The Emerging Powerhouse of South East Asia: What Does It Mean

The Emerging Powerhouse of South East Asia: What Does It Mean for Real Estate Investors?May 2015

Contents

03 Executive Summary04 Introduction06 Powering SEA : Drivers of Growth10 Of Barriers and Stumbling Blocks13 What Does This Mean for Investors?21 In a Nutshell

Executive Summary

• South East Asia (SEA) took some years to recover after the onslaught of the Asian Financial Crisis. China and India caught the attention of investors looking towards other emerging markets in Asia when their economies started expanding at double digit levels.

• Whilst the idea of an economic bloc in SEA has been around for over 30 years, this regional integration should finally come to fruition with the formation of the ASEAN Economic Community (AEC) in 2015.

• The AEC creates a single market of over 600 million people overnight, making the region more attractive than any single nation would be on its own. The long-term prospects for the region look promising, and likewise the property market should eventually benefit from this integration.

• Meanwhile, there are enabling factors shaping the property markets across SEA. The continual urbanisation trend supported by a young, literate population and growing middle class, coupled with competitive labour costs, are likely to continue to drive the property markets across SEA.

• Amidst this potential, much of SEA faces challenges of transparency, legal and political risks, and corruption. Nonetheless, some areas have seen improvement in recent years and some of these risks can be mitigated.

• In this paper, we discuss the above drivers and challenges, and highlight some of the investment opportunities across SEA’s property markets. In the emerging economies of SEA, these opportunities include Manila office, Bangkok retail, the logistics and residential sectors in Jakarta, and the hotel market in Myanmar. In Singapore, the mature commercial gateway to the rest of SEA, we favour the office and high-end residential sectors.

• We also include the key takeaways from our discussions with regional and global investors who are active in SEA.

Introduction

South East Asia (SEA) is a diverse region within Asia that has seen tremendous change within the last 20 years. It comprises 10 nations, namely Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam. SEA has emerged from a struggling economic region, hit hard by the Asian Financial Crisis (AFC) in 1997, to an emerging economic powerhouse in Asia Pacific, offering a range of investment opportunities and an attractive low cost environment for global businesses. The nations of SEA are very diverse in terms of culture and demographics, as well as economic size and growth drivers. They include the geographically small city-state of Singapore, with a population of 5.5 million, through to Indonesia, which has the world’s fourth-largest population and a land mass of over 1.8 million square kilometres. The youngest in terms of median age is Laos at 21.7 years, while Singapore and Thailand face greying populations with median ages of 38.4 and 37.4 years respectively (see Table 1).In terms of economic size, the smallest is Laos at USD 12 billion in 2014 and the largest Indonesia, 80 times bigger at almost USD 900 billion. Both are driven by agriculture, construction and mining activities. Unlike the rest of SEA, Singapore is driven more by banking and related financial services. In fact, services comprise a majority share (66%) of Singapore’s GDP. Similarly, the Philippines has seen an increase in the importance of its services sector. The sector accounted for 57% of its GDP in 2014, up from 53% in 2004.

Source: Oxford Economics, “Global Economic Databank”, April 2015

China

India

Australia

Malaysia

IndonesiaSingapore

PhilippinesVietnam

CambodiaThailand

LaosBurma

Table 1: ASEAN - a region of very diverse profile

2015 Population

(mil)

2015 Median Age

(years)

2014 Nominal GDP per Capita, US$ (estimated)

2014 Nominal GDP, US$ bil

(estimated)

Main GDP Drivers

Brunei Darussalam

0.4 30.8 38,102 16.1 Industrial Production (oil), Textile, Services

Cambodia 15.4 24.7 1,097 16.9 Services, Textiles, Tourism, Agriculture

Indonesia 252.8 28.0 3,515 889.8 Agriculture, Oil and Gas Mining, Construction

Lao People’s Democratic Republic

6.8 21.7 1,680 11.6 Agriculture, Construction, Hydropower, Mining, Services

Malaysia 30.1 27.8 10,810 327.0 Agriculture, Oil and Gas Mining, Public Admin and Defense

Myanmar 53.7 29.4 1,204 64.6 Agriculture, Services, Transportation, Business Services

Philippines 100.0 23.1 2,836 284.5 Agriculture, Retail Trade, Wholesale Trade

Singapore 5.5 38.4 56,259 307.9 Banking and Related Financial, Retail Trade, Wholesale Trade

Thailand 67.2 37.4 5,558 373.8 Agriculture, Retail Trade, Wholesale Trade

Vietnam 92.5 30.2 2,017 186.6 Agriculture, Oil and Gas Mining, Wholesale Trade

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Formation of ASEAN Economic CommunityThe Association of South East Asian Nations (ASEAN) was formed in 1967 as a political entity to collaborate for regional security and stability among the nations in SEA. The GDP for ASEAN collectively grew at a stunning average of 14% per year between 1992 and 1996. However, with the economic crash following the AFC, some of these countries did not recover to their pre-AFC GDP level until 2003, and in the case of Thailand, it was much later, in 2006. China and India caught the attention of investors looking towards other emerging markets in Asia when their economies started expanding at double digit levels in 2003. While China’s market continued at this pace for a number of years afterwards, India’s growth was more sporadic (See Figure 1). In 1995, China’s GDP per capita in US dollar terms was only 40% of that of ASEAN’s. By 2006, it had surpassed it, and has continued to rally upwards thereafter, to 1.8 times that of ASEAN by 2014. India’s GDP per capita, on the other hand, continues to remain below that of ASEAN, although the gap has narrowed from 26% in 1995 to 40% in 2014 (See Figure 2).Even before the AFC, the leaders of SEA understood the need for more economic integration. Thus, although ASEAN started in 1967 as a political entity, it has evolved into an intra-regional economic cooperative group whose purpose now includes promoting the free flow of goods within its member nations. The ASEAN Economic Community (AEC) is the consummation of this regional economic integration, through the establishment of a single market supporting the free flow of goods and services, including labour. In 2003, the deadline for its formation was brought forward from 2020 to 2015, and an action plan to achieve the specific objectives of the AEC was adopted in 2007.It is estimated that this regional integration generates a huge market, to the tune of over 600 million people, with a combined GDP of some USD 2 trillion. By way of comparison, Europe has some 615 million people but produced some USD 18 trillion in 2014. When fully implemented and operational, the AEC has the potential to create 14 million new jobs from 2015 to 2025 and increase the annual growth rate in the region to 7.1% in 2025, from the average growth of 5.1% between 2007 and 2013, according to the report by the International Labour Organization and the Asian Development Bank (2014)i. Based on this projected growth, the aggregated GDP for ASEAN could reach some USD 8 trillion by 2025.

