Real Estate Inv Aspac 0805

8/10/2019 Real Estate Inv Aspac 0805

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Real Estate Investment in

Asia Pacific: Migrating capital

In Association with:


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Contents

1 Introduction

2 Executive summary

4 The significance of real estate investment in Asia

A Global context

The Asian story

Capital flows in Asia

18 Outlook for real estate products in Asia

Real Estate Investment Trusts

Real Estate Funds

Real Estate Derivatives

32 About KPMG

33 About FTSE Group

34 About APREA

2008 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.

All rights reserved.


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All rights reserved. 1

Introduction

Property investment has emerged as an asset class, but it remains difficult to

access and is often beset by complex structures and regulation. The factors

governing investment decisions differ greatly from one market to another.

Developed jurisdictions such as Australia, Hong Kong, Japan and Singapore all

have well defined and strictly governed real estate markets, often competing to

attract investment from institutional investors with an Asian property mandate.

The other end of the spectrum sees frontier markets such as Vietnam, China and

India closely studying regulatory frameworks in the rest of the region as a guide

to establish their own viable marketplace for international real estate investors.

Regardless of the variation in market development there is an underlying

trend the proliferation of REITs and the increased number of property stock

listings. Both vehicles give investors the advantage of transparent reporting

and accounting required by the listing exchange. As a result, we are seeing

investors increasingly include listed property in their portfolio which compliments,

rather than competes, with their allocation to direct property investment. A

consequence of this new demand is the growing choice of Asian property funds.

KPMG China, FTSE Group and APREA are pleased to have teamed up to develop

this report, which explores the fast developing landscape of Asian real estate.

Andrew Weir Fran Thompson Peter Mitchell

Partner in Charge Director CEO

Property and Infrastructure Asia Pacific APREA

KPMG China FTSE Group

Real Estate Investment in Asia Pacific: Migrating capital


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2



Executive summary

The credit crisis in the United States and Europe brought to an end a decade of

sustained growth in global real estate. During this period, the debt-driven nature

of real estate was a key factor in its emergence as a core asset class. These

developments, which also had implications for equity markets, also started to

make their way to Asia.

Asian real estate has rebounded impressively since its own financial crisis a

decade ago. Questions continue to be asked as to just how severe an impact the

present credit crisis will have on the region. Arguably, many have been surprised

by how relatively little Asia has been affected.

Asia as a whole has continued to perform relatively well against the US and

European real estate markets and more importantly, continues to attract

investment. This is not to say that Asia has been immune, but it has been

impacted to a much lesser degree. This has led some US and European funds to

review their perspective on the region. Asian real estate may finally be getting

the respect that many say it deserves.

Capital flows in Asia have traditionally come from bank debt leveraging

developments while real estate funds awash with capital have been investing

throughout the region. With credit problems in the US and Europe, more focus is

being given to Asia, with investors viewing market fundamentals favourably and

increasing their allocations to the region.

The credit crisis has not slowed the inflow of capital to Asia quite the

opposite. While real estate investment was already growing steadily due to a

combination of opportunistic and increasingly longer-term investments, the credit

crisis appears to be accelerating this process.



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More funds have been looking around the region than ever before, many with

capital waiting to be invested. In recent months, a number of European pensionfunds have been looking to Asia in search of stable returns. There has been

continued interest from Australian funds and even opportunistic US funds in

search of distressed assets. Alongside huge Asian pension funds from markets

such as Singapore, interest hasnt been this high for a long time.

Though interest may be here, there is also caution. Traditional sources of debt

from US and European banks have all but dried up, and some Japanese and

Australian banks are delaying loans, so financing deals around the region has

become increasingly difficult.

Probably the most pronounced effect from the credit crisis is a tightening of

credit controls. In Asia, this is slowing the financing process rather than bringing

it to a halt, which suggests it has arisen from the temporary uncertainty of

lenders rather than more deep-seated problems in Asias real estate markets.

Eventually, this could have a positive impact for the region, improving bank

controls and in turn leading to stronger equity returns.

Meanwhile, the traditional debt leverage model in Asia is being challenged from a

number of directions. The recent and rapid emergence of real estate investment

trusts around the region is one immediate sign. Although many are trading below

net asset value, this generally does not reflect the quality of underlying assets

and the expected positive returns.

Likewise, the market capitalisation of listed real estate companies and real estate

funds in emerging markets have been increasing at an extraordinary rate. In India,

market caps are at an all time high far exceeding the expectations of mature

markets and leading some observers to question the sustainability of this growth.

To a lesser extent, increasing attention on Shariah-compliant financing (which

prohibits the earning of interest) and the fledgling real estate derivatives market

illustrate that debt-driven financing will not be the primary source of capital in

future.

Asian real estate may be experiencing some short-term pain, but the credit crisis

will eventually benefit the region. The perception that the region is only suitablefor opportunistic investors has been prevalent since the Asian financial crisis,

but is now being turned on its head. In time, the credit crisis will result in Asia

being regarded on a more equal and level playing field to the more mature but

struggling markets of the US and Europe.



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4



The significance of real estate investment in Asia

real estate equities are

gradually becoming a global

market, just like other listed

assets. There are dozens ofglobal funds, the vast majority of

which have appeared in the last

five years, and companies can

raise money on three continents.

The drivers include: abundant

liquidity, strong property markets,

REIT legislation in key markets,

more fund managers in the

sector, and more research and

information.2

A Global context

End of a debt-driven era

Real estate is now emerging globally on the scale of other asset classes.

The underlying real estate market reached a value of over USD 17 trillion in

2007.1The majority of investment still remains in North America and Europe

(75 percent), while Asia Pacific accounted for around 20 percent. Little of this

underlying market is listed, but Asia Pacific leads in this area with around 15

percent versus a global average of 9 percent.

The era of exceptional returns from global real estate came to a close in 2007.

Events in the sub-prime market in the US resulted in a credit-crunch in a number

of countries, and closed out a robust period of debt-driven investment.

Global real estate value, 2007 (USD billion)

8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

0Europe North America Asia Pacific Latin America

Underlying real estate Listed real estate

Source: EPRA, 2008

1 EPRA, 2008.2 Patrick Sumner, Head of property equities in the London office of Henderson Global Investors, Navigating real estate investment on a global

basis 2007.



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Invested and investible real estate stock by region, 2007 (USD trillion)

12

10

8

6

4

2

0North America Europe Asia Pacific

Investible stock Invested stock

Source: RREEF Asia Pacific Real Estate Outlook 2008

Globally, there is room for further investment. Total invested stock only accounts

for 40 percent, and in regions like Asia Pacific, this is even lower. With the US

and Europe stalling from the credit crunch at the moment, eyes are turning to

Asia faster than before.

Global real estate transactions continued to grow in 2007 over the watershed

year of 2006, helped predominantly by high levels of investment in the first half

of the year. Strong investor interest and favourable credit conditions had driven

volume growth and increased pricing over the past few years.

The credit crunch in mid-2007 led many investors to hold back on investments aspricing levels were revised and they reappraised their appetite for risk. However,

the slowdown in the second half did not dampen overall growth for the year,

which increased by a healthy 9 percent to reach around USD 760 billion.3This

growth has been increasingly driven by cross-border activity, which accounted for

nearly half of transactions last year.

