An influx of foreign capital is targeting riskier retail assets in Asia as confidence returns and consumers continue to spend.
Shopping centres are the latest ‘must have’ for investors, who are targeting Asia in a bid to benefit from the region’s growth and ever-increasing consumer confidence.
Despite slower than expected GDP growth from China and nerves over US Federal tapering, consumer spending remains robust in Asian cities driven by rapid urbanisation.
As a result, retail investment in Asia witnessed another year of prolific activity in 2013 with turnover totaling US$21.17 billion – a 41 percent increase on 2012.
But competition is fierce and there is plenty of fresh capital targeting the sector, from local high net worth investors to global sovereign and pension funds. Private Equity funds raised for exclusive investment in the region are also a dominant force, particularly for riskier assets
“Buyers will increasingly look to invest in assets that stretch their comfort levels, a phrase growing in popularity is ‘they’re ‘moving up the risk curve’,” said David Raven, Lead Director, Retail Investment, JLL, the author of a new retail investment report.
“Private equity investors are having to target secondary properties or assets that require some form of repositioning.”
Buyers however have to be aware when buying secondary assets according to Raven. “Unlike other asset classes, there is the propensity for investments in retail real estate to go horribly wrong if investors fail to do their homework when purchasing or don’t have the necessary skills to appropriately manage once acquired.”
While mixed use is nothing new, as a vertical living society, Asia lends itself to this type of property. Private high net worth investors are seeing the benefits of investing in these retail assets, and unsurprisingly, this cash-rich demographic dominated prime buying in 2013. Having reaped the benefits of owning hotels, the natural next step is retail.
Asian billionaires have long been buyers of trophy hotels around the globe. Shopping malls and flagship retail stores have similar qualities and, for many, are seen as ‘must haves’ for private collections.
The Knightsbridge mall on Singapore’s Orchard Road is a good example of this. Last year, it sold to Bright Ruby Resources, which is controlled by the Du family of China, for US$921 million. While a hotel sits above the shops, the retail component made up more than half of the sale price at US$595 million.
As retail in Asia becomes more sophisticated, with more international landlords and brands targeting the region, David expects more investors to seek out local partners for their on-the-ground-knowledge.
“A lot of the capital that we envisage targeting the market this year is the relatively passive global pension fund and sovereign style capital. These groups tend not to have huge operational teams and they’ll need help from local partners to access the market and manage their investments.”
In Shanghai, the largest shopping centre transaction of 2013 was a joint venture. Morgan Stanley sold its 80 percent stake in Life Hub @ Jinqio for US$425.8 million to Keppel Land Limited – the property arm of Singapore’s Keppel Corporation, together with Alpha Investment Partners. Chongbang Group from Hong Kong owns the remaining 20 percent. The development includes 98,000 square metres of retail and 16,000 square metres of office space.
But joint ventures are only possible if the right investment opportunities present themselves. In what David describes as a distinctly ‘sellers’ market, there’s likely to be an acute shortage of investable stock in the coming year.
“On the supply side there’s very little stress in the system so the only motivations we envisage for people choosing to sell are either going to be maturing equity funds or those taking a proactive route to crystalise profit.”
“For landlords, they will need to increasingly be aware of ecommerce and constantly evolving technology in order to attract retailers. Historically, developers have built and the retailers have showed up. But because of continuous shopping centre development and ecommerce expansion, retailers are becoming more discerning.”
“The adoption of new technology is very advanced in Asia. Increasingly retailers are demanding that landlords provide more than just a shop. They need to ensure that additional infrastructure is in place which includes offering assistance with logistics platforms and ensuring that the tenant mix keeps shoppers spending. “
Wider market-altering factors like this aside, David warns investors that they shouldn’t underestimate the effects of an underlying economy. In Japan, for example, media murmurs of an Abenomics backlash are rife but David takes a contrary view.
“Investor demand is going to focus on Japan again. This has been helped by the devaluation of the yen, the tick up in economic growth, the spread of growth beyond Tokyo and the major cities plus investors again recognising the sheer size of the economy and the wealth of Japanese citizens: all of these factors read well for Japan. “
In the developing markets, Malaysia was a hot spot for retail real estate investors in 2013.
“The government has been very proactive in Malaysia, particularly in the Johor Bahru region. The infrastructure investment goes in and you can see there’s going to be a big upsurge in people and the dynamics of the area will change and that will have a hugely beneficial effect on retail.”
While it’s impossible to pin the future hopes of the retail investment sector on one market accelerant, it appears to be achieving ‘escape velocity’ from the effects of the GFC, which presents some exciting investment propositions.
JLL’s Asia Retail Investment Outlook and Review can be downloaded here