Figure 2: China’s GDP per capita has surpassed that of ASEAN


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Figure 1: China’s economic growth has outpaced ASEAN and India

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The Emerging Powerhouse of South East Asia: What Does It Mean for Real Estate Investors? 5

The large economic and population base of SEA is already translating to significant opportunities through increased inter- and intra-regional trade, regional and domestic tourism, expanded financial and insurance services, and higher demand for logistics services. In the longer term, this regional economic growth will continue to support the development and expansion of the region’s real estate market. Meanwhile, there are several underlying domestic enabling trends that are supporting the property markets in SEA. In the next section we examine some of the major enabling factors.

Increasing Urbanisation• Urbanisation rates across SEA vary significantly, with Singapore (100%) and

Malaysia (74%) being highly urbanised countries. In the case of Indonesia and Thailand, about half live in cities. Overall, the majority of people in SEA (53%) still live in rural areas (see Figure 3).

• An additional eight million people per year will be making the rural to urban migration across SEA from 2015 to 2020 and this will help push the urbanisation rate for the region as whole to above 50%, from 47% today.

Growing Services Sector • Hand in hand with increasing urbanisation is the growth of the services sector. The

economies of Singapore, Malaysia and the Philippines are already largely driven by the services sector. Singapore is the highest, with 66% of its GDP in 2014 relating to services, comprising mostly banking and financial related firms. Given the size of Offshoring & Outsourcing (O&O) activityii in the Philippines, the size of its services sector was some 57% of the country’s GDP in 2014. In Malaysia, the services cluster increased from 43% in 2004 to 53% by 2014, driven in part by the growth in its oil and gas industry, as well as Islamic finance.

Powering SEA: Drivers of Growth

Figure 3: Urbanisation rate rising across ASEAN

Source: United Nations, “World Urbanization Prospects: The 2014 Revision”, June 2014.

Singapore

Brunei Darussalam

Malaysia

Indonesia

Thailand

Philippines

Myanmar

Vietnam

Cambodia

0 20 40 60 80 100 120%

2020 2015 2005

Lao People's Democratic Republic

South East Asia has been a big beneficiary of QE and monetary policy globally. Risks will always unravel but the fundamentals

are relatively strong, particularly in Indonesia and the Philippines. For a long time the political risks were very high but it’s quite attractive from a real estate point of view now.

– Global Financial Advisor

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• The services sector in Indonesia currently has the smallest share of GDP, at just 37% in 2014, with the primary and secondary sectors comprising a combined 63%. There is significant potential for the services sector to increase as urbanisation continues and the economy matures.

• Based on ASEAN Secretariat’s recent report (ASEAN Investment Report 2013-2014), foreign investment into the services sector in ASEAN has grown particularly in real estate, professional, scientific and technical activities, and administrative and support service activities. On the back of this regional economic integration, the regional financial markets will gradually deepen, led by the development of the banking and insurance sectors, which have recently been driven by investment into Singapore, Indonesia and Malaysia.

• Singapore, as the natural commercial gateway to ASEAN, will continue to enjoy attention from businesses looking to set up or expand. The number of companies listed on the Singapore Stock Exchange has grown 2.4 times from 323 in 1996 to 775 by December 2014; with foreign companies accounting for almost 40%. In contrast, over 50% of the 1,752 listed companies on the Hong Kong Stock Exchange in December 2014 are Chinese and foreign companies.

Young and Literate Population• The median age in ASEAN current stands at about 29.0 years. This is young

compared to China where the median age is 37.0 years, and even younger in comparison with Japan which has a median age of 46.0. Most SEA nations have relatively young populations: 21.7 years in Laos, 23.1 years in the Philippines, and 28.0 years in Indonesia. The oldest nations are Singapore at 38.4 years and Thailand at 37.4 years (see Table 2).

• The potential benefit of this young population base is best explained through the economic concept of demographic dividend. Often when the populace transitions from an agrarian to an industrial economy, there is a fall in fertility rate which leads to a more rapid growing labour force than the population dependent on it. All things being equal, this leads to an increase in the per capita income which supports a greater domestic consumption.

• As the young emerging SEA nations transition to a more industrial economy, their domestic consumption demand should consequentially rise. In the case of the Philippines for example, for every 100 economically active individuals there are 58.3 dependents. With a median age of only 23.1 years, the majority of these dependents are younger, school going children, who in time to come will enter the workforce and drive the economic engine both from production and consumption perspectives. Singapore, in contrast, currently has 35 dependents to every 100 economically active persons. The dependents are largely older as the higher median age suggests. In time to come the number of dependents could swell as the population ages, and impact Singapore’s economic output, if there is no immigration.