Global direct commercial real estate investment, 2003-2007 (USD billion)

800

700

600

500

400

300

200

100

2003 2004 2005 2006 2007

Domestic Cross-border

Source: Jones Lang LaSalle Global Real Estate Capital Oct 2007 and press releases March 2008

3 Jones Lang LaSalle, March 2008.


0


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All rights reserved.6

Extraordinary performance

Returns from real estate securities were exceptional between 2003 and 2006,averaging over 30 percent during the period. Last year saw an abrupt end to

these golden years with returns dropping dramatically to a tenth of this

average. Meanwhile, investment in direct real estate has experienced more

steady returns, comfortably averaging double-digits for the past decade.4

Real estate as an asset class has certainly outshone equities and long-term

government bonds over the past decade, providing average returns of between

7-8 percent. The success of real estate may have taken a few by surprise, but it

illustrates how important it has become to global capital markets.

FTSE EPRA/NAREIT Rental and Non-Rental Market Cap Index, 2001-Q1 2008

600

500

400

300

200

100

0Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Mar 08

FTSE EPRA/NAREIT Global Index FTSE EPRA/NAREIT Asia Index*

FTSE EPRA/NAREIT North America Index FTSE EPRA/NAREIT Europe Index

* includes Australia and New ZealandSource: FTSE Group 2008

FTSE EPRA/NAREIT Real Estate Index, 2001-Q1 2008

300

250

200

150

100

50

0Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Mar 08

FTSE EPRA/NAREIT Global Rental Index FTSE EPRA/NAREIT Global Non-Rental Index

FTSE EPRA/NAREIT Asia Rental Index* FTSE EPRA/NAREIT Asia Non-Rental Index*

FTSE EPRA/NAREIT Europe Rental Index FTSE EPRA/NAREIT Europe Non-Rental Index

FTSE EPRA/NAREIT North America Rental Index FTSE EPRA/NAREIT North America Non-Rental Index


4 RREEF Asia Pacific Real Estate Outlook 2008.



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Annual returns by global asset class, 1998-2007

20

10

0

-10

-20

-301998 2007

30

1999 2000 2001 2002 2003 2004

40

50

2005 2006

Direct real estate

Real estate securities


Equities

Long-term government bonds

2008: Time to slow down

Global economic growth slowing

The global economy continued to expand in 2007 and this trend is expected to

continue in 2008, albeit at a slower rate. Global gross domestic product growth

is forecast to slow to 3 percent in 2008 and this is expected to mildly weaken

demand for real estate.5

Despite the sub-prime crisis and the housing market slowdown in the US, it

is generally felt that the US could still avoid a deep recession and may even

maintain some mild growth over the course of the next two years.6While most

European countries are expected to maintain growth in 2008, in particular in

Central and Eastern Europe, the UK is expected to feel the impacts from the

global credit crunch with economic growth slowing to less than 2 percent.

As Asia Pacific emerges as its own growth engine, a slowdown in US and

Europe is unlikely to have a significant impact on the region. Overall, economic

growth for the region is expected to remain strong, supported by growing intra-

regional trade.

Real estate returns declining

Strong real estate fundamentals bode well for most markets, with generally low

vacancy rates and healthy pipelines. Global transaction volumes are expected

to decrease. Total global volumes [are expected] to be below those achieved

in recent years due to lower pricing and fewer transactions, commented Tony

Horrell, CEO European Capital Markets at Jones Lang LaSalle,7while adding that

even with the tightening of credit a number of equity investors are cash-rich and

prepared to wait for good buying opportunities to emerge.

5 ING Real Estate Global Vision 2008.6 Economist Intelligence Unit, March 2008; ING Real Estate Global Vision 2008; KPMG and FTSE interviews with industry participants.7 Jones Lang LaSalle press release, March 2008.



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On the whole, returns on real estate investments are expected to decline in most

countries, but still remain positive for 2008. Returns from investments in AsiaPacific are expected to generally remain higher than the global average for the

coming year.

Direct real estate returns, 2007 and 2008

35%

30%

25%

20%

15%

10%

5%

0%

-5%

Singapore

China

HongKong

SouthKorea

Japan

Australia U

S

Germany

Netherlands

Italy

UK

Global

2007 2008F


The Asian story

Real estate growth has not slowed

Asian real estate has remained strong in the face of the credit crisis in US and

Europe. Backed by strong market fundamentals and even stronger economic

growth, real estate in Asia is expected to continue to weather any global

problems. Capital flows throughout the region are at an all-time high, and the

general sentiment in the market is still favourable. The credit crunch has not

significantly impacted market sentiment in Asia.

A number of interviewees did not expect Asia to be as badly hit as the US and

Europe, with one fund management executive commenting Asia is certainly not

immune, but it wont be impacted to the same degree as elsewhere.8

Total investment in the region has continued to increase, growing by over 27

percent in 2007 to reach USD121 billion. Unlike the US and Europe, where

real estate investment slowed in the second half of last year, over half of

investments in Asia Pacific were made during this period.

8 KPMG and FTSE interview with a fund manager at an investment bank.



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Asia Pacific direct commercial real estate transactions, 2005-2007 (USD billion)

commentators still view China as a popular place to look as large volumes of

capital chase more limited investible stock.9

Asia Pacific direct commercial cross-border transactions, 2006-2007 (USD billion)

Japan remains a dominant force in the region, not only accounting for half of last

years real estate transactions but also experiencing the strongest growth. China

also grabbed a number of headlines last year as it continued to produce attractive

returns for investors. Looking forward though, Japan continues to be viewed as

an attractive market to look into, particularly for the lower-risk investor, while

Domestic Cross-border

100

80

60

40

20

02005 2007

120

140

2006

Source: Jones Lang LaSalle Global Real Estate Capital 2008 and press releases March 2008

What you have is a balance of

both theories: globalisation in the

real estate sector will continue,

meaning that what hurts the US

will hurt Asia, but at the same

time Asia is continuing along its

own trajectory making it more

immune than it was two or three

years ago.

Morgan Parker,

President,

Taubman Asia

15

10

5

20

25

30

Japan

China

Singapore

SouthKorea

Australia

HongKong

Taiwan

Malaysia

Macau

Vietnam

2006 2007

Source: Jones Lang LaSalle Asia Pacific Property Digest Q4 2007

9 Urban Land Institute Emerging Trends in real Estate in Asia Pacific 2008.



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10 All rights reserved.

Healthy performance continues

Investors in Asian real estate have been enjoying healthy returns for the past fewyears. Returns from direct real estate investments last year were as high as 20

percent in some Asian markets, with almost all markets exceeding 10 percent.

Although 2008 is expected to slow, most Asian countries are forecast to beat the

global average. Investor confidence appears to remain high, with many expecting

the prospects for profitability in the coming year to be good and in some cases

exceed last year.10Investment in Asia seems to be taking a cautious approach

at the moment, but it will continue and most markets [in Asia] will see growth

albeit slower than before, one director at a European investment bank

commented.11

FTSE EPRA/NAREIT Global and Asia REIT and Non-REIT Indexes,

Q2 2006-Q1 2008

200

150

100

50

0Mar 06 Sep 06 Mar 07 Sep 07 Mar 08

FTSE EPRA/NAREIT Global REIT Index

FTSE EPRA/NAREIT Asia REIT Index*


FTSE EPRA/NAREIT Global Non-REIT Index

FTSE EPRA/NAREIT Asia Non-REIT Index*

Against global averages, Asia generally tracked global trends, illustrating that it

is unlikely to ever de-couple from the US or Europe; however Asia has largely

outperformed global averages in both the REIT and the non-REIT areas. In the

US, real estate securities have been more closely linked with underlying realestate markets. This trend is also likely to emerge in Asia as the market matures.

Likewise average Asian yields from REITs have generally outperformed REITs in

Europe and North America and the global average. Non-REIT yields have been

slightly below global averages.

