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Emerging Trends Real Estate Asia Pacific 2019 PDF
Emerging Trends Real Estate Asia Pacific 2019 PDF
in Real Estate ®
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Contents
1 Executive Summary
3 Notice to Readers
4 Chapter 1: Calling the Top?
7 China: Key Themes
7 Big Money Chases Slow Growth
9 Will Cap Rates Reverse?
10 Strategies Evolve
11 Japan: Key Themes
11 Value-Add Ticks the Boxes
13 Build-to-Core Strategy Aims at Institutions
14 Return of Distress?
14 Emerging Markets Still a Draw
15 Niche Sectors Still in Demand
17 Worker Housing Cuts Commutes
17 Government Policies Boost Affordable Housing
18 Co-living – Template for the Future?
18 Multifamily – Slow but Steady
19 Australia: Key Themes
21 Coworking Questions Remain
22 Rate Hikes Loom
56 Interviewees
© 2018 PwC. All rights reserved. PwC refers to the PwC network and/or
one or more of its member firms, each of which is a separate legal entity.
Please see www.pwc.com/structure for further details.
Printed in Hong Kong. All rights reserved. No part of this book may be
reproduced in any form or by any means, electronic or mechanical,
including photocopying and recording, or by any information storage and
retrieval system, without written permission of the publisher.
PwC and the Urban Land Institute: Emerging Trends in Real Estate® Asia
Pacific 2019. Washington, D.C.: PwC and the Urban Land Institute, 2018.
ISBN: 978-0-87420-420-9
After nine years of relentless expansion, Asia’s real estate markets are facing rising
headwinds. An impending trade war, rising interest rates, tighter access to credit, and
buyer fatigue at sky-high prices for both commercial and residential properties are
causing investors to question whether the long bull cycle may be reaching its peak: “The
market’s wobbling like a jelly on a plate,” as one investor put it. “We’re at historic highs
across the board.”
That said, market fundamentals in 2018 remain robust. Transactions for the year are at
record levels and pricing is strong, sustained by ever-growing volumes of institutional
capital piling up in Asia’s biggest economies.
For now, then, the music continues, and although some investors are looking to sell down
their holdings and reposition, the sheer weight of capital looking to find a home in real
estate means that prices may not fall significantly even if other indicators turn south.
As a result, and as in previous years, investors must consider more varied strategies than
in the past to get money into the market.
25
24.7%
20
17.9%
Percentage of responses
17.0%
15
14.0%
10
9.5%
5 5.9% 6.0%
5.2%
0
Singapore Australia Hong Kong India Japan Philippines China Others*
*Includes Germany, Indonesia, Malaysia, South Korea, Taiwan, Thailand, United Arab Emirates, United
Kingdom, United States, and Vietnam.
REIT markets have turned in a fairly Finally, this year’s investment prospect
stagnant performance in 2018—an rankings reflect the enduring appeal of
unsurprising consequence of the upward the slow-but-steady returns offered by
trajectory in global interest rates as gateway cities in developed markets, with
capital transitions to higher-yielding Melbourne, Sydney, Tokyo, and Osaka to
Notice to Readers
Emerging Trends in Real Estate® Asia Pacific is a trends and forecast publication now in its 13th edition, and is one of the most
highly regarded and widely read forecast reports in the real estate industry. Emerging Trends in Real Estate® Asia Pacific 2019,
undertaken jointly by PwC and the Urban Land Institute, provides an outlook on real estate investment and development trends,
real estate finance and capital markets, property sectors, metropolitan areas, and other real estate issues throughout the Asia
Pacific region.
Emerging Trends in Real Estate® Asia Pacific 2019 reflects the views of individuals who completed surveys or were interviewed
as a part of the research process for this report. The views expressed herein, including all comments appearing in quotes, are
obtained exclusively from these surveys and interviews and do not express the opinions of either PwC or ULI. Interviewees
and survey participants represent a wide range of industry experts, including investors, fund managers, developers, property
companies, lenders, brokers, advisers, and consultants. ULI and PwC researchers personally interviewed 89 individuals and survey
responses were received from 373 individuals, whose company affiliations are broken down below.
Throughout the publication, the views of interviewees and/or survey respondents have been presented as direct quotations from the
participant without attribution to any particular participant. A list of the interview participants in this year’s study who chose to be identified
appears at the end of this report, but it should be noted that all interviewees are given the option to remain anonymous regarding their
participation. In several cases, quotes contained herein were obtained from interviewees who are not listed. Readers are cautioned not to
attempt to attribute any quote to a specific individual or company.
To all who helped, the Urban Land Institute and PwC extend sincere thanks for sharing valuable time and expertise. Without the
involvement of these many individuals, this report would not have been possible.