• Alongside a young population base, the overall literacy rate in SEA is high at over 90%, although Cambodia and Laos are notably lower than the other SEA nations. As a comparison, India’s literacy rate is estimated at 71% (and only 61% for females). However the quality of education is lacking in some areas, as discussed later.

2005 2015 2020Brunei Darussalam 27.1 30.8 33.0Cambodia 20.3 24.7 26.9Indonesia 25.5 28.0 29.6Lao People’s Democratic Republic 18.8 21.7 23.6

Malaysia 24.8 27.8 30.2Myanmar 25.4 29.4 31.7Philippines 21.0 23.1 24.5Singapore 35.5 38.4 40.1Thailand 31.6 37.4 40.5Vietnam 25.9 30.2 33.1

Table 2: Young population (median age) in Cambodia, Laos and the Philippines

Source: United Nations, “World Population Prospects: The 2012 Revision”, June 2013.


Rising Middle Income • With increasing urbanisation comes structural economic change and rising

wealth levels. The current middle income population in SEA is estimated to total 125 million, roughly equivalent to the population of Japan. SEA’s middle class is expected to grow by another 70 million by 2020. Indonesia is expected to account for about one-half of that increase (see Table 3).

• SEA is also witnessing rapid growth in the number of people in the top income bracket. Singapore is estimated to have the third-highest number of millionaires per capita in the worldiii.

Low Cost Alternative to China• Labour costs across much of SEA are competitive in comparison to China, and

have become increasingly so in recent years. According to the State Council’s Five-Year-Plan (2011-2015), the minimum wage across China is slated to increase at an average of 13% a yeariv. Increasingly the labour costs across SEA, particularly in emerging markets such as Vietnam, Myanmar and even Thailand, are looking very attractive.

• This lower cost environment in ASEAN has supported a higher rate of increase of foreign direct investment (FDI) in this region than in China. According to a report by Bank of America Merrill Lynch (2014)v, in 2013 the volume of FDI into ASEAN-5 (Indonesia, Malaysia, the Philippines, Singapore and Thailand) grew by 7% while that into China fell by 3%. This trend is likely to continue, given the higher manufacturing wages in China, which have outpaced those in ASEAN, and the contrasting demographics in these regions – China ageing while ASEAN is relatively young.

• Japanese firms have emerged amongst the top sources of FDI in ASEAN, ahead of the UK and China, especially in Cambodia, Thailand and Vietnam (see Table 4). In 2013, Japanese companies’ direct investment into ASEAN came to USD 22.9 billion, a marginal drop from the USD 23.7 billion in 2012vi. In another survey in December 2014 by the government affiliated Japan External Trade Organization, 60% of Japanese businesses expressed intentions to expand in ASEAN, exceeding those with expansion plans in China (see Table 5 for examples of Japanese firms increasing presence in ASEAN).

Table 3: Middle class population rising in ASEAN (‘000s)

2005 2015 2020

Brunei Darussalam n/a n/a n/a

Cambodia 230 855 2,333

Indonesia 15,393 45,662 80,274

Lao People’s Democratic Republic n/a n/a n/a

Malaysia 10,644 17,375 21,966

Myanmar n/a n/a n/a

Philippines 10,188 19,322 29,228

Singapore 3,384 4,357 4,827

Thailand 18,627 30,486 41,709

Vietnam 1,567 6,522 15,064

ASEAN 60,033 124,579 195,401

Note: Middle class is the number of people living in households earning or spending between 10 USD and 100 USD per person per day (2005 PPP USD). No data available for Brunei Darussalam, Laos PDR or Myanmar.Source: Brookings Institute, “Brookings Development, Aid and Governance Indicators: Raw Data”, July 2012.

Sources: Bank of Japan, Indonesia Investment Coordinating Board, Malaysian Investment Development Authority, Myanmar Directorate of Investment and Company Administration, National Statistical Coordination Board of the Philippines, Singapore Department of Statistics, Thailand Board of Investment, General Statistical Office of Viet Nam.

Table 4: Japan ranked top foreign investor in most ASEAN countries

2013 2014

Brunei Darussalam

n/a n/a

Cambodia 1 1

Indonesia 1 2

Lao People’s Democratic Republic

n/a n/a

Malaysia 4 1

Myanmar 8 10

Philippines 3 1

Singapore 3 n/a

Thailand 1 1

Vietnam 1 1

Source: ASEAN Secretariat, “ ASEAN Investment Report 2013-2014”, October 2014.

Table 5: Examples of Japanese firms increasing presence in ASEAN

Company ActivitySojitz Expanding industrial complex in Jakarta

ITOCHU Expanding industrial foothold by 20% in Indonesia

Marubeni Bolster water and sewerage treatment plant in Bekasi, Jakarta

Nissan Building a factory to assemble cars for domestic market in Myanmar

Suzuki Start production of small trucks and spare parts in Myanmar

AEON Opened a new mall in Cambodia and Vietnam; and expanding up to 20 malls in Vietnam

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Source: World Economic Forum, “Global Competitiveness Report 2014-2015”, 2014Note: The Global Competitiveness Index (GCI) is based on weighted scores in 12 categories using country-level data. The charts above show the relative positioning of the advanced economies globally and those emerging economies in Asia based on this GCI scoring.

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Improving Competitiveness• In 2014, the World Economic Forum (WEF) produced a report on country

competitiveness. Competitiveness is defined in the report as “the set of institutions, policies, and factors that determine the level of productivity of a country”.

• According to the report, three of the top 10 most competitive economies in Asia Pacific are in SEA – namely Singapore, Malaysia and Thailand. Singapore is ranked second globally, due to its strength in its infrastructure, higher education and training, and efficient labour and goods markets. Among the developing/emerging Asia economies, five out of the eight that scored above average in terms of overall competitiveness are from ASEAN. These five are Malaysia, Thailand, Indonesia, the Philippines and Vietnam.