10 Urban Land Institute Emerging Trends in Real Estate in Asia Pacific 2008.11 KPMG and FTSE interview with a director at a European investment bank.



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Yields from rental properties by region, 2006-Q1 2008

7%

6%

5%

4%

3%

2%

1%

0%Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Mar 08

FTSE EPRA/NAREIT Global Rental Index FTSE EPRA/NAREIT Asia Rental Index*

FTSE EPRA/NAREIT Europe Rental Index FTSE EPRA/NAREIT North America Rental Index


Yields from non-rental properties by region, 2006-Q1 2008

5%

4%

3%

2%

1%

0%Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Mar 08

FTSE EPRA/NAREIT Global Non-Rental Index FTSE EPRA/NAREIT Asia Non-Rental Index*

FTSE EPRA/NAREIT Europe Non-Rental Index FTSE EPRA/NAREIT Non-North America Rental Index


Direct real estate returns, 2006-2008F

60%

50%

40%

30%

20%

10%

0%

Singapore

China

HongKong

SouthKorea

Australia

Japan

Global

2006 2007 2008F




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Asia has some of the fastest

growing economies in the world.

Real estate will continue to benefit

from this growth particularly

as Asia comes into its own and

becomes less reliant on trade with

the US and Europe.

Dr Henry Chin,Global Real Estate

Strategist,

RREEF

Key economic indicators

As with US and European markets, yield compression throughout Asia Pacific

region is expected to be nearing its end.12This is due to demand for propertiescontinuing to increase, forcing prices to rise and cap rates to decline.

There is potential for returns from the market this year, though most likely in

the form of rental returns rather than capital appreciation. The general view is

that rents will continue to rise in several Asia cities over the coming year, easing

the income pressure from compressed yields and benefiting project cash flow.

Well probably start seeing rental prices increase in some markets this year,

which will help stabilise returns for some of the less opportunistic investors,

said one US fund manager.13

The outlook is good

Continued economic growth

Asias increasing economic independence and inter-regional trade will help it

to overcome most negative impacts from any US and European slowdown this

year. As impacts from the credit crunch are being felt in the financial sectors

overseas, Asias growth is forecast to slow in 2008 but still remain at a healthy

level.

Capital spending is expected to remain high in the region, as one commentator

noted, this is due in part to a lack of investible options in home markets in US

and Europe.14While the Australian REIT market is starting to show diminished

interest in offshore acquisitions, the countrys superannuation funds continue to

demonstrate growing interest in Asian real estate. Meanwhile, the outlooks for

other economic indicators remain healthy, with industrial production and retail

sales generally remaining level or increasing.

Australia

China

Hong Kong

IndonesiaJapan

Malaysia

New Zealand

Philippines

Singapore

South Korea

Taiwan

Thailand

Vietnam

World average

Gross domestic product

(% Growth)

2008F 2009F

3.2 2.8

10.1 9.6

4.8 5.7

6.1 5.7 1.3 1.3

5.7 5.8

8.3 8.2

5.3 5.4

4.9 4.7

4.7 4.7

4.6 3.9

4.8 4.1

8.3 8.2

2.9 3.3

Prime lending rate

(%)

2008F 2009F

10.3 9.6

8.1 7.8

7.0 7.6

13.0 12.4 2.1 2.8

6.5 6.5

12.7 12.2

8.6 9.3

5.5 5.4

6.4 6.2

4.7 5.3

6.5 6.2

11.6 11.3

Retail sales growth

(%)

2008F 2009F

1.4 3.8

13.2 12.8

4.0 1.7

5.2 4.5 -0.1 0.5

4.8 4.0

1.8 3.2

3.9 5.2

1.5 1.8

2.8 2.9

1.5 1.4

1.1 2.9

6.0 6.0

2.3 3.5

Industrial production

(%)

2008F 2009F

3.4 2.6

15.7 13.0

-0.5 -1.4

4.4 4.0 1.2 1.4

3.8 5.2

2.0 1.9

5.5 5.5

5.9 5.6

6.7 4.6

5.0 5.1

6.0 5.2

16.5 16.5

Source: Economist Intelligence Unit, 2008

12 Jones Lang LaSalle press release, March 2008; Urban Land Institute Emerging Trends in Real Estate in Asia Pacific 2008;

KPMG and FTSE interviewees with industry participants.13 KPMG and FTSE interview with a US fund manager.14 Urban Land Institute Emerging Trends in Real Estate in Asia Pacific 2008.



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Asia not immune

Buoyed by healthy economic growth, Asias position in real estate markets lookssecure. Investment volumes throughout the region have declined recently but are

expected to pick back up towards the end of the year.

The slowdown in the US and Europe is expected to flow through to Asia, but it

is unlikely to be immediate. The most significant impact interviewees expected

was a tightening of credit from banks, in particular for financing large-scale

developments.

The impact is expected to result in a smoothening out of supply, as one real

estate fund manager described it, explaining that deals will continue to happen,

but will take longer, resulting in a slowing of the supply cycle.

Transfer pricing issues affecting real estate sector

The recent increase in transfer pricing enforcement in the Asia Pacific region

has led to severe tax scrutiny and transfer pricing audit cases for several

listed REITs. Since the burden of proof lies with the taxpayer, it has become

increasingly important for REITs to have an intricate and clear strategy in place

to handle potential transfer pricing issues. Some of the common issues for

REITs include the following:

l Determination of related party transactions and ownership structures:

From a transfer pricing perspective, the related-party transactions must

not disadvantage the REIT in accordance with internal, statutory and other

transfer pricing regulations; furthermore, the REIT must document its

ownership structure to ensure that it complies with all of the regulatory

constraints.

l Pricing for services provided by the REIT subsidiaries:Typically related

subsidiaries engage in a variety of real estate management and development

activities on behalf of the REIT, such as leasing, development of real property,

management services, acquisition services and tenant services. The service

fee paid to the subsidiaries of the REIT for these functions must be at arms

length.

l Allocation and recharging of shared expenses:Various related group

entities may also perform support services that benefit the REIT or other

group recipients; these services need to be allocated and reimbursed

appropriately.

l Consideration of thin capitalisation issues:A REIT is typically financially

leveraged and may have obtained funding from related entities. Consideration

needs to be paid to arms length interest rates and thin capitalisation issues,

so as to avoid transfer pricing adjustments and potential loss of interest

deductions.

Key factors driving real estate

investment in Asia Pacific

l Unparalleled volumes of global

liquidity

l Relatively cheap debt

l Ongoing re-rating of real estate as

an asset class

l Increased Asia Pacific allocation of

institutional funds

l Low levels of institutional

ownership in Asia Pacific real

estate

l Continuing yield compression in

global real estate markets.15

15 Urban Land Institute Emerging Trends in Real Estate in Asia Pacific 2008.



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There is no question at all the

US slowdown is impacting Asia:

financing options are increasingly

limited. Its not that you cant

obtain financing, even for large

developments, its that banks are

being much more cautious and

its taking longer to secure and

close the deal on terms that are

different than before.

Morgan Parker,

President,

Taubman Asia

Capital flows in Asia

Asian real estate has seen a broadening of its capital base away from real estate

developers into other equity-based sources over the past decade. Although

financing in Asia remains privately driven, as the globalisation of real estate

continues, other types of public capital flows are beginning to emerge in the

market.

Between the varying types of public and private debt and equity (see table

below), private debt and equity funding continues to dominate as bank loans and

funds remain the key sources of capital in the region. Real Estate Investment

Trusts (REITs) have emerged in places with fanfare over the past couple of years,

while securitised financing remains some way off for many Asian markets.

