The Urban Land Institute has put out its signature annual publication, the 2017 version of Emerging Trends in Real Estate Asia Pacific, and it makes for some very surprising reading.
For the last three years, stable, core markets such as Tokyo and Sydney have topped the charts in terms of investment and development prospects, which the ULI rates separately. In fact, the two cities were the only ones voted "generally good" for investment last year. Everywhere else, spanning another 20 major cities across Asia, was rated only "fair" for the two polls.
That pattern has been totally turned on its head with this year's report. Emerging-nation cities Bangalore, Mumbai, Manila and Ho Chi Minh City are the only "generally good" cities for investment this time around, in that order. It's the same set of cities for development, too, although Ho Chi Minh City -- Saigon, to you and me -- moves into second place.
Why has the picture changed so dramatically in a year? Well, Japan and Australia translate basically as a "flight to safety," a wish-list that has now switched to "the quest for yield."
This desire to boost returns in more speculative ways stems in part because there just aren't properties available at a sensible or indeed any price at the biggest cities in the region.
It presents a challenge, because the emerging cities don't have the appropriate stock -- not because no one wants to sell, but just because it doesn't yet exist. The ULI notes that the institutional investors often don't have the necessary experience to truly understand how to operate in those markets either.
Indian real estate had been a no-go area for ages. People that I spoke with at companies like Jones Lang LaSalle (JLL) or its investment arm LaSalle Investment Management were put off by an ownership structure that often broke buildings into tiny lots owned by several or many people in a family. Negotiating with them wasn't worth the worry.
Another hurdle is the fact that it is not easy for foreign investors to buy property in India. Most individual foreign investors need the approval of the Reserve Bank of India to do so unless they live in the country more than 183 days a year or are a person of Indian origin. Individual investors can only buy residential property -- those willing to purchase office or commercial space need to set up a company in the country.
Blackstone (BX) , the world's biggest private-asset investor, with huge real-estate funds that withstood the financial crisis well, wasn't any more charmed either. But it has changed tack. It has become the most-prolific investor in Indian commercial real estate, and according to the Times of India, may be preparing to list an Indian REIT domestically. India has been struggling to create a REIT market for years.
Brookfield Asset Management (BAM) , the Toronto-based institutional giant, has made a major move in Mumbai, shelling out $1 billion for 4.5 million square feet of commercial space in a city suburb. That makes it the largest single purchase of commercial real estate there. The Singapore sovereign wealth fund GIC was also thought to be bidding but backed away.
As of the end of last month, Indian media stated that Brookfield is now in talks to buy Continuum Wind Energy, a Singapore-based, India-focused wind-farm giant ultimately backed by Morgan Stanley (MS) and its Morgan Stanley Infrastructure Partners arm. That deal has yet to be confirmed.
Dalian Wanda, the huge privately held Chinese conglomerate with a U.S.-listed commercial-property subsidiary (DLWNY) , has also said it may invest up to $10 billion into India. And Fosun International (FOSUY) , another huge private Chinese company, is said to be prepping a $1 billion investment platform in India.
Sourcing core assets in major gateway cities is becoming too expensive or hard for many investors, hence the changing of the guard.
Sydney has slumped to 9th place in both rankings, and Tokyo is even further on down. Hong Kong, with the most-expensive rents and office property, is in the bottom five for investment or development.
There aren't enough buildings to buy in Tokyo, where locals get first dibs on any of the best projects anyway in a market that is not very transparent. Non-Japanese institutional investors such as MGPA took to buying second- or third-rate buildings, known kindly as Class B or Class C office or retail properties, and overhauling them to meet Japan's new and stricter earthquake-protection measures. For good measure, they then moved the lower-grade tenants on their way, upped the rents and brought in higher-quality corporates.
MGPA was launched by Australian bank Macquarie (MQBKY) but now is a part of BlackRock (BLK) , the world's largest asset manager. At the time of the acquisition in 2013, MGPA managed about $12 billion, two-thirds of that in Asia, and to a lesser extent Europe. So BlackRock bought a nice chunk of Asian exposure in one go.
The ULI quizzes investment managers, real-estate commercial brokerages, private investors or developers, public Real Estate Investment Trusts, homebuilders, private equity and banks that lend to real estate to generate its results. They interviewed 94 people directly and got survey replies from another 604 people for the 2017 report. So it's a pretty strong indication of what the institutional and investor market thinks.