• Improving competitiveness within the ASEAN economies will lead to a myriad of benefits, including higher volumes of foreign investment into the region.

Figure 4: Singapore ranks amongst the most competitive countries in the world


Of Barriers and Stumbling Blocks

Weak Public Infrastructure• Across SEA – with Singapore a notable exception - corruption, litigation and

poor oversight have left many major cities with poor public transportation and infrastructure. This has led to, in the case of Manila, the leapfrogging of private developments from the old city to outlying areas such as Fort Bonifacio Global City near the Makati CBD. In Indonesia, stopgap measures, such as the temporary ban on motorcycles in parts of Jakarta to mitigate the traffic situation, are common. Bangkok, which already accounts for almost 80% of the total urban area in Thailand, faces immense pressure, and new investments are needed to improve the current road and rail network systems. Unless city governments place greater focus on infrastructure investment and provide alternative public transportation, such traffic grid lock will continue to cap the economic and physical growth of these cities.

Shortcomings in Education and Innovation• Despite widespread basic literacy, SEA still needs to make further inroads into

tertiary education to nurture more knowledge workers. Based on education statistics from the World Bank, as of 2012 only some 2.4% of the total population in emerging SEA were enrolled in tertiary education, compared to 4.6% in Singapore. Equally, the quality of the universities in emerging SEA is rated significantly lower than Singapore’s oldest university, which was ranked highest in Asia and 22nd globally by QS World University Rankings (2014)vii.

• In terms of innovation, emerging SEA lags a long way behind East Asia. Outside Singapore, the annual number of patents applied per million people is significantly below the numbers in Japan, Korea and China (see Table 6).

No. of patents applied per million people

Korea 3,816

Japan 2,699

Singapore 1,755

China 468

Malaysia 223

Thailand 100

Vietnam 41

Philippines 30

Indonesia 23Source: World Intellectual Property Organization, 2013

Table 6: Emerging SEA ranks low in the number of patents applied

What’s the first thing we look for? Political stability and government policy, stable law and regulation surrounding

investment. In some cases, the legislation is not in place to support the real estate market. These are standard risks that companies face in emerging markets, but we are also quite

positive about growth in South East Asia. – Regional Property Developer

10 JLL

LOW TRANSPARENCY

OPAQUE

SEMI TRANSPARENT

TRANSPARENT

HIGHLY TRANSPARENT

Low Property Market Transparency & Restrictive Ownership Rules• Market transparency has a general correlation with investment volume. Toward this end, JLL conducts a biennial survey on the transparency of

the global real estate markets. The survey encompasses qualitative and quantitative factors relating to the fundamentals and performance of the real estate markets, the governance of listed vehicles, regulatory and legal structure, and the transaction process.

• In SEA, the transparency is very diverse. According to JLL’s 2014 Transparency Index, Singapore has the highest transparency score in the region and is ranked 13 globally, ahead of Hong Kong, but below Australia and New Zealand. Indonesia, the Philippines and Thailand are all semi-transparent markets (see Figure 5). In the past 10 years, all SEA countries have scored higher in real estate transparency. Malaysia has progressed from a semi-transparent to transparent market; Indonesia and the Philippines have gone from low- to semi-transparent; and even Vietnam has improved from opaque to low transparency.

• However, unless the governments of SEA continue to improve their real estate transaction process, legal and regulatory environment, and governance of listed vehicles, foreign investors will generally continue to favour more transparent markets. That said, some investors may favour a less transparent market, as it usually means less competition for assets with peers. Also, investors with good on-the-ground knowledge are often able to enjoy above-normal returns in comparison to highly transparent markets.

• Nonetheless, the rules governing ownership of land remains very complex and restrictive for non-citizens: – Foreigners are generally not allowed to own land or freehold interests in the Philippines, although if they invest in the country they are

allowed to lease private land for 50 years, renewable for a maximum of 25 years. – In Thailand, foreigners are not allowed to own land other than through leasehold interests, or through joint venture arrangements where

they do not have the majority share. Interestingly, investors have got around this by breaking up the ownership into multiple levels. – Foreigners in Indonesia are generally only allowed the right of use for 25 years, extendable for another 20 years. Foreign-owned companies

that are registered in Indonesia, however, may have more land use options available to them.

Australia, New Zealand

Singapore, Hong Kong Japan, Malaysia

Taiwan, Thailand, South Korea China, India, Indonesia, Philippines

Vietnam

Mongolia, MyanmarVietnam, Mongolia, Myanmar

Japan, Malaysia, Taiwan Thailand, South Korea

Singapore, Hong Kong

Australia, New Zealand

China, India, Indonesia, Philippines

20142004

Source: JLL, Global Real Estate Transparency Index, 2014

Figure 5: Emerging countries in SEA have opaque to semi-transparent real estate markets


Source: World Federation of Exchanges, March 2015

Immature Financial Markets• Many of the SEA markets, barring Singapore, have immature financial markets,

as reflected in stock market capitalisation and other avenues available for access to finance for business set-ups and expansion. Singapore has the highest ratio of stock market capitalisation to GDP, and Vietnam the lowest. Most SEA countries have seen their stock market capitalisation growing faster than GDP in the past 10 years, but Indonesia and Vietnam still have low stock market capitalisation relative to their respective GDP in comparison to the US and Japan (see Table 7).

