Already the world’s largest destination for real estate investment, Asia’s emergent middle-class population and improving business environment mean the opportunities available are only set to expand, with regional investors predominantly leading the way.
Over the past two years, an increasingly prosperous Asia has fueled unprecedented growth in the global property market. While 2017 was the second-best year in the past decade for investment in income-generating commercial real estate, according to Real Capital Analytics, 2018 looks set to go one better. Under the latest research published by consultants Cushman & Wakefield, investment in the global property market has grown 18 percent year-on-year to a new record high of US$1.8 trillion this year, up from US$1.5 trillion in 2017.
As the main thrust of this growth, Asia is today not only the world’s largest destination for real estate investment (accounting for over half of global activity), but also the market’s largest source of capital, with Asian buyers dominating cross-border property ventures (making up a 45 percent share over the 12 months to the second quarter of 2018).
If this region – and within it, the Association of Southeast Asian Nations (ASEAN) in particular – has been a recent hive of real estate activity, then at the focal point of interests has been one city especially: Singapore.
During the final quarter of 2017, Singapore’s Asia Square Tower 2 was bought for US$1.5 billion by CapitaLand – one of the city state’s leading developers, whose global assets under management (AUM) have grown rapidly to reach S$93.1 billion (as 30 June 2018), putting it on track to achieve its target AUM of S$100 billion by 2020.
CapitaLand’s investment was a highlight in a record-breaking period for global real estate, while the city-state’s cross-border capital grew 35 percent to US$19.9 billion last year overall. In terms of outflows, Singapore has given generously, with its investments in regional portfolios having helped Asia-Pacific become the world’s largest source of real estate capital.
So what exactly is behind the meteoric rise of the ASEAN property market? And indeed, what part does Singapore play in its future? The answer to the second of these questions is simple: an increasingly important one. Answering the former can also be explained by some basic economics. It is said that the real estate sector is often referred to as a thermometer of economic growth, and this is clearly being reflected by the current market. The economy of ASEAN is today in a state of acceleration driven by a fast-expanding middle-class population. This in turn is demonstrated by strong consumer spending, improving labor market conditions and wages, and growing pension funds, all of which create extra cash to invest.
All of this is to say, therefore, that ASEAN presents an extremely positive case for real-estate investment going forward. The size of the populations in many of ASEAN’s major markets are set to increase the popularity of real estate as a long-term growth opportunity, especially in those markets where a younger population and burgeoning middle-class are starting to become more influential. Indonesia and Vietnam, for instance, have populations of 261 million and 93 million respectively, and as regulatory governance eases, the number of possibilities available to investors are set to expand.
In Singapore, ASEAN real estate developers and capital investors are leveraging this growth for internationalization – or more specifically, regionalization. One such developer is CapitaLand, the company behind that eye-popping acquisition of Asia Square Tower 2 last year, which builds and operates integrated developments, malls, lodging, offices and residential developments in over 30 countries across the globe.
As the global real estate market has boomed, CapitaLand has witnessed impressive growth in recent years, with its profit after tax and minority interests (PATMI) increasing by 85 percent from S$840.2 million to S$1.550.7 million between FY2013 and FY2017; while its AUM grew 44 percent, from S$64.6 billion to S$93.1 billion between FY2013 and 1H2018. CapitaLand’s return on equity grew from 5.4 percent in FY2013 to 8.5 percent in FY2017 (a 58 percent increase); and as the company continues to expand globally, the Group is particularly upbeat about the opportunities in Southeast Asia."The fundamentals of ASEAN have been very positive,” explains Ming Yan Lim, CapitaLand’s Board Director, and former President & Group CEO. “This will lead to greater urbanization and economic growth, and is very promising for ASEAN real estate.”