Private

Bank loans

l Debt leverage still popular

form of financing in Asia

l Prime rates in Asia not set to

change dramatically

Real estate funds

l Majority of real estate capital

in Asia

l Asian and overseas funds

remain very active

l Australian funds investing in

Asia

Public

Securitised financing

l Little traction in Asia for

CMBS

l CDOs have yet to become

active in Asia

Real Estate Investment Trusts

l Market correction following

period of overvaluation and

excessive speculation

l Yield compression means

many are performing below

NAV

Debt

Equity



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Private capital is king

The sub prime crisis in the US had a significant impact on US and Europeanlending attitudes. As banks become more selective over loans in the real estate

sector, the debt-driven growth in real estate of the past few years has come

to an end. In response, the Federal Reserve decreased interest rates towards

the end of last year and recently again to around 2 percent, while the Bank of

England is expected to decrease rates to an average 5 percent over the coming

two years.16

The response in Asia has been mixed, affected to a large extent by domestic

market conditions. However, the majority of countries are forecast to maintain

relatively high rates in the face of robust economic activity, with average prime

lending rates for the region forecast at around 8 percent and most countries

expected to remain above 6 percent.17

With private equity and bank loans remaining the major forms of real estate

capital in the region, debt funding is expected to continue to support much of

the real estate investment immediate future. As one real estate executive put

it, Some of the major real estate funds have significant balance sheets and can

afford not to rely on loans, however, most real estate investment in Asia requires

debt, and this will remain the norm for some time to come.18

Real estate funds are a dominant source of real estate financing in Asia. With

many banks sitting on large amounts of fund capital awaiting allocation, the

region has become a key target. The opportunistic funds of the past that had

viewed Asia as high risk are starting to dwindle, and longer-term perspectives on

the sustainability of the regions real estate market are now prevailing.

The regions generally low interest rates are expected to continue to support the

activity of private equity in the region, as alternative sources of finance, remaining

the key source of finance over Asias emerging REIT and collateralised mortgage-

backed securities (CMBS) markets.

Cross-border investments around the region are expected to continue to grow.

Much of this will be driven by diversification of global funds as managers view

Asia as a less opportunistic destination and local markets remain less attractive.Debt may be less available globally this year, but equity is expected to remain in

healthy supply.

16 Economist Intelligence Unit, Nov 2007.17 Economist Intelligence Unit, March 2008.18 KPMG and FTSE interview with the regional director of a professional real estate services firm.



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Public financing developing

Debt leverage in Asia remains the predominant form of real estate financing however, this has primarily been supplied by banks. Although the securitisation

of real estate assets has brought additional liquidity and transparency to markets

and is often seen as an innovative financial product, it has not been without

problems. Under normal market conditions it spreads risk, however, what has

emerged in the US and Europe is often a lack of knowledge of where this risk

lies.

Asia on the other hand, has largely been sheltered from this recent problem, as

securitised financing has not yet properly taken off around the region. Where

it has, in the form of commercial mortgage-backed securities (CMBS), this has

mainly been in Japan, Australia and Singapore, which together account for over

90 percent of transactions in a relatively small market.19Meanwhile Hong Kong,

Taiwan, Malaysia and China have begun to introduce CMBS albeit, tentatively

and even more risky products, such as collateralised debt obligations (CDOs),

are yet to even emerge in this part of the world.

One reason CMBS have not appeared in most parts of Asia rapidly, is the easier

availability of finance from private equity and REITs sources of finance that at

present meet most real estate financing needs. Although in time, it is expected

that CMBS will gain better traction around Asia as capital flows continue to

broaden. One investment banker commented thatSecuritised finance will

eventually become more prominent in Asia. Regulators will be careful given what

has happened in the US, but it will continue to emerge.

More and more countries have begun adopting REITs or REIT-like legislation in

recent years, and although REITs have been around for more than 30 years in the

US and Australia, it has been in the past five years that their growth has really

boomed around the world. Tax transparency plus mandatory high distributions

offered by REITs make them an attractive proxy for holding real estate.

Moreover, these factors underpin their liquidity as an asset class. ING Real

Estate explains the rationale for investing in REITs as being liquidity, competitive

total returns, diversification via low correlation to broad equities and bonds and

diversification by geography.20

Asian REITs have had an impressive start and have grown by a compound annual

growth rate between 2004 and 2007 of over 35 percent to reach a combined

value of over USD80 billion around 12 percent of the global value. Meanwhile,

a number of REITs around the world have been trading at above average

discounts to Net Asset Value, as they reflect the correction in real estate values

in certain markets.

Around Asia this trend has also emerged and with REITs being impacted by

continued yield compression, interest in them has declined recently. This has

led some market commentators to reappraise the prospects for REITs, while in

some cases triggering opportunities for merger and acquisitions.21

19 Urban Land Institute Emerging Trends in Real Estate in Asia Pacific 2008.20 ING Real Estate Global Vision 2008.21 KPMG and FTSE interviews with industry participants.



19/40

Real Estate Investment in Asia Pacific Migrating capital

17




20/40

18



Outlook for real estate products in Asia

As US and European banks tighten lending to the real estate sector in response

to sub-prime lending problems, eyes have turned to Asia for new and continuing

opportunities. It is unlikely that Asia will be immune to these issues, but the

region will not be as severely impacted as the US and Europe.

Meanwhile, Asian real estate is emerging as its own growth engine. With

established markets such as Japan, Hong Kong and Singapore demonstrating

robust real estate fundamentals, many of the emerging markets such as China,

India and Vietnam, are also providing some, albeit more limited opportunities for

investors.

In this section, we take a look at three areas of real estate investment in Asia:

REITs, real estate funds and real estate derivatives. We discuss how global

trends are expected to impact these three areas over the remainder of the year

and how they will continue to contribute to Asias growing real estate sector.

Real Estate Investment Trusts22

Rapid growth has suddenly slowed

REITs in Asia have had a tough ride in recent months. With the tightening of

credit, yield compressions and differing views on the price of underlying assets,many REITs have been trading at a price below their net asset value. This is a far

cry from their rapid growth over the past few years.

The first Asian REIT arrived in Japan in 2001, and the market grew at an

incredible rate from around USD 2 billion in 2001 to USD 82 billion six years later

and this is only the beginning of Asias REIT journey.

Growth, however, has been uneven around the region. Japan dominates, with

an estimated 54 percent of market cap at March this year, followed by Singapore

with around 28 percent. In terms of the number of REITs, Japan dominates again

with 42 of the markets 113 REITs, with Singapore and Thailand following behind.

22 The term REIT refers to both REITs and REIT-like structures.



21/40



Why has Asias REIT story been so successful? In essence, REITs appeal to

direct real estate investors by offering a range of benefits:

l Diversification:REITs allow investors to invest in different properties in

various geographical locations, with a variety of lease terms and tenant profiles,

without the associated risks of owning the real estate.

l Liquidity:REITs are a more cost-effective method of gaining exposure to real

estate due to their higher liquidity than investing directly in the underlying

asset, coupled with low transaction or holding costs. The liquidity benefit is

underpinned by tax transparency and the mandatory high distributions required

of REITs, which make them a proxy for holding real estate.

l Efficiency:REITs in Asia are generally required to pay annual dividends of up

to 90 percent of earnings, limiting the impact of management discretion on

dividend returns to investors and encouraging a constant return to investors.

Asian REITs have typically started with single-geography and single-market

strategies. However, as they have gained success, many have started

diversifying into multiple geographies and markets. For example, approximately

one quarter of all REITs in Singapore and Hong Kong have assets outside in more

than one country.

