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This feature was originally published in the Nikkei Asian Review.
Conversations among real estate investors in recent weeks have mostly focused on Japan's low interest rates, the potential opportunities to be had from China's economic slowdown, and the safe-haven nature of the property markets in Australia. Few talk about opportunities in Southeast Asia -- but this could soon change.
With the ASEAN Economic Community due to be formalized by the end of the year, the region is going to be increasingly on investors' radar. The investment community has been rather skeptical that freer movement of goods and people within this new trading bloc will do much for foreign investors, but there may well be good medium-term real estate opportunities.
Economic growth across the 10 member countries of the Association of Southeast Asian Nations has averaged about 5% per annum in recent years. Gross domestic product growth in the Philippines, Vietnam and Cambodia has been especially robust, with rates exceeding 6% last year. Myanmar expanded at nearly 9%.
All this growth should attract attention, but from a global real estate investor's point of view, Japan remains the Asia-Pacific region's most-traded market, accounting for more than half of foreign real estate investment. This is followed by Australia, then Hong Kong and Singapore. China has also seen increased activity in recent years. The Southeast Asian countries draw relatively little overseas interest in part because of a lack of transparency and also due to government restrictions. Availability of investible real estate stock is also low: Most of the prime assets are tightly held by wealthy individuals or groups and rarely traded.
The environment in the region, however, is changing, and for the astute property investor it could become quite interesting. While foreign investment into the region is comparatively small, the local markets are fairly active, particularly in the Philippines, Vietnam and Indonesia.
The region, as a whole, is likely to see increased urbanization, a growing middle class, increased wealth and rising tourist numbers. All of these factors will support development in office, retail, industrial, leisure and residential real estate. Our data estimates that ASEAN will require an extra 700 million sq. meters of office space in the next 10 years. It is amazing to think that the equivalent of Singapore's central business district will need to be built, on average, each year to satisfy likely demand across the ASEAN bloc.
The Philippines is the region's fastest-growing and biggest business process outsourcing center. The outsourcing and offshoring sector is expected to grow by 15-18% in the next two years, meaning further increases in demand for office space.
Currently, property yields are much higher than the cost of borrowing in Manila, and this spread is wider than in more mature markets like Hong Kong and Singapore. This reflects the limited availability of credit and the lack of foreign investment in Manila's real estate sector due, in part, to legal restrictions on ownership of property. However, there is speculation that the authorities are considering easing the regulations. This would push prices up and yields down, so it is a market to monitor.
Indonesia, the most-populous ASEAN member, is also thinking about changing its rules to allow easier direct foreign ownership of property. Currently, foreigners have to use elaborate structuring or create long-term leasehold interest in order to invest. By 2020, Indonesia's middle-income population is expected to reach 80 million, equivalent to the current population of Germany. Demographics like these drive real estate performance and international investors are watching closely.
Vietnam has seen many changes in the last five years. The government recently relaxed rules on investment by foreign companies. Considerable investment has come from Asian conglomerates, such as South Korea's Samsung, which has become one of the country's largest investors in the manufacturing sector. Real estate returns have disappointed in the past, but the trading environment has become a lot more stable in recent years.
To provide a perspective on growth since the global financial crisis, office rental values have nearly tripled in Jakarta from their pre-crisis peak. In Manila, rent has risen by 35%. Compare that with Tokyo and Hong Kong, where rental values remain 40% and 17%, respectively, below their pre-crisis highs.
When it comes to investment strategies, there are three potential routes to get more involved in Southeast Asia. The least risky would be to buy in Singapore. This is one of the easiest ways to buy into the ASEAN story, given the city-state's status as a gateway to the rest of the region. The second-least risky option would be to acquire completed and leased assets in emerging Southeast Asia with a reliable local partner. The most risky would be to invest in a piece of land and hope to get permits and undertake development.
While Southeast Asia may offer opportunities in an uncertain economic world, getting exposure to real estate is not straightforward. If foreign investors do find a sensible and well-researched entry point, the region should deliver strong returns. A lack of foreign investment has, in general, meant that the sector is further behind the cycle than many of the world's property markets.
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