Political Risks• Political risk is a concern across SEA. While the military coup in Thailand has

helped contain civil disruptions and allowed the economy to resume business, ongoing uncertainty over the long term political regime could dampen investors’ plans. In the Philippines, while the political climate remains fairly benign, things may change again after President Aquino finishes his single six-year term in 2016. The Indonesian political environment is more stable now, although the road to reform will be a long and arduous one for President Joko Widodo.

2004 2014

Indonesia 26% 47%

Malaysia 140% 140%

Philippines 31% 92%

Singapore 190% 245%

Thailand 72% 115%

Vietnam 0% 25%

Japan 125% 95%

US 132% 150%

Table 7: Low level of stock market capitalisation in emerging SEA

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What Does This Mean for Investors?

Besides the challenges discussed above, investing in emerging SEA can be difficult due to a general lack of income assets for sale. While some investors have taken the development route, others have preferred to wait out until these development projects come into the market. Investment in institutional-grade real estate has been relatively small across most of SEA, compared with Asia Pacific’s more mature markets. In 2014, direct commercial real estate investment totalled USD 130 billion, of which Singapore contributed USD 8 billion worth of deals. Collectively, emerging SEA contributed only half of that, at USD 4.8 billion. As part of this study, we spoke with some major regional and global investors regarding their views on the SEA real estate markets. In general, their view can be simply summarised as pragmatism. Investors typically treat SEA (other than Singapore) as any other emerging market, such as India, Brazil or China. They tend to view each opportunity on its own merit regardless of its location – in other words, being in ASEAN or in an economic bloc such as AEC has little bearing on their decision making. As a whole, SEA provides attractive opportunities for investors across many different sector types, including office, retail, residential, logistics, and hotels. In the next section, we provide examples of attractive SEA markets for different asset classes from the perspective of an institutional investor. These examples are not meant to be exhaustive, but illustrative of the types of opportunities and underlying drivers.

The greatest challenge is the lack of assets and liquidity. If there are not many transactions because people don’t want

to sell, how do you buy and invest? Overall, there isn’t much distress in the region, we don’t see people being forced to sell,

if that’s the case then people aren’t willing to sell.– Global Investment Fund


OfficeThe office sector is driven by the growth in the services sector that supports the larger economy. The share of the services sector to the overall economy in SEA ranges from a low of one-third in emerging markets to a high of two-thirds in the more mature economies. In general, there is a lack of good quality investment assets for sale.

Manila: Offshoring and Outsourcing destination• Manila, being a major city, attracts the young literate English speaking adult

population that has supported the continual growth of the O&O industry. Following the AFC in 1997, global companies started to “outsource” business processes that could be done outside the company with more efficiency and at less cost. From a USD 3.4 billion industry in 2006, the O&O industry in the Philippines is estimated to have reached USD 18.0 billion in revenues in 2014. Major property developers are taking advantage of the demand for a large volume of office space from the O&O sector. From 1.1 million sqm in 2005, Grade A office stock in Makati CBD and Bonifacio Global City (BGC) more than doubled to 2.4 million sqm by end-2014.

• While an expected large supply of completions in the next two years could add short-term downside pressure to occupancy costs, this could also support the continual demand from occupiers. Demand for O&O activities is likely to continue, and possibly increase on the back of the US recovery, as cost savings strategies by regional and global corporates are likely to remain. Demand from local business support services such as IT, accounting, marketing and real estate should expand as the economy matures, supporting stable rental yields in the office market.

• Partnering or buying into an existing ownership is possibly the easiest route, given the dearth of office assets currently available for sale. In the past few years, we have seen regional and global investment funds buying into a share of the growth in the office market. In 2014, Baring Private Equity Asia, based out of Hong Kong, bought a 21% interest in Accralaw Tower in Bonifacio Global City, where Accralaw – a major local legal firm - is the major tenant. A year before, SM Investments Corp (a local conglomerate) bought a collection of office buildings in Taguig from Apollo Global Real Estate (a US-based equity fund) for USD 260 psf. More investment grade assets could come into the market in the next few years as developers look towards lightening their balance sheets by monetising their completed or near-completion projects.

4Q10 4Q154Q144Q134Q124Q11

90

80

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100

130

120

140

150

160

Rental Value Index Capital Value Index

Inde

x

Figure 6: Manila Office (Grade A)

Limited assets for saleSignificant supply

completions

Young and literate English speaking populationGrowth of domestic

services sector

Stable rental yieldsRecovering US economy

Election in 16 months (low)

WeaknessesStrengths Opportunities Threats

Source: JLL, Asia Pacific Property Digest, 4Q14

14 JLL

LogisticsThe logistics sector is relatively immature in SEA, but offers attractive opportunities given the solid economic growth across the region, the rapidly increasing middle class, competitive wage costs and potentially high investment yields. A lack of good quality infrastructure is one factor impeding rapid development.

Jakarta: Urbanisation drives demand• The demand for consumer goods is rising rapidly in Indonesia in tandem with solid

economic growth, rising urbanisation and increasing wealth levels. Currently just over half of Indonesia’s population of 250 million live in cities, and this is set to rise to 57% by 2020. Compellingly, the middle class is projected to almost double between now and 2020, to 80 million people.

• With an expanding consumer market, a larger volume of goods is being transported throughout the country. This, together with an increasing number of new international brands with production facilities in the Greater Jakarta area, has resulted in a rapid increase in the demand for distribution and logistics services by local and foreign manufacturers, including third-party logistics (3PL) companies.

• Currently, there is very limited existing stock of institutional-grade logistics facilities. Most investors and 3PL companies look to acquire land within established industrial estates in the Greater Jakarta area. A smaller number of players seek opportunities in Surabaya, Medan and other secondary cities, although these are more challenging markets. Land prices within industrial estates have increased significantly over the last few years. However, the preference is still for estates with good infrastructure, utilities and professional estate management.