200 40%
180 35%
160
30%
Volume (US$ billion)
140
120 25%
100 20%
80 15%
60
10%
40
20 5%
0 0%
'12 '13 '14 '15 '16 '17 '18
20%
10%
Year-over-year change
0%
–10%
–20%
'13 '14 '15 '16 '17 '18
In Hong Kong, huge sums paid in a Perhaps unsurprisingly, those markets also dominate our survey findings of the most
couple of flagship deals involving Mainland attractive markets for regional investment and development (see chapter 3). Cap rates,
Chinese investors propelled the city to the meanwhile, have continued to compress, especially in Australia and South Korea.
top of the charts (second worldwide only to
the New York City metro area), despite its But while neither transaction statistics nor the profitability forecast in our 2019 survey
reputation as a market where stock rarely (see page 10) betray particular signs of weakness, interviewees across Asia voiced a
trades. consistently negative theme that markets were at or near a cyclical peak, with some
investors who don’t have to stay invested indicating they were looking to sell properties
Otherwise, spending by domestic into the current strength.
institutions saw both Tokyo and Seoul also
registering high volumes, with deal flow In Hong Kong, one opportunistic investor commented that “The market’s wobbling like
in the latter up 66 per cent over the same a jelly on a plate at the moment. Nothing is making us collapse or melt, but nothing is
period in 2017. Sydney, Shanghai, and making us rise, but it’s hard to see where the markets are going to go from here—we’re
Melbourne were the other Asian markets at historic highs across the board.”
among the global top 30, rounding out
a shopping list of gateway cities for core
investors in search of Asian assets.
Tokyo 95 5
Auckland 61 17 4 19
Sydney 58 13 29
Melbourne 56 6 37
Hong Kong 46 16 6 32
Singapore 38 38 6 19
Brisbane 33 11 55
Bangalore 13 63 13 13
Beijing 13 50 38
Mumbai 6 57 25 13
Guangzhou 63 38
Perth 55 45
Shanghai 36 64
Kuala Lumpur 17 23 60
Jakarta 13 25 63
0 10 20 30 40 50 60 70 80 90 100
Source: RICS.
Exhibit 1-3 Sales Volumes for Most Active Global Real Estate Markets, First Half of 2018
2017 H1 2018
Rank Rank Market Sales Volume (US$ million) Year-over-year Change
1 1 NYC Metro $26,034 23%
7 2 Hong Kong $19,681 89%
3 3 London Metro $17,476 7%
2 4 LA Metro $15,867 4%
5 5 SF Metro $11,188 -7%
6 6 DC Metro $10,663 24%
9 7 Tokyo $9,276 11%
4 8 Paris $8,479 19%
13 9 Chicago $8,182 42%
8 10 Dallas $8,012 -12%
21 11 Seoul $7,785 66%
12 12 Atlanta $6,233 -8%
26 13 Phoenix $5,984 59%
24 14 Seattle $5,722 27%
11 15 Amsterdam/Randstad $5,662 -6%
19 16 Miami/South Florida $5,208 -21%
18 17 Houston $4,915 -9%
14 18 Boston Metro $4,621 -45%
20 19 Sydney $4,346 -2%
25 20 Denver $4,226 9%
28 21 Toronto $3,944 32%
31 22 Munich $3,775 18%
17 23 Rhine-Ruhr $3,706 -37%
10 24 Shanghai $3,687 -48%
22 25 Frankfurt/Rhine-Main $3,499 -32%
30 26 Philly Metro $3,227 17%
15 27 Berlin-Brandenburg $2,920 -51%
34 28 Austin $2,891 -27%
32 29 Melbourne $2,852 50%
35 30 San Diego $2,769 21%
Note: Includes office, industrial, retail, apartment, hotel, senior housing, and elderly care real estate.
Source: Real Capital Analytics.
China: Key Themes forcing many developers onto the sidelines. or located in a less fashionable area used
“Government pricing is now just too high,” as spillover for back-office purposes.
With GDP growth in China ticking down to one investor said. “The basis doesn’t Then international expertise provides
its lowest rate since the global financial work.” Starved of capital, developers now global property standards and financial
crisis and senior officials making also have less money to replenish land management, while the local partner
uncompromising statements about the banks. contains labour and operating costs.
need to curbing further home price rises,
Mainland markets end 2018 in subdued Increasingly, therefore, land at auction The flood of institutional capital that has
mood and a sense that change is in the air. often goes unsold, previously a key source built up in China at least provides an exit
“In China right now, the macro view is that of revenue for many local governments. for investors willing to take development
the way most private-equity investors have That is causing some authorities to resort risk. “Build to core” is the play. “In all
made money in the past is not how they’re to drastic action. “There are signs that of our markets, there’s a shortage of
going to make money in the future,” one government auctions are now coercing quality yielding institutional assets for local
special-situations investor said. companies to make bids, because institutional investor as well as foreign
companies are not wanting to do that,” investors,” the investor said. That provides
As usual, government policy mandates have the family office head said. the exit for development or value-add
been enforced by imposing limitations on projects. As a result, “we are looking to
credit for both developers and retail buyers. Opportunistic Entry create institutional-quality assets to sell
As a result, according to the head of a into that market.”
family office that invests exclusively in China: Opportunistic investors may look for other
“We are seeing residential prices softening ways of purchasing land. One special- Returns in the low teens are attainable for
significantly.” The impact of the measures situations investor is targeting stabilised opportunistic plays in China, particularly
is being felt in other parts of the industry returns of 13 per cent in China. “We are for value-add projects with a hands-on
too. Whether residential, commercial, or very focused on developing something approach and a strong local partner.