First movers like CapitaLand with over 20 years of presence in ASEAN are well poised to seize opportunities. The company, through its wholly owned lodging business unit The Ascott Limited (Ascott), recently entered the fast-growing middle-class business hotel segment by investing in a 70 percent stake in TAUZIA Hotel Management (TAUZIA), giving Ascott an instant boost of close to 20,000 units spanning 123 hotels across Indonesia, Malaysia and Vietnam. CapitaLand is also building up its existing S$1.1 billion portfolio of integrated developments, homes, malls and serviced residences in Vietnam, with a recent acquisition of a prime residential site in the fast-growing District 2 of Ho Chi Minh City to tap the growing demand for quality residential developments in the country, driven by rapid urbanization and rising affluence of its population.
In years gone by, ASEAN-wide progress made within the areas of hard infrastructure and free trade has contributed to businesses like CapitaLand expanding their interests across the region – today it has a strong presence in nine of the 10 ASEAN countries through its lodging, residential, retail and commercial portfolios. However, according to Mr. Lim, the real estate industry must now look forward to and embrace the “next phase” of ASEAN’s development to thrive and maximize the opportunities being presented by a rising middle class and rapid urbanization. He is referring, of course, to the digital economy.
“For the next phase of ASEAN’s development, it's very important for us to be able to support digitalization,” he says. “The critical tipping point will be when connectivity has improved so much that it is possible for individuals across all parts of ASEAN to be connected through their smart devices.”
For some, this is a tipping point that does not bode especially well for the brick-and-mortar business of real estate, particularly in the retail sector. The impact of the growing digital marketplace on the high street is well documented. With an ever-increasing number of consumers opting to do their shopping online rather than visit malls or shopping centers in person, fewer physical customers buying in store means less demand for retail units, and that’s not such great news for real estate. However, Mr. Lim says it doesn’t have to be that way. And CapitaLand – at the forefront of driving digital innovation in the retail sector across Asia through its portfolio of popular shopping malls – is proving as such. With shopper traffic of 1.1 billion across Asia, CapitaLand is primed to tap the region’s growing retail demand.
“Shopping malls are no longer a place just for you to sell and buy things. It's a place where people want to experience something new, different and convenient. It's about providing services,” he explains. “For us, we focus on building relationships and engaging with our end customers by leveraging digital technology. This focus on customers is why we see technology as an opportunity, rather than a threat.”
To this end, CapitaLand is racing ahead to open Singapore’s first online-and-offline (O&O) shopping mall, Funan, integrating online, offline, data and logistics aimed at empowering retailers’ omnichannel strategy and transforming the customer experience in 2Q 2019. Beyond retail, the multi-asset class developer is also creating an ‘office of the future’ ecosystem with a core-flex model in Singapore’s central business district. The strategy involves integrating a building’s conventional office space (core) and flexible space (flex) – of which coworking space is one of the types – into an ecosystem of innovative workplace solutions that are community-driven, tech-enabled and provide value-add for all tenants.
Besides improving services, digitalization also has the potential for ASEAN to create a “network of hubs”, says Mr. Lim – something the sector can additionally embrace and benefit from through facilitating knowledge exchange between the region’s real estate investment community.
One investment tip that certainly seems to have been doing the rounds in Singapore lately is this: watch out for Real Estate Investment Trusts (REITs). That has been the message at least from a growing number of analysts who say REITs are a solid bet considering the island's recent cooling measures.
Many investors like to invest in REITs as these investment vehicles produce regular income, often on a quarterly basis. CapitaLand for instance, which launched the first REIT listed on Singapore Stock Exchange in 2002, now owns four Singapore-listed REITs and one listed in Malaysia.
“Fueled by Asia’s rapid urbanization, REITs have been one of the fastest growing asset classes in the region,” explains John Lim, CEO of Singapore-based ARA Assets, one of the largest REIT managers in Asia. “We expect REITs to accelerate in growth in Asia over the next decade, with multiple new REIT regimes coming online and existing REIT markets becoming more developed and sophisticated across the region.
“Taking the lead from Singapore which now boasts over 40 REITs and property business trusts and other more developed REIT markets in the U.S., Australia and Japan, there is a lot of potential for growth in this asset class.”