• Attractive rental yields and the potential for capital value appreciation have seen considerable interest from local and foreign investors. These include local and regional private equity groups, as well as pension and sovereign wealth funds. A number of these investors have enjoyed success, being the first movers in other emerging markets across Asia. Foreign players have typically sought to mitigate risks – many of which are associated with low property market transparency – by forming joint ventures with local players. For example, MITSUI & Co. Ltd. - one of the largest trading company in Japan - along with a developer from Thailand, TICON Industrial Connection Public Company Ltd, have partnered with Jakarta

Poor existing infrastructureProperty market

transparency

Large population of 250 million people

Increasing urbanisation and wealth levels

Improved confidence post-election

Limited existing productsGood rental yields and

potential for price growth

Loss of stamina for political reform (low)

listed property and construction firm, PT Surya Semesta Internusa, to jointly develop a 146,000 sqm industrial project comprising warehouses, factories and commercial buildings in Karawang, West Java. Kerry Logistics, Asia’s premiere logistics service provider headquartered in Hong Kong, recently also established a joint venture with Indonesia’s largest logistics company Puninar Logistics.

• Newly-elected President Joko Widodo has prioritised a number of reforms, including improvements in the country’s transport infrastructure. If successful, this will significantly enhance the attractiveness of the country’s logistics sectors for investors.



RetailThe retail sector in emerging SEA has been performing well, given the strong underlying demand coming from a young population base, rising middle income group, and urbanisation. These enabling trends are likely to remain in place and continue to support the growth of the retail sector. However, the lack of income assets for investment is a challenge.

Bangkok: Consumer confidence lifts• A more stable political environment, following the military coup in May 2014, has

given landlords and occupiers greater motivation to renew their contracts as consumer confidence has also recovered.

• Although the population in Thailand is ageing, it has buying power. In terms of GDP per capita, Thailand is ranked fourth highest in SEA after Singapore, Brunei and Malaysia at over USED 5,000 per capita in 2014. Coupled with the large middle income population, which exceeds 30 million (based on estimates by the Brookings Institute in 2012), this is attracting new-to-market international retailers. For example, Takashimaya – a Japanese department store - will be joining other international brands such as H&M, Sephora and Superdry, and Pepe Jeans has opened its largest standalone flagship store in Asia in Bangkok. Luxury brands, such as Dior, Salvatore Ferragamo and Miu Miu, have expanded their footprint in Bangkok.

• Beyond the large supply completions in the next two years, the continual urbanisation, growth in tourist arrivals, and strong domestic buying power will support the retail market. While the limited retail assets available for sale makes direct investment challenging, investors have participated in the growth of the retail market through joint ventures with local partners or direct participation in the equity market. At the end of 2014, the first major deal recorded after the coup was the injection of a major share of Terminal 21, a lifestyle mall, into LH Shopping Centers Leasehold REIT by L&H Property Company Ltd (a joint venture between the local

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Figure 7: Bangkok Retail (prime malls)

Large supply completions in the next two years

Ageing populationDifficulty getting good assets for investments

Improved consumer confidence

Large middle income population

Strong rental yield with potential capital upside

Strong tourist arrivals post military coup

Political risk from fresh elections (moderate)

Land and Houses Public Company Ltd and GIC from Singapore) at a unit price of USD 516 psf. Earlier in January that year, Tesco Lotus Retail Growth Freehold and Leasehold Property Fund, a property fund listed on the local stock exchange, completed a sale and leaseback of Tesco Lotus Navanakorn – a 214,300 sq ft retail mall in Klong Luang, in the suburbs of Bangkok, at a unit price of USD 320 psf. Other regional and local investors that have been active in the past include Pacific Star Group, United Overseas Bank and the Central Group.


Retail and residential look quite interesting. At this level of income we are

starting to see discretionary spending; growth in consumption will benefit malls

and residential sectors.– Global Investment Fund


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Figure 8: Jakarta High-end ResidentialResidentialThe residential sector is fundamentally driven by population and income growth. With sustained economic expansion in SEA over the past few years, the size of the middle income population has grown alongside household income. Together with urbanisation, the demand for housing has been strong.

Jakarta: Housing demand on the rise• A large population base, coupled with stable economic growth over the past few

years, has supported the housing market, especially in Jakarta. Indonesia, with a population of over 250 million today, is expected to add 3 million more people per year from 2015 to 2020. Supported by sustained economic growth, the middle income population has grown to 45 million in 2015, and is expected to swell by another 7 million a year, reaching 80 million by 2020.

• The improved economic conditions post-election, a lack of housing supply over the next two years, and further urbanisation, are supporting strong capital gains in this market. There are currently some 100,000 apartments, with another 60,000 under construction and already 80% pre-sold. Residential land prices across Jakarta have risen over 300% in the last four years, forcing new buyers into apartments.

• The strong upside for capital values has supported considerable interest from local investors and developers. To mitigate the risks associated with the less transparent nature of the market, foreign developers and investors typically have participated through joint ventures with local developers, or indirectly through the listed developers. In 2014, CapitaLand (Singapore) partnered with Credo Group, a local conglomerate, to jointly develop an integrated development comprising residential, office, serviced apartments and retail in central Jakarta.

• For those who are more familiar with the market, a standalone basis for project development is also possible. For example, Keppel Land recently announced their purchase of a site in West Jakarta for a high rise condominium project, in addition to their current development of the International Financial Center Jakarta Tower 2, which is expected to be completed by end-2015.