industrial, “the clampdown on government that is better than the tenant is expecting The choice of product and partner is the
credit to real estate companies is at a lower cost than they expected,” the key determinant of profit margins, rather
happening.” investor said. That is achieved by working than the choice of market. “I don’t see a
with local partners to drive secondary- massive differential these days between
Adding to these problems, land in major market plot prices as low as possible, Shanghai, Beijing, Shenzhen, Guangzhou,
cities has become prohibitively expensive, perhaps because the seller is distressed,
Big Money Chases Slow Growth are pushing that figure well north of 10 For European or North American
per cent. “There are trillions of dollars institutions such as pension funds and
Fears of an impending cyclical reversal lined up wanting to get invested in real insurance companies, Asian assets offer
come as liquidity in the market reaches estate, massive amounts of capital,” one better returns than they can earn at home.
an all-time high, with capital from some of opportunistic investor said. So “there’s a In particular, if they are comparing the
the world’s largest institutional investors— lot of money pushing the market up, but excess return from prevailing rental rates
mostly based in Asia—continuing to pour not great expectations of [rental] growth.” over the local cost of borrowing, markets in
into regional property assets as investors
Japan and Australia are attractive options.
seek to boost income beyond what With so much capital now in play, the
regional or global bond markets can offer. search for core investments in Asia is Institutional buyers enjoy a number of
Having resisted real estate investment in tougher than at any point since the global competitive advantages over private-
the past as an illiquid and alternative asset financial crisis. According to one core equity players. In particular, investment
class, they now increasingly view it as a investor: “Obviously, the pricing is where it yields are not necessarily seen as the main
mainstream portion of their portfolios. is—it has made our lives more difficult, and consideration, allowing the big funds to
requires a lot of work to get one investment look to other factors, including long-term
As a result, allocations to property that in done vis-à-vis what it was five years ago. capital appreciation, diversification of
the past were considered aggressive at 5 But as an insurance company, we are a assets, and provision of a safe haven in the
per cent to 8 per cent of assets are now de longer-term investor with certain unique event of a global economic downturn.
rigueur, with some investment managers features and the ability to hold things long-
reporting that the biggest institutions term.”
Exhibit 1-4 Office Sector: Projected Total Annual Return, 2018–2022 In addition, because pension funds and
insurers can operate with little or no
leverage, rising interest rates are less of a
10-year bond yield Excess return risk, nor are they subject to the limited life
spans of private-equity funds, allowing them
Shanghai – Pudong 4.1% 3.1%
to “play it through cycles,” as an investor at
Osaka 0.1% 7% a large insurance company put it.
Sydney – CBD 2.8% 4.2%
Asian institutions investing in their domestic
Fukuoka 0.1% 6.5%
markets enjoy further advantages. They
Shanghai – Puxi 4.1% 2.5% are, of course, more familiar with local
conditions. In addition, they are exempt from
Nagoya 0.1% 6.3%
a range of factors such as currency-hedging
Beijing – overall 4.1% 2.1% costs, foreign-exchange restrictions, fees
Melbourne – CBD 2.9% 3.3% and charges aimed at overseas entities,
as well as the expense of moving money
Auckland – CBD 3.1% 2.9% internationally. As a result, “it’s very difficult
Seoul – CBD 2.7% 2.7% to compete with local capital for core
assets,” the investor said. “Almost by
Yokohama 0.1% 5.3%
definition, if you’re layering in the cost of tax
Singapore – Marina Bay 2.6% 2.7% and currency hedging, your cost of capital
2.6% is going to be higher than the domestic
Singapore – Shenton Way 2.6%
competition for the same assets.”
Kuala Lumpur 4.5% 0.7%
–1 0 1 2 3 4 5 6 7
Note: Projected compound annual return. Excess return equals rate of total income plus capital
appreciation over the local 10-year sovereign bond rate.
Source: DWS, as of July 2018.
Will Cap Rates Reverse? Exhibit 1-5 Most Problematic Issues for Real Estate Investors
The glut of institutionally held core capital
circulating in regional gateways is now
forcing more yield-sensitive investors to Low yields 6.10
travel ever further afield in search of deals.
This means not only that assets are harder Lack of investable properties 5.81
than ever to find, but also that cap rates
continue to be prohibitively tight. Possible trade wars 5.50
Fair
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Japan: Key Themes to any market that a foreign investor can despite a revival in Japanese wage growth
breach. providing a slight lift to rents, investor
Perhaps surprisingly, Japanese cities have
interest in residential has waned as the
migrated upward in this year’s investment One unique aspect of the Japanese market supply of suitable properties dries up.
prospect rankings to near the top of the is that returns can be outsized due to
table, following a couple of years when the low cost of borrowing (i.e., sub–1 per According to one investor active in the
investors questioned whether local markets cent), access to relatively high amounts of sector: “I think part of it is that lenders are
had run out of steam. Their resurgence is leverage, and the availability of seven- to concerned about pricing. They’re saying,
likely a reflection of the fact that Tokyo in 10-year fixed-rate financing, which basically ‘Do we want to do something below a 3
particular is one of the few destinations in locks in a minimum level of return from the cap?’ I’ve always thought the 3 per cent
the Asia Pacific region where institutional outset. In the Asia Pacific region, only Hong level was going to be a hurdle in Tokyo.