Asset diversification can benefit the value and income of a REIT, providing assets

are valued expertly and properly managed with the aim of ensuring a stable cash

flow, not only growth. On the other hand, geographic diversification can bring the

risk of managing exchange controls when transferring cash, and valuations dont

always reflect this.2

Number of REITs by country, 2001-Q1 2008

120

100

80

60

40

20

0

Japan

2000 Q1 20082001 2002 2003 2004 2005 2006 2007

Singapore Thailand Malaysia Taiwan

Hong Kong South Korea

Source: Bloomberg, APREA

23 Fitch REITS: Singapore and Hong Kong June 2007.



22/40

20



Market cap by country, 2001-Q1 2008 (USD billion)

30

20

10

0

40

50

60

2000 Q1 20082001 2002 2003 2004 2005 2006 2007

70

80

90

Japan

Thailand

Source: Bloomberg, APREA

Singapore

South Korea

Hong Kong Taiwan Malaysia

Top 10 REITs in Asia by market cap, 31 March 2008

S/N

1

2

3

4

5

6

7

8

9

10

Name

Nippon Building Fund Inc

Japan Real Estate Investment Corporation

Link Reit

Capitamall Trust

Fortune Reit

Japan Retail Fund Investment Corporation

Ascendas Real Estate Investment Trust

Capitacommercial Trust

Nomura Real Estate Office Fund

Japan Prime Realty Investment Corporation

Ticker

8951 JP Equity

8952 JP Equity

823 HK Equity

CT SP Equity

FRT SP Equity

8953 JP Equity

AREIT SP Equity

CCT SP Equity

8959 JP Equity

8955 JP Equity

Market Cap

(USD billion)

6.85

5.15

4.79

4.17

3.02

2.44

2.29

2.24

2.16

2.06

Country

Japan

Japan

Hong Kong

Singapore

Singapore

Japan

Singapore

Singapore

Japan

Japan

Date of

establishment

9/10/2001

9/10/2001

11/25/2005

7/17/2002

8/12/2003

3/12/2002

11/19/2002

11/5/2004

12/4/2003

6/14/2002

Source: Bloomberg



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Stable performance

On the whole, Asian REITs have performed well over the last few years, makingrecent declines all the more noticeable. Average REIT yields since the second

quarter of 2006 have been around 4.3 percent in Singapore, 3.3 percent in Hong

Kong and 3.1 percent in Japan. This compares favourably against average non-

REIT real estate yields of 1.2 percent in Singapore, 2 percent in Hong Kong and

0.5 percent in Japan for the same period.24

In the past nine months, REITs have been significantly impacted by changing

market conditions, with many selling at prices considerably below their net asset

values. As liquid investments, REITs are hit more immediately when market

sentiment changes.

Many real estate fund managers interviewed for this report held the view that

their inability to retain earnings has made them vulnerable, but as Asian REITs

require income from rental (unlike some other REITs globally), having good

underlying assets is of benefit. If [the REIT] has good underlying investments,

they should be able to maintain earnings, commented one REIT manager in

Singapore.25

However, despite the general view of interviewees that real estate fundamentals

are solid in most markets in Asia and that many REITs have good underlying

assets, current performance is bringing into question the sustainability of some

of the smaller REITs, which may lead to consolidation in some markets.

REITs have been sold off quite

severely it appears to be

an overreaction given in Asia

they derive 100 percent of their

earnings from relatively low risk

contracted rentals.

Matt Nacard,Executive Director,

Macquarie Capital

Securities

Top shareholder

Japan Trustee Services Bank


The Childrens Investment Fund Management

Capitaland Ltd

Cheung Kong (Holdings) Limited


Ascendas Land Singapore

SBR Pte. Ltd



Market sector focus

Residential Office Industrial Retail

Geographic focus

Japan

Japan

Hong Kong

Singapore

Hong Kong

Japan

Singapore

Singapore & Malaysia

Japan

Japan

24 FTSE EPRA/NAREIT Japan, Hong Kong and Singapore REIT and Non-REIT Indexes.25 KPMG and FTSE interview with a Singapore REIT manager.



24/40



Average quarterly REIT yields by country, Q1 2006-Q1 2008

8%

7%

6%

5%

4%

3%

2%

1%

0%Q2 2006 Q3 2006 Q4 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008

Australia

Hong Kong

New Zealand

Japan

Singapore

Source: FTSE EPRA/NAREIT REIT Index

Total REIT Index Returns by country, 2006-Q1 2008

2,000

1,800

1,600

1,400

1,200

1,000

800600

400

200


FTSE EPRA/NAREIT Hong Kong REIT Index FTSE EPRA/NAREIT Japan REIT Index

FTSE EPRA/NAREIT Singapore REIT Index FTSE EPRA/NAREIT Australia REIT Index

FTSE EPRA/NAREIT New Zealand REIT Index

Source: FTSE Group 2008

Total Non-REIT Index Returns by country, 2006-Q1 20083,000

2,500

2,000

1,500

1,000

500


FTSE EPRA/NAREIT Hong Kong Non-REIT Index FTSE EPRA/NAREIT Japan Non-REIT Index

FTSE EPRA/NAREIT Singapore Non-REIT Index FTSE EPRA/NAREIT Australia Non-REIT Index

Source: FTSE Group 2008



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A temporary speed bump

REITs may have been the most immediately impacted by changing marketsentiment in Asia, but the general view of interviewees is that returns should

continue to be good over the remainder of the year.

Many REITs have taken a long-term perspective on their investments, and as

a result often have good underlying assets that provide a constant dividend to

investors. The recent exiting from many REITs does not necessarily reflect their

value and the REIT sector has an opportunity to outperform other classes of

securities over the remainder of 2008.

Long-term performance will ultimately depend on two factors: the quality of the

asset and the quality of the REIT manager.

However, negative market sentiment is expected to impact some REITs that may

be looking to list, as one Asian REIT manager commented: The timing may not

be right to list at the moment. Its not that they wouldnt provide returns, but the

markets a little shaky at the moment.

This has been seen recently as a number of REITs have delayed their listing

plans. For example, Singapores MacarthurCook REIT in January this year

announced a delay to its fund raising,26while David Tan, chief executive of APL

Japan Trust Management, the manager of APL Japan Trust REIT, explained that

uncertainty was also causing them to delay. Even though the fundamentals of

our transaction are sound, there is a risk of post-listing price weakness as a result

of negative market sentiment, he remarked.27

Interviewees generally held the view that the full impact from the US credit crisis

should have worked its way through the system by the third quarter of this year,

with expectations that market sentiment in Asia will improve by end of the fourth

quarter or early 2009.28

Net Asset Value premium/discount by region, Nov 2007

REITs and private equity funds

require a good pipeline of

quality assets. If there is sound

management expertise in fund

managers to source, develop and

incubate assets to bring them to

their full performance potential,

they should be able to weather

the uncertainties this year.

Ng Hsueh Ling,

CEO,

Korea and Japan,

Ascendas

10%

-20%

-40%

20%

0%

-30%

-10%

JREIT

HongKong

Australia

Singapore

World

US

ConinentalEurope

US

JapanREOCs

Source: ING Real Estate Global Vision 2008

26 AFX Asia Singapores MacarthurCook REIT delays equity fund raising Jan 2008.27 Financial Times Reit woes Nov 2007.28 KPMG and FTSE interviews with industry participants.



26/40

24



Consolidation will begin in

Japan. It wont necessarily be the

better performers taking over the

poorer performers. Well see a

combination of both the smaller

REITs going private as well as

the larger, more established

REITs taking over the newer less

established.

