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October 4, 2016

One of the current hotly-debated topics in Asia-Pacific amongst Capital Markets professionals is the uncertainty surrounding interest rate direction and the stabilisation of equity and bond markets. There remains continued uncertainty about the strength of the global economy and how economic factors will impact the region, particularly regarding inflation expectations and yields.

Falling yields in other asset classes have driven increasing allocations to real estate. Even funds that have already allocated a customary real estate exposure in the 10 percent range are planning to increase their allocations further. There have also been a number of new investors to the sector, albeit with allocations in the 5 percent range or below. Given the outlook for continued low interest rates, appetite from buyers is rising and this demand is stemming from corporates, insurers and sovereign wealth funds. Dr Megan Walters, Head of Research for Asia Pacific at JLL explains more about the environment in Asia Pacific.

What are the new demographic trends shaping the real estate landscape in the Asia-Pacific Capital Markets sector?
Some of the key demographic trends that are changing the real estate landscape in this region are firstly – urbanisation. ASEAN alone will see a further 40 million people relocate to cities by 2020. Secondly, China’s aging population means that its old-age dependency ratio will rise to 56 percent by 2030. Further, China is forecast to add just 18 million jobs compared to say the expected 81 million in India, which could lead to further pressure on its economy.
Currently, cooling measures by some governments in Asia Pacific’s residential markets are driving investors and developers into the commercial property sector. Keen competition for limited higher-yielding assets in seven of the major Asia Pacific real estate markets, namely Shanghai, Tokyo, Japan, Singapore, Hong Kong and Sydney and Melbourne, has caused investors to consider assets in what may be classed as smaller or second tier cities such Bangalore, Adelaide and Auckland.

Have there been any major legislative changes that have affected the sector recently?
Some of the economies in the region are developing rapidly and there has been great progress in terms of real estate market reforms. One key legislative change is India’s REIT regulation. The Indian government recently pushed forward the introduction of REITs with the exemption of Dividend Distribution Tax, clearing a big hurdle for REIT investment. India REITs or I-REITs would provide much needed liquidity by providing an alternative source of finance to the real estate market.
Another change was the reduction of interest repayments for first-time buyers. This was announced by India’s government in its 2016/2017 Union Budget. The move will likely increase the demand for housing at the lower end of the market, benefitting buyers in tier-2 and tier-3 cities.
In Indonesia, a recently revised tax rate on the sales of property to REITs of 0.5 percent (down from 5 percent) could potentially see new funds being raised in the domestic market. REITs currently listed overseas may also consider re-listing on the domestic stock exchange or seek secondary listing. Further amendments to investment regulations drawing offshore funds through the recently announced tax amnesty program will increase the domestic capital pool. Moreover, Bank Indonesia has initiated plans to reduce required down payment for first-time home purchases and this may fuel demand in the housing market.
Taiwan’s new property capital gains tax regime took effect at the beginning of 2016 – a measure designed to curb speculation in the domestic housing market. Coupled with loosened credit control, property transactions have surged across six major cities in the country. Also, in Taiwan, the government has revised regulations to allow Taiwanese insurers to increase their overseas real estate allocations. This increased allowance for overseas real estate investment has led to more intense competition globally as Taiwanese insurance companies actively seek higher yields comparing to those that their domestic market can offer.
In China, the government’s new value-added tax scheme has given the economy a fiscal boost and stimulated growth in the service sector (including manufacturing, construction, property, consumer and finance). This shift from business tax to value-added tax will encourage upgrading and expansion, providing a boost to the absorption of office space in the long run.
In the broader market, effects from the OECD’s proposed action points for Base Erosion and Profit Shifting (BEPS) are expected to ripple through the real estate fund management industry. Fund managers will face significant challenges primarily structural issues surrounding transfer pricing, interest deductibility and tax treaty abuse, and more importantly protecting the interests of investors.
Elsewhere in the region, cooling measures in Singapore, Hong Kong, Beijing and Shanghai have led to falling prices of luxury residential properties. The market is down approximately four percent (year-on-year) and one percent respectively in Singapore and Hong Kong while prices in Beijing climbed 11 percent. In Shanghai, prices were up 20 percent. All the numbers are derived from JLL’s Residential Index.

Are there any challenges with the regulatory framework surrounding this area?
In Asia, it is not uncommon to see multiple ownership of commercial buildings, subdivisions
and strata titles. This could be reduced to help maintain institutional grade office and retail stock in core markets. Multiple ownership systems, if not well regulated, can have a tendency to degrade public space and reduce the quality of city life. More importantly, commercial assets under such structures often face the risk of mispricing between rents and capital values. I would encourage commercial real estate to be securitised at the building level and ban the sale of individual floors in commercial buildings over a certain height. Having multiple owners of buildings makes redevelopment exceptionally costly and leads to an aged building stock and poor urban environment.

What is particularly interesting about the Asia Pacific region?
Markets in Asia Pacific are constantly moving at varying speeds with differing drivers and dynamics – understanding is key thus keeping research challenging. Despite global headwinds, Asia-Pacific as a whole is gaining traction through resilience and confidence. The IMF forecasts that India’s GDP will grow from 7.4 percent to 7.6 percent (for FY16F to FY18F). The middle income population in ASEAN will expand to approximately 200 million by 2020, leading to greater discretionary spending power, especially in emerging markets such as China and Indonesia.
The global economy often has its eyes set on Asia Pacific given two of the biggest emerging markets in the world sit in the region, not to mention Japan, Australia and the four Asian Tigers.
We have rising pools of capital in Asia to be deployed in commercial real estate; this includes Sovereign Wealth Funds such those from Singapore; pension funds such as those from Korea and Malaysia and insurance companies from China and Taiwan. Big Japanese pension funds are expected to be the next pool of capital to deploy funds to real estate.

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