investors can find a deep and liquid pool of Kong promises lower annual total returns People were suggesting it could go to a 2,
assets to trade. on office property than Tokyo, according to but once it does, when you start to look at
DWS. But with the risk-free (i.e., Japanese that price per square metre on the building,
Tokyo promises stabilised, high-quality government bond) rate at only 0.1 per cent, it’s higher than you’re selling individual
office assets that have delivered better- Tokyo’s annual 3 per cent cap rate offers condos for—obviously that doesn’t support
than-expected returns in the last couple a handsome yield spread over both cost of your strategy for making money.”
of years. “We expected flat-ish rents over capital and the local sovereign. That said,
2017 and ’18, but have been surprised by investors are reporting that borrowing rates As a result, some investors are now
3 per cent to 7 per cent [increases],” the may be set to inch up, and in practical rotating into B-grade office. According
Asia CEO of one European developer said. terms may indeed already have done so to one fund manager: “If you’re looking
Yields have generally fallen around one given new bank policies imposing upfront at B-grade and below-market rents, I
percentage point over the last five years, fees on lending. think that’s still a good play. Probably still
due to strong capital value growth. Still,
defensive for all intents and purposes, but
many of the best buildings in the Japanese Last year saw investor focus turn away I’m more comfortable with tenants who
capital are closely held by Japanese from office and towards to the residential pay 20,000 yen or less per tsubo because
corporations, or trade between the market, which offered slightly higher yields I can raise their rents a bit and still make
developer and its sponsored REIT. Even together with lower volatility. Yields have it work for me, and I can also find tenants
the buildings that change hands often do now compressed drastically, however, and to take that space even in a downturn. In
so behind closed doors, without coming
Build-to-Core Strategy Aims at for the risk, but then you are left with the hitting a level of market maturity that is
Institutions core portfolio at the end,” the investor equivalent to that in cities such as London
explained. “At the end of the day, what and New York City. With effectively no
Development is another strategy now we’re chasing is income-producing land in city centres left to sell, and with
increasingly on investors’ radars, especially assets.” surrounding areas already developed for
with so many institutional investors in miles around, the natural response is for
the market. The overall dearth of core The Indian market is another destination planners and developers to focus instead
properties in Asian markets, combined ripe for development projects: “The market on opportunities to buy dilapidated,
with an apparently limitless hunger for is becoming institutional very quickly,” underperforming, or outdated city-centre
core product, means that build-to-core commented one opportunistic investor, assets and either reposition or redevelop
strategies have become a go-to option and “development of office is where you them.
even for risk-averse investors who would want to be, selling into that. The demand
normally regard development risk as a for office investments over there is very, For China, this marks the first time that
bridge too far. very strong, and prices have gone up the outlet for ever-growing price pressures
significantly over the last two or three in downtown areas is to redevelop for
As a result, build-to-core projects, years.” urban regeneration purposes rather than
particularly office space in underserved head for the expansive suburbs and make
markets such as India or even Seoul, have The objective is to produce assets of the new space. This promises to open a new
become common. “If we want a scalable right quality to outperform what’s already paradigm of city-centre development
presence in India, is the stock going to be in the market. “The market is oversupplied opportunities for foreign funds that
there for the next five, 10, 15 years?” one pretty much across all sectors across is not contingent on buying land in
core investor asked. “If the answer is no, China,” another special-situations investor competition with big domestic developers
you may want to start developing those.” said. “But in the right markets in the right at government auctions. “We are working
cities in the right assets, the product is not with partners to develop real estate that’s
Call them accidental, even reluctant there.” Development will therefore fill that not being met by current supply and is now
developers. The temporary goosing gap. in demand,” the special-situations investor
to returns from delivering a successful explained, referring to one such project.
property is highly desirable, though the Interestingly, the same investor feels “The sophistication of the end users has
ultimate goal is to own a largely risk-free that China’s biggest cities are now advanced beyond the property that’s
building for decades. “You get rewarded available.”
7 60.0%
6
50.0%
(Volume US$ billion)
5
40.0%
4
30.0%
3
20.0%
2
1 10.0%
0 0.0%
'11 '12 '13 '14 '15 '16 '17 '18
Senior housing
China’s data-centre industry also features 41% 46% Data centres
significant barriers to entry. Licensing
is problematic, as is the acquisition of
adequate power supply from China’s 42%
electricity network. Operators with the right Affordable housing 46% Student housing
permissions in place can therefore afford to 43%
be selective in their choice of investors. Business parks
21 Perth
32 Singapore
33 Tokyo
74 Osaka
0 2 4 6 8 10 12 14 16 18 20
Note: Median multiple is the median house price divided by median household income.
Source: Demographia.