Capital Value IndexRental Value Index

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80

120

140

160

180

200

Index

4Q10 4Q11 4Q12 4Q13 4Q14 4Q15

Property market transparency

Improved confidence post election

Large middle income population

Continual urbanisation Limited supply

Strong price growth potential

Loss of stamina for political reform (low)




HospitalityHospitality is driven by rising income and socio-political stability, both domestically and in the surrounding region. With the rise in urban population and middle income households in major SEA cities, the demand for regional tourism will increase. In 2014, foreign visitors spent some USD 112 billion in SEA, and this is expected to grow to USD 202.4 billion by 2025, according to the World Travel Tourism Council.

Myanmar: Opportunities abound• Investors are beginning to take note of the tourism growth in emerging markets

such as Vietnam, Myanmar and Cambodia. Myanmar is one of the last frontier markets in SEA, with immense potential given the government commitment to political and economic reforms in recent years.

• The physical infrastructure in Myanmar remains weak. However, with almost 2,000 km of coastline and an immense collection of archaeological sites, the tourism opportunity ahead is strong. According to statistics released by the Myanmar Ministry of Hotels and Tourism, visitor arrivals grew by 50% from 2 million in 2013 to 3 million in 2014, the bulk of which were from Thailand, China and Japan.

• Specifically on Myanmar real estate, particularly hospitality, there is interest from institutional investors with higher risk appetite, but mainstream investors find the political landscape and land ownership structure too challenging. Furthermore,

Poor infrastructure Poor market transparency

Frontier market in SEALarge population of

50 million

Limited supplyContinual urbanisation

in SEA Strong regional tourism potential

Social and political unrest in the north (low)

the immature, highly non-transparent and tightly held real estate market has made investment sales rather infrequent. Foreign investments are largely in development. By 2014, foreign firms invested USD 2.5 billion into development projects (hotels and commercial). The bulk of the investors are from Singapore, with over USD 1.5 billion, followed by Vietnam and Thailand, contributing between USD 340 to 440 million each. For example, the Pan Pacific Hotels Group (a wholly owned subsidiary of Singapore-listed UOL Group Limited) has a joint venture with local Shwe Taung Group to develop the first “Pan Pacific” hotel in Myanmar, to be ready by 2017. The same group also recently announced the opening of its second ParkRoyal hotel in Nay Pyi Taw, where the government administration is situated. Keppel Land (Singapore) has also expanded its foot-print, with a 29-storey hotel added to its existing Sedona Hotel in Yangon. The project is expected to be completed in 2016.


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Singapore: Gateway to ASEANSingapore’s business environment, economic structure, and real estate market are relatively transparent and mature compared to the rest of SEA. As such, many investors regard it as a core market where rental yields and capital value upside are more moderate but stable.The key assets for investment in Singapore are office and residential. • Singapore’s business friendly environment, political and financial stability, and its

reliable and clean legal structure, have earned the government the top grade (AAA) rating by the major credit rating agencies.

• The investment friendly environment, with few restrictions on foreign ownership of real estate (except in residential), and the highly transparent nature of its real estate market have attracted global and regional investment funds and developers e.g. Hongkong Land, AEW, SEB, The Blackstone Group and BlackRock. Most recently, a group of local developers and investors acquired from BlackRock Real Estate (a US based investment firm) its interest in AXA Tower, an office tower in the CBD, for USD 1,317 psf. The seller had acquired that asset from CapitaLand back in 2007 for USD 1,016 psf.

• As a global financial hub, Singapore is a natural commercial gateway to ASEAN. Occupier demand has been driven by a broad spectrum of occupiers, ranging from regional financial and wealth management firms to IT. Social media companies and other modern services firms have been expanding or establishing their SEA headquarters in Singapore since 2009. Google built its second data centre (first in SEA) for USD 120 million in 2011. Tata Communications has setup a global services hub in Singapore, covering network and cloud based services.

• The stable regional economies, plus the US recovery, will support the Singapore office market in the longer term, despite the large supply completions in 2016/2017. Demand from modern services such as IT and business advisory, including legal, real estate, and financial services, are expected to grow on the back of the regional integration as well. Several legal firms have set up their ASEAN desks, for example, Rajah & Tann Asia by Rajah & Tann, and ASEAN+ by RHTLaw Taylor Wessing. As early as 2010, several financial institutions have also setup support and training centres in Singapore, e.g. BNP Paribas Asia Pacific Training & Development Campus, OCBC Regional Learning Hub and UBS Business University.

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Significant office supply completions

Government policy relating to the residential market

Business friendly environmentHighly literate multi-lingual

populationStable economic growth

Transparent market

Commercial gateway to ASEAN

Growth of decentralised commercial hubs

Reversal of residential policies

Unstable politics post Lee Kuan Yew (low)

Figure 9: Singapore Office (Grade A)




• On the development front, there are increasingly more opportunities in the commercial space. In the interests of maintaining Singapore’s overall competitiveness, the government will strategically release more land in the suburbs to support the growth of the suburban office market. The economic risk associated with political uncertainty, arising from the passing of the founding Prime Minister Mr Lee Kuan Yew is low. The economic and institutional frameworks were strongly set in place during his term as Prime Minister, and since his retirement his involvement was mostly ceremonial.

• The Singapore high-end private residential market has slowed on the back of existing policies, and correction in this segment has been severe. As such, the upside for this market is fairly strong given that the pricing gap between the high-end and mass market homes (entry level private housing) must widen to a more sustainable level when the government loosens its policies and the market recovers. Blackstone Group, the world’s biggest private equity fund, has recently bought a 10-storey apartment block and another 18 units in Singapore’s prime residential district.