David Lewis,

Partner,

Real Estate,

KPMG in Japan

Consolidation a natural progression

Meanwhile, there has been some degree of expectation that consolidationin some of the REIT markets will occur, in particular Japan and Singapore.

A director at an Asian real estate fund commented: Theres definitely an

opportunity for consolidation in the market, especially in more developed markets

like Singapore and Japan. Consolidation has started, with Jones Lang LaSalle

Inc gaining control of eAsset the first takeover in Japans REIT market.29

Other interviewees asked on the subject, generally agreed with this sentiment,

and added that Singapore may follow. One commented that, itll be later than

Japan, and to a smaller degree. Its a natural progression for any market.30

REITs will remain important going forward

Despite Asian REITs hitting a speed bump at the moment, their longer-term

outlook remains positive. One forecast sees Asias REIT market exceeding a

market capitalisation of USD 100 billion by 2010, with the following seen as key

reasons for this outlook:

l The bulk of real estate in Asia is held in corporate hands, weighing heavily on

company balance sheets and calling into question its long-term sustainability.

l India and Chinas growth will have cascading effects on regional economies,

irrespective of when they introduce their own REIT markets.

l Asia has the lowest level of securitised real estate in the world with potential

to increase the level of securitisation of investment-grade real estate by four

times.31

There still remain a number of markets in Asia in the early stages of development

and others without REIT-like legislation in place.

With regards Asias two fastest growing economies, China and India, the view of

several interviewees was that India is likely to have REIT-like legislation in place

within two years, while China is likely to follow in the next three to four years.

This will help solidify Asias position in the global REIT market.

In addition, there has been increasing interest in Shariah-compliant financing

(see box) around Asia. The first Islamic REIT was listed in Malaysia in 2006, the

Al-Aqar KPJ REIT, launched by KPJ Healthcare Bhd with more than USD 130

million focused on investing in hospitals. Where Shariah-complaint investing

has at times been restrictive by typical investment bank approaches, REIT and

Shariahrequirements are actually fairly compatible, making them an attractive

proposition.

29 Shanghai Daily Japan REIT market sees 1st takeover Nov 2007.30 KPMG and FTSE interview with a director of a Singapore-based REIT.31 APREA The Growth of REITs in Asia 2007.



27/40



Eventually, Asian REITs will be looking to gain experience from the Australian

market, where A-REITs (formally known as LPTs) have been in operation forseveral decades. Australia is now one of the most mature REIT markets in

the world and its growth has been assisted by substantial investment from

Australias superannuation fund. Nearly 10 percent has been allocated to real

estate investments, with the result that A-REITs are worth more than USD110

billion today.32More significantly, A-REITs experienced rapid growth followed by

a period of consolidation, a pattern that many other Asian REIT markets are now

following.

Shariah-compliant REITs

Shariah law governs all aspects of Muslim life, providing guiding principles for

moral and economic decisions. Of particular relevance to the financial world is

the prohibition against interest, known as riba, which is considered unearned

income and therefore unjust. In addition, the law prohibits areas for investment,

such as casinos or bars.

The requirements of Sharia law and REITs are fairly compatible. The only

difference in a Shariah-compliant REIT is the use of the ijara(lease financing).

With an ijara, the REIT would lease property from the title holder and pay

money upfront for the purchase price. Economically, the REIT is the same

as the owner, and for tax purposes the REIT owns the property. However,because this is styled as a lease and treated as a lease for Islamic purposes,

the REIT can be Shariah compliant.

This compatibility has opened up a number of opportunities for investors. With

around 45 percent of the worlds Muslims living in Asia, the development of

Shariah-compliant REITs provides viable alternative opportunities for Islamic

investment.

Source: Michele Lerner Shariah Compliance Opens Doors for Islamic REITs March 2006

The opportunity for REITs in

Asia is huge, as shown by the

success of the Singapore REIT

market in recent years. Korea and

Thailand now have nascent REIT

markets while the Philippines and

India have REIT legislation under

discussion. And this is before

taking into account the massive

potential of China-based REITs.

Andrew Weir,

Partner in Charge,Property and

Infrastructure,

KPMG China

Real Estate Funds

The dominant investors

Real estate funds remain the dominant source of capital for real estate

investments in Asia, and this look set to continue. An increasing number of

real estate funds have been active in Asia, with the majority of Watson Wyatts

Top 30 real estate funds list being present in the region. As the director of

one professional real estate services firm commented, Weve seen a growing

number of US and European funds take an interest in real estate in Asia over the

past five years many of which have been very successful.

32 Urban Land Institute Emerging Trends in Real Estate in Asia Pacific 2008.



28/40

26



Top 30 real estate funds

A considerable amount of

private equity real estate

opportunity fund capital has been

raised by major investment banks

and others over the past couple

of years. Much of this remains to

be invested and much is targeted

on Asia. Little has changed in the

outlook for Asia.38

Real estate funds have generally approached investing around the region in two

ways. The first is opportunistic funds, which are typically looking for high capitalgrowth, often focusing on such markets as India, China and Vietnam. The second

is long-term funds, which are typically seeking assets with the potential to

provide steady longer-term returns from rents.

Asias ability to provide a platform for different types of investors is testament to

its growing maturity. Opportunistic investors have been making returns alongside

funds looking for steadier returns.

1

2

3

4

5

6

7

8

9

1011

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

Name

RREEF

AEW Capital Management

ING Real Estate

JPMorgan Asset Management

LaSalle Investment Management

UBS AG/UBS Global Asset Management Real Estate

AMVESCAP

Hermes Pensions Management

Hetiman

Oppenheim Immobilien-KapitalanlagesellschaftStandard Life

Arlington Securities

Morley Fund Management

Rockspring Property Investment Managers

Schroders

BlackRock

Russell Investment Group

Cushman & Wakefield Investors

Credit Suisse

Morgan Stanley

Lend Lease

DTZ Investment Management

Henderson Global Investors

GE Asset Management

Scottish Widows Investment Partnership

Cohen & Steers Capital Management

Kempen Capital Management

Perennial Investment Partners

The Bank of New York Company

Prudential M&G

Main country of domicile

United States

United States

Netherlands

United States

UK/US

United States

United States

United Kingdom

United States

GermanyUnited Kingdom

United Kingdom

United Kingdom

United Kingdom

United Kingdom

United States

United States

United Kingdom

Switzerland

United States

Australia

United Kingdom

United Kingdom

United States

United Kingdom

United States

Netherlands

Australia

United States

United Kingdom

AUM (USD billion)

38.9

38.5

37.4

36.3

29.5

20.9

18.6

16.2

14.6

12.711.0

9.7

8.2

8.1

8.1

7.7

7.6

6.4

6.0

5.2

4.6

4.3

4.0

3.5

3.4

3.4

3.4

2.6

2.6

2.5

Source: Watson Wyatt Global Alternatives Survey 2007

33 ING Real Estate Global Vision 2008.



29/40



Investment in Asia by real estate funds is expected to continue to grow,

maintaining its position as the key source of capital for the region. A director in aUS real estate fund remarked: With the tightening of credit around the region,

real estate funds will remain one of the key sources of capital flow for many

investments. Respondents to a survey conducted by the Urban Land Institute34

were of the view that Private Equity/Opportunity/Hedge Funds and Institutional

Investors/Pension Funds are to remain the two main sources of equity capital for

the region, anticipating a large increase this year.

Recent market downturns do not appear to have dampened interest in Asian real

estate with new funds being invested into, for example MGP Asia III Fund35and

CalPERS.36The US and European funds are not the only ones bringing capital

into Asia, as Australian funds are also investing heavily in the region. With its

compulsory superannuation pension scheme mandating an allocation of 8 percent

in real estate, Australia is becoming a significant investor beyond its own shores.