Australia: Key Themes “big four” banks have reversed their policy The result is that foreign buyers currently
and reverted back to the central business account for some 40 per cent of all
With Melbourne and Sydney occupying district (CBD) after they encountered transactions for prime assets in Australia.
two of the top three places in this year’s problems in attracting and retaining According to one local investor: “The issue
Emerging Trends investor prospects staff. This is putting further pressure on that’s forcing domestic REITs and funds
survey, Australia remains the single most occupancy rates. out of that market is because [their] cost of
popular investment destination in the
capital can’t compete—it’s basically foreign
Asia Pacific. Unsurprisingly, fundamentals Although yields in Australia continue to capital displacing local capital.”
remain strong. In the first half of 2018, compress (into the low 4s for opportunistic
prime office rents in Sydney and Melbourne and just under 5 per cent for portfolio Why is Australia such a magnet for
registered growth of 12.5 per cent and deals, according to one locally based foreigners? It’s that “we just tick the boxes
10.7 per cent respectively over the same investor), they remain higher than those for global mandates—the fact that Australia
period in the previous year, according to in other Asia Pacific gateways, further is triple rated ticks one box, and its prime
JLL. boosting the appeal for international commercial, so that ticks another box. It’s
investors. Finally, cap-rate “leakage” in the also just a weight of capital issue, and the
Already-low vacancy levels continue to form of hefty tenant incentives that tend to fact that they’re still getting a good risk
decline, and with very little new supply in distort the actual level of local yields is also spread premium even on those [tight]
the pipeline, pressure on rents seems set falling. cap rates.”
to continue, with projected increases of
more than double the long-term average As usual, however, the real problem in Another way for both foreign and local
of 4.5 per cent—among the highest in the Australia lies in actually getting money into capital to access the market is via unlisted
region. What’s more, an experimental push the market. Although activity by Chinese funds, where core exposure is now
several years ago by some larger tenants buyers has ebbed in 2018 due to problems coming available. The driver for this is that
to decentralise by shifting a percentage of moving capital out of China, other foreign Australian superannuation funds and other
staff to suburban locations appears now institutional buyers (especially American) institutions with large holdings of local
to have ended—accounting firms and the have been happy to take their place. property are compelled to sell if capital
Over the long term, the government will In other markets, growing pains are also developer, build-to-rent doesn’t get
probably have to reduce the cost basis to evident. In Australia, recently introduced tax close—it can’t compete to buy the land.
bring scale to a fragmented industry. “If breaks have sought to provide a measure Part of that is because the tax concessions
land is priced well, you’re going to have of support, but progress so far has been aren’t working and also the zoning isn’t
interested buyers,” the investor said. “And minimal. According to one Sydney-based specific, so there’s no advantage from a
if you build a business across cities, you developer: “A lot of local players are talking zoning point of view.”
have the ability to build a good brand about multifamily, and we have some of
name in micro apartments, rentals, shared the U.S. players in the market here with A more activist approach from government
communities, things of that nature.” mandates. But the tax concessions haven’t that provides real incentives for developers
really addressed the issue, so we’re not to pursue multifamily projects will be
Meanwhile, compounding matters, seeing any real investment. Some of the needed before the industry can gain
breakneck growth is creating cash-flow larger developers will just build strata traction. The same applies elsewhere
complications that only add to the pressure apartments or condos and hold them across the Asia Pacific.
of low margins. At least seven Chinese for rent, just to practice and get into that
rented-flat operators are reported to have market. But when you’re competing for the
failed in 2018. same block of land against a residential
Philippines have all raised interest rates in According to one Tokyo-based fund
Rate Hikes Loom
order to support their currencies and fight manager: “If you look at Japanese
Slow but steady increases in U.S. interest inflation. companies, they have record profits and
rates are playing an incrementally more record amounts of cash on their balance
important role in determining capital Rising interest rates could have a significant sheets. So the corporations now can start
flows worldwide. The Federal Reserve impact on real estate markets in Southeast to pay more for debt, and [rates] don’t
Bank is widely predicted to introduce a Asia, where cheap capital from domestic need to be at zero because they have
fourth 25-basis-point rate rise for 2018 banks has been one of the drivers of the cash on the balance sheet they can use
in December, with two further rate hikes regional development boom. One Manila- to service it. So if the BoJ is going to look
projected for 2019. The threat of higher based developer identified higher rates as at when they start to tweak rates up a bit,
interest rates did not emerge as a particular “one of the big concerns locally,” noting I don’t think they’re going to find a better
concern for most investors in our survey, that they could prove beneficial for foreign time than now.”
however, with the cost of finance ranking investors who have for years struggled to
next to bottom amongst a list of potentially compete in local markets because their Meanwhile, the Australian dollar has also
problematic issues (see exhibit 1-5). “I hurdle rates make them uncompetitive weakened against the U.S. dollar, and is
don’t think people are expecting interest compared with the cost of financing via expected to weaken further. However, the
rates to blow out,” one opportunistic local banks or bonds. Reserve Bank of Australia has left interest
investor said. “But everybody is looking rates unchanged for more than two years
to see what the next slap across the Japan is also facing the prospect of higher and is not expected to raise rates until the
shoulders is going to be.” rates. The government has been engaged second half of 2019 at the earliest.
