that Asian markets are waking up to the importance of transparency.