It is estimated that Australian real estate funds acquired around USD 12 billion in

overseas assets in 2006.37

Meanwhile, private equity funds continue along their opportunistic path in Asia.

Most have focused on investing in the underlying assets and exiting through a

trade sale as opposed to listing, which has generally been easier for residential

assets versus commercial. However, many private equity funds have been

turning their attention real estate companies, which in some markets have been

looking for more immediate capital with banks tightening credit.

Asian funds have fared better

The average global performance of real estate funds dropped significantly from

over 33 percent gain in 2006 to a 14 percent loss in 2007. Research by AME

Capital also showed that real estate funds with an Asian mandate did not fare

much better, with 2007 returns of only 0.25 percent.38

The AME Capital analysis was based on the performance of 685 real estate funds

of varying geographic mandates with a combined value of around USD 170 billion

and a median fund value of USD 79 billion.

Asian mandates had managed to withstand much of the sub-prime crisis in 2007,however, eventually market sentiment caught up and its fourth quarter results

significantly impacted the overall performance for the year. Despite the 2007

performance of Asian funds being nothing like their 25 percent returns in 2006,

other regions performed even more poorly, with European and US mandated

funds posting losses of 25 and 20 percent, respectively.

34 Urban Land Institute Emerging Trends in Real Estate in Asia Pacific 2008.35 Australian Financial Review MGPA raring to go with new fund Nov 2007.36 Australian Financial Review CaIPERS invests in Asia Nov 2007.37 Urban Land Institute Emerging Trends in Real Estate in Asia Pacific 2008.38 AME Capital Real Estate Securities Funds Jan 2008.



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28



2007 returns, by mandate

Real estate securities funds, Dec 2007

Mandate

European

Global

Global REIT

US

Australian

Asian

Dec 07 return

-3.42%

-4.21%

-2.12%

-4.35%

-7.14%

-1.64%

Q4 07 return

-12.32%

-11.14%

-12.25%

-13.28%

-13.06%

-6.97%

2007 12-mth return

-24.59%

-14.38%

-14.82%

-20.06%

-9.31%

0.25%

Source: AME Capital Real Estate Securities Funds Jan 2008

Total returns by mandate, 2006-2007

50%

40%

30%

20%

10%

0%

-10%-20%

-30%

Europe

Global

GlobalREIT

US

Australia

Asian

2006 return 2007 return

Source: AME Capital Real Estate Securities Funds Jan 2008

A wait and see approach

The general view of interviewees is that most real estate funds are adopting a

wait and see attitude towards new investments in the market, at least for the

next couple of quarters. On the whole, availability of deals is considered to be

good, but issues lie with the high pricing of some of the deals and difficulty in

securing financing.39

On the whole, the approach of real estate funds in Asia depends on their attitude

to investing:

l For opportunistic funds, a number of new distressed asset funds have

emerged, in particular from US real estate fund managers

l

While long-term funds are generally taking a wait and see approach

Some of the larger deals may be

impacted by reduced availability

of debt. But there are still plenty

of deals in the market it just

depends on whether you have the

right value-proposition. I dont see

it drying up landlords are still

selling off portfolio.40

39 KPMG and FTSE interviews with real estate fund managers.40 KPMG and FTSE interview with a European real estate fund manager.



31/40



However, despite many real estate funds holding back in terms of making

investments, many are still looking at deals: Were still looking, were just notin a hurry. In particular, were waiting for some assets to be re-priced before we

make a move.41

Fund managers are expected to eventually start investing again, most likely in the

third and fourth quarters. Funds have money to spend. They can afford to wait

out the first two quarters, but will be looking to spend towards the end of the

year,said one US fund manager.42

Whether spending is triggered by decreases in sellers prices remains to be

seen, as many executives do not expect prices to decline until early 2009.

Despite many real estate funds taking a more cautious approach for the time

being, Asia holds a lot of potential for investment. The credit crunch will force

many banks to revisit their lending policies resulting in higher quality loan

portfolios and improved returns.

Real Estate Derivatives

The new big thing

Real estate derivatives are emerging in Asia, albeit on a small level. Allowing

investors to take instant positions on the real estate sector, real estate

derivatives do not require the investor to trade in the physical assets. This is

immediately attractive to investors as it allows them to increase or decrease

exposure instantly while not having the time lag of buying the underlying asset

and without the additional costs associated with such a transaction.

While other asset classes have developed derivatives markets, real estate has

lagged behind. The key reason is due to problems with developing an iron clad

measure for a markets performance. Reliable and universally-agreed data is

essential to the development of an index that can be used for derivatives trading,

followed by an infrastructure to support the trades.

Real estate derivatives were first introduced in the UK with a landmark three-

year all-real estate total return swap completed in late 2004. The UK market

has since grown six-fold from USD 620 million in 2005 to an estimated USD 3.6

billion in 2007, as demand has rapidly increased and products have become more

complex. From its first over-the-counter trade, the UK real estate derivatives

market now handles such products as inter-sector swaps, 1-2 year and 5-10 year

swaps, sub-sector swaps, options, as well as overseas swaps and spreads.

41 KPMG and FTSE interview with a European real estate fund manager.42 KPMG and FTSE interview with a US fund manager.



32/40

30



This rapid development would not have been possible without the following core

fundamentals:

l A reliable and accepted index

l Standardised documentation, accounting and taxation treatments

l An established administrative framework.

Continental Europe followed soon after, with the first total return swap

completed in France at the end of 2006, based on IPDs French Index, and a

total return swap in Germany based on IPDs DIX German Property Index in early

2007. Australia completed its first trade, a commercial real estate swap between

Grovsenor and ABN Amro in May 2007.

These trades demonstrate how other countries have benefited from the UKs

development. For example, Frances first swap was regionally-traded, as opposed

to the UKs all-real estate trade.

Testing the waters

Asia has not been too far behind. Hong Kong was home to Asias first real

estate derivatives trade, a one-year price return swap of less than USD 13

million conducted between ABN Amro bank and Sun Hung Kai Financial in

February 2007. It was small by global standards, but a move in the right direction.

Subsequent trades have followed, but have remained short one-year swaps due

to the high volatility of Hong Kongs residential real estate market.

These trades have been based on The Hong Kong University Real Estate Index

Series (HKU-REIS), developed between GFI-Colliers and Hong Kong University,

and comprises four residential indices: one covering the whole region and three

other regional sub-indices.

Meanwhile, a trade between Royal Bank of Scotland and Grosvenor took place in

Japan in July 2007, based on IPDs J-REIT monthly indicator, marking it the first

commercial real estate derivatives trade in Asia.

Challenges for new markets

A number of benefits can be gained from a successful real estate derivatives

market, in particular

l Replicating real estate exposures without having to trade the physical asset,

thus saving on transaction costs, stamp duty, and time

l Gaining sub-sector and region-specific exposures without needing to establish

portfolios of physical properties which may be tightly held

l Speed and flexibility in selecting the size of real estate exposures



33/40



l The ability to short real estate as an outright position or as part of an asset

allocation adjustment to a real estate portfolio.43

However, these benefits can only be realised when a number of challenges are

successfully overcome, from the buyer and seller sides, as well as the underlying

market.

l Buy-side challenges:Buyers need the confidence that products will be fairly

priced on entry and exit, which underpins the necessity for an independent and

robust index to be in place as well as market makers (typically licensed banks)

to be active.

l Sell-side challenges: Sellers are typically used to taking long exposure on

positions and will also need the confidence to take short or hedged exposures.

l Market conditions:Real estate markets need to be sufficiently volatile for

investors to trade off one another frequently and generate liquidity. A relative

price-stable market is not necessarily attractive to traders.