in unprecedented fiscal and monetary
Because rising interest rates in the United easing since 2013 that has depressed Finally, while Hong Kong is a largely
States make American fixed-income assets domestic interest rates to around zero. equity-driven real estate market, interest
more attractive, capital is beginning to However, there is now a growing conviction rates there have just begun to rise, too.
leave emerging markets to seek a home in the market that the Bank of Japan A bigger concern, however, is the Hong
in the United States. There are various (BoJ) may finally move slowly to increase Kong dollar’s peg to the U.S. dollar, which
(and potentially profound) implications to the cost of capital. BoJ purchases of means that local assets are becoming
this shift, although the effect will vary from Japanese government bonds (JGBs) have less attractive to Mainland Chinese buyers
market to market. The biggest impact is been quietly tapering in recent months, as the renminbi continues to head south
likely to be felt in emerging markets, where and a Goldman Sachs report in October against the U.S. dollar.
currencies are depreciating against the suggested that quantitative easing could fall
dollar. As a result, India, Indonesia, and the to 2013 levels by the end of 2019.
50%
26% 83%
72% 56% 75%
34%
24%
12%
Total Cross-border only Total Cross-border only Total Cross-border only
Cross-border capital from Asia Pacific (ex. China) Cross-border capital from China Cross-border capital from Americas
Cross-border capital from Europe Cross-border capital from Middle East and Africa Cross-border capital from others
Note: Based on independent reports of income properties and portfolios, US$10million or greater. Income properties include the following property types: apartment,
office, retail, industrial, and hotel.
Source: Real Capital Analytics.
5
GERMANY
CHINA
1
JAPAN
US 10
3
HONG KONG
6
INDIA
9
SINGAPORE
7
4
Note: Apartment, hotel, industrial, office, retail, and senior housing transactions included. Entity-level deals included. Development sites excluded. Data are for
the 12 months to 31 June 2018.
Source: Real Capital Analytics.
While domestic capital still dominates “flowing thick and fast” into major cities, largest superannuation funds, and
purchasing in all markets (the long-term according to one Australian developer. Australia’s sovereign funds. This may be
market share of cross-border capital varied This is “driven by numerous factors, but set to change, however, given how fast
between 17 per cent in South Korea and Australia is a triple A–rated country, so it’s superannuation fund capital is piling up—
40 per cent in Australia), global capital always going to attract institutional money. an increase of some 7.5 per cent annually
is more evident at the top end of the We’re also seeing Asian high-net-worth dwarfs that of the stock of domestic core
market. According to one U.S. investment capital from Singapore and Hong Kong assets, which is growing at less than 2 per
manager: “If you were to focus on deals chasing prime assets.” cent annually, according to JLL.
of $100 million and above, I believe you
would see more overseas institutional In contrast, outbound capital from Australia Foreign-exchange movements and hedging
capital in these markets. It is harder to get remains subdued, perhaps unsurprisingly costs have also become significant factors
data from a decade ago, but the average considering the outperforming domestic in 2018. One large global fund said that
[today] of around 25 per cent of deals market and lingering memories of bad currency effects wiped a percentage
being cross-border capital was under 20 experiences for Australia investors point off third-quarter performance of its
per cent then.” in international markets following the global real estate fund. At the same time,
global financial crisis. At present, there are also benefits—both Japan and
Australia remains the most cosmopolitan outbound investment is limited to a Australia are now both more attractive to
market in the region, with offshore capital small number of large developers, the U.S. dollar–denominated investors than a
year ago.
Chinese investors are also looking at real London was the destination for as
estate platforms as a proxy for real estate much as 26 per cent of Asian outbound
investment, said one manager. “There’s capital in the first half of 2018, with both
still appetite to invest in platforms to take Singaporean and Hong Kong investors
stakes in management companies, and active in the British capital, shaking off
we’ve seen quite a lot of inquiries about concerns over the United Kingdom’s
opportunities for Chinese investors to do impending departure from the European
that.” Union.
South Koreans Turn to Europe investing in euro-denominated markets.” significantly to 30 per cent of the total, up
and Debt In recent years, European investment from from 17 per cent the previous year.
South Korean institutions has shifted away
Investors from South Korea continue to from the United Kingdom into continental The biggest change saw U.S. investors
be major outbound investors but have to Europe, with Germany, France, and increasing activity in China and Australia,
some extent changed their strategies due Belgium preferred destinations. with capital flows rising 215 per cent and
to concerns over currency and returns. 138 per cent respectively. Unusually,
Finally, and in a move that may be U.S. investors have also made significant
Currently, the high cost of hedging against indicative of future plans of other Asian investments in Hong Kong, and were also
the U.S. dollar can cut two percentage institutions, South Korean capital has responsible for most of the overseas capital
points off returns from South Korean equity begun looking for higher returns by placed in Indian real estate, with US$1.84
investments in U.S. real estate. However, moving up the risk curve. For now, this is billion of investment in the first half of
Korean institutions are able to invest in restricted to the domestic market, where 2018—a fivefold increase.
real estate debt without foreign exchange the historical preference has long been for
hedging. As a result, in the first half of single-asset vehicles or club deals focused Notwithstanding this, Japan remains
2018, Koreans became the largest single on core assets. This is beginning to the biggest Asia Pacific market for U.S.
foreign investor in U.S. real estate debt. change, however. “Korean investors tend investors, with flows of US$4.2 billion.