Key takeaways for the various investment examples discussed above are as follows:

Assets and Location

Capital Gains Tax (%) *

Corporate Income Tax (%)

Investment Option ** WEF Global Competitiveness

Report, 2014-2015 (out of 144)

JLL Global Real Estate Transparency Index,

2014 (out of 102)

Political Risk ***

Physical Infrastructure ****

Emerging

Manila Office

6 30 Income assets, partnering with local

52 38 Low Moderate

Jakarta Logistics

5 25 Income assets 34 39 Low Poor

Bangkok Retail

- 20 Income assets 31 36 Moderate Moderate

Jakarta Residential

5 25 Development, partnering with local

34 39 Low Poor

Myanmar Hospitality

10 25-35 Development 134 100 Low Poor

Mature

Singapore Office

- 17 Income assets and Development

2 13 Low Good

Singapore Residential

- 17 Income assets 2 13 Low Good

Source: World Economic Forum, “Global Competitiveness Report 2014-2015, 2014; JLL, Global Real Estate Transparency Index, 2014; JLL, Asia Pacific Investment Guide, 2014.

Footnotes* Capital gains tax refers to tax on gains from the sale of a property that was purchased at a cost that was lower than the amount realised on the sale. ** For the purpose of this paper, investment is categorised into two options; 1) Income Assets - buying completed/near completion project for income and/or capital appreciation; and 2) Development - developing projects for sale or leasing purposes. *** Author’s assessment of the risk associated with political regime change **** Author’s evaluation of the quality of the physical infrastructure

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In a Nutshell

• The strength of SEA lies in its unified diversity. The plan for an economic bloc will come to fruition but its immediate impact on the property market is limited. Long term prospects for a unified region of over 600 million consumers look promising and the property market should eventually benefit from this economic integration.

• Meanwhile, there are already enabling factors that are shaping the property markets across SEA. The strong urbanisation trend will drive the growth of the services sector and increase the household wealth, which will fuel consumption demand. Additionally, the rising cost of labour in other markets including China will help to make SEA markets look increasingly attractive for businesses.

• The opportunity for countries in SEA is to capitalise on these drivers and at the same time work to reduce the existing challenges. If this can be achieved, their property markets will surely benefit from higher levels of investment in the future.


ASEAN Secretariat, “ASEAN Investment Report 2013-2014, Oct 2014.Boston Consulting Group, “Global Wealth 2014: Riding a Wave of Growth”, June 2014.Brookings Institute, “Brookings Development, Aid and Governance Indicators: Raw Data”, July 2012.International Labour and Asian Development Bank, “ASEAN Community 2015: Managing integration for better jobs and shared prosperity”, 2014.JLL, “Asia Pacific Property Digest”, 4Q14.JLL, “Asia Pacific Investment Guide”, 2014. JLL, “Global Real Estate Transparency Index”, 2014.Oxford Economics, “Global Economic Databank”, April 2015.United Nations, “World Urbanization Prospects: The 2014 Revision”, June 2014.United Nations, “World Population Prospects: The 2012 Revision”, June 2013.World Economic Forum, “Global Competitiveness Report 2014-2015”, 2014.

Statistical Sources:Bank of America Merrill Lynch, 2014.Bank of Japan, 2014.Indonesia Investment Coordinating Board, 2014.Japan External Trade Organization, 2014. Malaysian Investment Development Authority, 2014.Myanmar Directorate of Investment and Company Administration, 2014.Myanmar Ministry of Hotels and Tourism, 2013/2014.National Statistical Coordination Board of the Philippines, 2014.Quacquarelli Symonds World University Rankings, 2013/2014.Singapore Department of Statistics, 2014.Thailand Board of Investment, 2014.General Statistical Office of Vietnam, 2014.World Federation of Exchanges, March 2015.World Intellectual Property Organization, 2013.World Travel Tourism Council, 2015.

i. International Labour Organization and Asian Development Bank, “ASEAN Community 2015: Managing integration for better jobs and shared prosperity”, 2014.ii. Backroom business support operations such as IT-related work and call centres that have been outsourced to a lower cost country.iii. Boston Consulting Group, “Global Wealth 2014: Riding a Wave of Growth”, June 2014.iv. According to China’s Ministry of Human Resources and Social Security, a total of 27 provinces have increased their minimum wage by an average of 17% in 2013, and in 2012, 25 provinces

increased their minimum wages at an average of 20.2%.v. Bank of America Merrill Lynch (2014).vi. ASEAN Secretariat, “ASEAN Investment Report 2013-2014”, Oct 2014.vii. Quacquarelli Symonds World University Rankings, 2013/2014.

Bibliography

Endnotes

With Contributions from:This paper would not have been possible without the contributions from Dr Jane Murray, Christopher Fossick, Todd Lauchlan, David Leechiu, Suphin Mechuchep, Vivin Harsanto, Andrew Gulbrandson, Claro Cordero, James Taylor, Lee Fong and Frank Sorgiovanni.

Special Acknowledgments: Sincere gratitude to all the clients, who prefer to remain anonymous, for taking time to participate in our survey. This paper would not have been the same without your invaluable insights.

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Dr Chua Yang Liang is the Head of Research & Consultancy for Singapore, and Head of Research for South East Asia. As a team leader for the firm’s local and sub-regional research service, he is responsible for the research and market commentary in Singapore and South East Asia, which includes Malaysia, Thailand, Vietnam, Myanmar, the Philippines and Indonesia. His specific responsibilities include research forecasts and analysis for the local auctions, commercial, industrial, investment, residential and retail sectors, as well as conducting client specific market research. Yang Liang has a Bachelor of Science (Estate Management), First Class Honours from the National University of Singapore, and a Masters and PhD in City Planning from the University of Pennsylvania, USA.

Dr Chua Yang Liang Head of South East Asia Research

About the author

Jones Lang LaSalle© 2015 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.

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The Emerging Powerhouse of South East Asia: What Does It Mean