Asia well positioned

Derivatives markets flourish when investors have differing views on the

market and trade against one another. As a result, Asia offers fertile ground for

derivatives traders since, as one senior vice-president of an investment bank

commented, Investors trade quickly in and out of real estate here (in Asia), and

opinions can range widely on markets even on specific cities.

Hong Kong is considered by some as one of the best markets in Asia for real

estate derivatives trading. With around 15,000 residential transactions per month,

it offers accurate index data and rapid swings in residential real estate prices

making a volatile market attractive.

Japan is also considered attractive due to divergent views on the future of the

market. One director of a professional real estate firm commented that You

have a difference of opinion about where Japans real estate market will go.

These are ideal conditions for traders.

It will still take time for Asia to fully develop real estate derivatives, and countries

such as China and India will remain some way off without reliable real estate

data.

For example, the FTSE EPRA/NAREIT Global Emerging Market Index is due for

release on 14 July 2008. With detailed coverage of the Asia Pacific Region, the

index will provide investors with more reliable data for their investments.

Still at an early stage in its development, real estate derivatives will eventually

emerge into a core financial product for the region.

43 AFMA Property Derivatives 2008.

The data and information

in markets around Asia is

improving. As a result, quality

indices are being developed for

the region which will support

the development of a property

derivatives market.

Fran Thompson,

Director,

Asia Pacific,

FTSE Group



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At KPMG, we are committed to providing quality service to our clients. KPMGs

Global Real Estate and Construction group is represented in all major international

markets, with industry knowledge and training shared among member firms, thus

enabling them to assist clients in recognising opportunities and implementing

changes necessitated by industry developments.

Audit

Clients look to KPMG member firms to provide independent and objective

assurance on the reliability of financial information for statutory, management,

and external capital raising purposes. We have extensive experience and

knowledge in initial public offerings and capital raising exercises in the Property

sector in local and international markets including REITs, listed and unlisted

funds. Our US Capital Markets Group, located in China, helps facilitate SEC filing

reviews in the US Capital markets.

Tax

KPMGs tax professionals analyse organisations and proactively identify tax-

related opportunities and challenges. Services included tax restructuring, tax

compliance and planning, tax due diligence, indirect taxes, transfer pricing,

international executive services, regulatory, and foreign exchange.

Advisory

Risk Advisory Services

Our Risk Advisory Services focus on key risk areas accounting and reporting,

information, operations, finance and treasury, regulatory compliance and controls to consistently help organisations manage those risks and improve on

business effectiveness.

Our Internal Audit Services (IAS) focus on the areas of internal audit, corporate

governance reviews, business risk management, process reviews, management

reporting, procedures and controls. Our IAS professionals can help organisations

to maintain effective and efficient controls, which are designed and functioning to

manage organisational and strategic risk.

Financial Advisory Services

Our Financial Advisory Services focuses on four core service areas Transaction

Services, Corporate Finance, Restructuring Services, and Forensic. Our servicesincludes deal origination, transaction evaluation, deal structuring, financing

options, modelling support, negotiation and completion, post-deal integration, and

IPO/trade sale exit.

About KPMG

China

8th Floor, Tower E2

Oriental Plaza

1 East Chang An Avenue

Beijing 100738

China

Tel: +86 (10) 8508 5000

Hong Kong SAR

8th Floor, Princes Building

10 Chater Road

Central

Hong Kong

Tel: +852 2522 6022

Australia

10 Shelley Street

Sydney NSW 2000

AustraliaTel: +61 (2) 9335 7000

Japan

Marunouchi Trust Tower North

8-1 Marunouchi 1-chome

Chiyoda-ku

Tokyo 100-0005

Japan

Tel: +81 (3) 3266 7233

Singapore

16 Raffles Quay #22-00

Hong Leong Building

Singapore 048581

Tel: +65 6213 3388

KPMG is a global network of professional firms providing audit, tax, and advisory

services, with an industry focus. With more than 123,000 people worldwide, the aim

of KPMG member firms is to turn knowledge into value for the benefit of clients,

people, and the capital markets.



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About FTSE Group

FTSE Group is a world-leader in the creation and management of indexes. With

offices in Beijing, London, Frankfurt, Hong Kong, Madrid, Paris, New York,

San Francisco, Boston, Shanghai and Tokyo, FTSE Group services clients in 77

countries worldwide. It calculates and manages the FTSE Global Equity Index

Series, which includes world-recognised indexes ranging from the FTSE All-

World Index and the FTSE4Good series, as well as domestic indexes such as

the prestigious FTSE 100. The company has collaborative arrangements with

the Athens, AMEX, Cyprus, Euronext, Johannesburg London, Madrid, NASDAQ,

Singapore and Taiwan exchanges, as well as Nomura Securities and Xinhua

Finance of China. FTSE also has a collaborative agreement with Dow Jones

Indexes to develop a single sector classification system for global investors.

FTSE indexes are used extensively by investors world-wide for investment

analysis, performance measurement, asset allocation, portfolio hedging and for

creating a wide range of index tracking funds. Independent committees of senior

fund managers, derivatives experts, actuaries and other experienced practitioners

review all changes to the indexes to ensure that they are made objectively and

without bias. Real-time FTSE indexes are calculated on systems managed by

Reuters. Prices and FX rates used are supplied by Reuters.

Hong Kong

59th Floor

The Center

99 Queens Road Central

Hong Kong

Tel: +852 2230 5800

Fax: +852 2230 5804

Sydney

Level 29, Chifley Tower

2 Chifley Square

Sydney NSW 2000

Australia

Tel: +61 9293 2866

Fax: +61 2 9293 2828

Tokyo

Yamato Seimei Building 10F

1-1-7 UchisaiwaichoChiyoda-Ku

Tokyo 100-0011

Japan

Tel: +81 (3) 3581 2764

Fax: +81 (3) 3592 8590



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About APREA

13 Amoy Street #02-01

Far East Square

Singapore 049955

Tel: +65 6438 1110

Fax: +65 6438 5550

e-Mail: [email protected]

www.aprea.asia

The Asian Public Real Estate Association (APREA) is the leading professional body

representative of the publicly traded real estate sector in Asia.

APREA is a non-profit industry association that works to encourage greater

investment in the listed real estate sector in Asia Pacific through the provision

of better information to investors, improving the general operating environment,

encouraging best practices and unifying and strengthening the industry.

APREAs mission is to:

l Promote the listed real estate sector in the Asia Pacific region to domestic and

foreign investors

l Develop a unified and powerful professional industry body

l Represent the sector to governments and regulators to improve the

commercial operating environment for members.

Based in Singapore, its membership comprises listed real estate companies,

listed real estate trusts, unlisted property funds, investment managers,

investment banks, property securities fund managers, institutional investors, real

estate consultants, corporate advisors, stockbrokers, investment advisors and

universities.

The APREA Institute, APREAs education and training arm, provides the

foundation for raising standards in the industry through the provision of practicaland applied training programs. Its Certificate of Real Estate Investment Finance

program is the only course of its kind in the region to be both developed and

delivered by industry practitioners.

APREAs achievements in education and information dissemination, and focus on

improving the general real estate operating environment, have firmly entrenched

it as the leading representative body for the industry in the region. In particular,

its achievements in driving regulatory improvements within the listed real

estate trust sector extend beyond existing markets and pave the way for the

emergence of new markets in other Asian countries.

APREA membership is the gateway to a network of the industrys most

influential decision makers and provides the opportunity to influence and

participate in the development of the

Documents

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