The preference for debt is also a reflection to follow a few leaders. We expect over Asia’s largest developed market remains
of a belief among Korean investors that time more institutions to take a closer look a particular favourite for core pan-Asian
with U.S. markets now late in the cycle, at the domestic value-add market,” the funds run by U.S. investment managers.
debt investments offer more downside investment advisor added. “The Japanese allocation of these funds is
protection in the event of a correction. 30 to 40 per cent because there are not
U.S. Investors Up the Pace of that many areas in these regions that can
A more favourable foreign-exchange be called core,” one Japan investor said.
Asian Investment
(FX) environment is also pushing South “The funds are dollar based, so there is a
Korean institutions to invest in Europe. Already the number-one source of cross- currency hedge when they invest in yen,
As one investment advisor said: “We’re border capital globally, activity from U.S. and presently this hedge is a 2 per cent
seeing a lot more interest in Europe from investors increased 20 per cent year-on- premium. They are aggressive because
Korean institutions. Currency hedging is year in the first half of 2018, RCA data of the magic that leads to a 3 per cent–
an interesting dynamic, because there’s show, with US$28.6 billion placed. The yielding Japanese asset becoming 5 per
actually an FX premium for [Koreans] share of Asia Pacific–bound capital rose cent when the hedge is added.”
6.54
Asia Pacific
6.70
5.50
Europe
5.91
5.37
Americas
5.81
5.29
Middle East/Africa
5.76
1 2 3 4 5 6 7 8 9
Large Stay Large
decline the same increase
Fundraising
The first quarter of 2018 was a record one for Asia Pacific real estate fundraising, with
US$9 billion of equity raised across 13 funds, according to fund industry analysts Preqin.
Much of this capital was committed to a single well-known opportunistic fund, in line
with a trend identified by Preqin showing the bulk of equity raised for real estate funds
in recent years migrating to the top 10 managers. At the same time, however, the
Cornell University/Hodes Weill 2018 Institutional Real Estate Allocations Monitor showed
increasing allocations towards real estate in general and more investors than ever
expressing an interest in the Asia Pacific region.
Average target allocations to real estate increased to 10.4 per cent in 2018, according
to Preqin, up 30 basis points (bps) from 2017 and are up approximately 150 bps since
2013. Nearly half (47 per cent) of the 208 investors surveyed said they planned to invest
in Asia, with 36 per cent saying they would invest in Australia. Interest in Australia remains
unchanged since 2016, while the percentage of investors interested in Asia has grown
from 43 per cent in 2017.
Exhibit 2-5 Quarterly Asia Pacific–Focused Private Real Estate Fundraising (Q1 2013–Q4 2018)
8 24
Source: Preqin.
Meanwhile, recent capital raising for Asia According to a Hong Kong–based debt In addition, while rates remain low on
Pacific real estate funds is adding to the adviser: “Core CBD office will get debt all paper, lending terms are tightening.
region’s existing pool of uninvested capital. day, every day. The area the market has According to one Japanese-based fund
So-called dry powder is more of a problem concerns about is where there’s some manager: “What’s happening is that
for European and U.S. real estate, but is reversionary story or if the asset is not the rates haven’t changed very much,
Opportunistic
Distress
Value-add
Core-plus
Core
but LTVs have. Everyone’s trying not to India has also experienced a pullback in defaults of a prominent local finance
bump rates but basically lowering LTVs bank lending in 2018. In what one local company—resulted in “the availability of
to manage risks. So you’re still below consultant described as a “tumultuous” debt capital for real estate becoming very
100 bps all in, but banks and some life period in the second half of the year, scarce,” as banks moved to reassess
companies are now charging upfront fees the depreciation of the Indian rupee— market risk. This has had a knock-on
as opposed to none, and they’re also combined with declines in the local stock impact for local developers who have been
offsetting some of the LTVs with an upfront market, uncertainties over international unable to refinance existing debt, with
fee as well.” interest rate movements, and the debt sometimes-calamitous consequences for
their solvency.
Note: Prime transactional yields for all markets (except equivalent yields for Australia and cap rate for United States), represent JLL’s “market view” based on
a combination of market evidence where available and a survey of expert opinion. Debt costs are based on investment-grade borrowers, core stabilised assets
fixed pricing on typical market maturities.
*China prime lending rate.
Source: JLL, as of October 2018.
New Lenders Still Emerging Exhibit 2-9 Change in Availability of Debt and Equity Finance
Nonbank financing is becoming an
increasingly popular option across the
region. According to one Hong Kong– Equity for financing or
5.58
based consultant: “Because banks are new investment
perceived to have let the side down in Debt for refinancing or 5.31
some markets and in other markets they new investment
are perceived to be too highly regulated, Debt for development 5.05
we’re noticing a lot more people going to
sources other than banks to get debt.”
1 2 3 4 5 6 7 8 9
Large Stay Large
This trend is particularly evident in decline the same increase
Australia, where the pullback of the four
Source: Emerging Trends in Real Estate Asia Pacific 2019 survey.
main domestic banks from real estate
lending has opened up opportunities
for both smaller banks and nonbank projects. A report from JLL suggested A number of platforms have recently
lenders, targeting in particular residential that Japanese banks in Australia would be been created by investment managers,
development. It is estimated that each 1 prepared to extend 10-year loans with a superannuation funds, and insurers. One
per cent reduction in lending by the big loan-to-value of up to 65 per cent. Some Australian investor commented: “Over
four banks leaves a gap of A$2.7 billion of respondents said that both French and the last 12 to 18 months, there’s been
debt funding. Chinese banks are also looking at lending significant growth in the nonbank lending
in Australia. sector. It’s basically pools of high-net-
Japanese lenders are also reported to be worth money pulled through investment
more active in Australia, often lending to More significant has been the growth management firms. Super Fund money is
Japanese developers involved in Australian in Australia’s nonbank lending market. there, but I think it’s starting to withdraw,
Exhibit 2-10 Quarterly Asia Pacific–Focused Private Real Estate Debt Fundraising (Q1 2013–Q4 2018)
600 6
400 4
300 3
200 2
100 1
0 0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2013 2014 2015 2016 2017 2018
Source: Preqin.
1 2 3 4 5 6 7 8 9 1 2 3 4 5 6 7 8 9
Large Stay Large Large Stay Large
decline the same increase decline the same increase
Source: Emerging Trends in Real Estate Asia Pacific 2019 survey. Source: Emerging Trends in Real Estate Asia Pacific 2018 survey.
Debt Opportunities in China offers new opportunities for profit, but also onto the market to step into other people’s
because it marks a return to a normalised options—that will probably accelerate over
The real estate cycle in China has long (and fundamentally healthier) real estate the next six to eight months.”
been regulated by the government, which cycle.
tends to step in when it feels the market—
Japan is another market that interviewees
particularly the residential market—is either China is one market where developers cited as at risk—this time as a result of
overheating or needs stimulus. are now feeling the pain. However, an impending rise in consumption tax
interviewees suggested that domestic coupled with a potential trade war should
Since mid-2016, China’s policy to de- specialists in the sector would be most the U.S. government follow through on
lever has reduced the availability of debt, likely to take advantage of any windfall. threats to impose tariffs on Japanese
particularly nonbank finance, in order to China is predicted to have as much as autos. According to one Tokyo-based
improve financial stability and reduce the RMB85.5 billion (US$13.6 billion) in real investor: “Right now, I see a lot of cracks
nation’s overall debt-to-GDP ratio. This estate nonperforming loans (NPLs) by the out there and I don’t think it will take much
deleveraging has squeezed a large number end of 2018, according to China Orient for those to get wider. I think it’ll be before
of real estate developers, especially in the Asset Management. Most likely, however, the Olympics, because next year the
private sector. the majority of these will end up on the consumption tax is going to hurt and the
balance sheets of state-backed asset chances of the USA coming after them on
One result of this is that Chinese developers management companies and sold to local auto tariffs is high. So [we have] to wait and
without access to offshore finance have players, as has happened in previous see what happens over the next 12 or 18
been targeted by overseas private-equity years. months.”
groups offering mezzanine loans. As such,
private-equity real estate companies are As one locally based investment manager Finally, developers in India also are
acting as lenders of last resort to local said: “There are lots of people looking at feeling the pain as banks tighten access
developers. According to one private- China NPLs because it’s a large-scale to credit. In particular, many mid-level
equity player: “We’re funding residential opportunity. The really large managers are residential players are now gasping for
development projects in the satellite cities set up for this and have acquired servicing air as they seek to refinance debt. With
of Tier 1 cities. The companies we are businesses in China. So far, though, banks unwilling to front more cash and
talking to, in the past, were relatively small it’s been slim pickings for international with access to the equities markets also
by China standards. Now, they are billion- investors—there hasn’t been the wave of constrained by newly imposed regulatory
dollar companies borrowing at mid-teens deals people have expected.” requirements, mid-tier developers may
or higher interest rates who could have
be forced to divest land banks in order to
borrowed at half that cost 12 to 18 months Even if NPL portfolios become available, pay back loans. So far, however, foreign
ago.” the manager does not believe that they investors have been slow to take the bait,
will offer easy profits. “China is a very big although at least one major foreign player
This business relies on a regular cycle of market. Your NPL portfolio will be backed has recently announced an intention to
tightening and loosening by the Chinese by hundreds of assets, not particularly pursue this theme. According to one
authorities, but there are now early signs located in one city or in one province. local adviser: “This is the time to put your
the U.S./China trade war might end the And your service provider probably only megadollars to work—you could scoop up
opportunity, as China loosens domestic specialises in particular cities or provinces. the market if you have a smart team. But
credit policy to combat the effects of U.S. It will be very challenging work.” because some had their fingers burned in
tariffs on its exported goods. In October,
the past, they’re now being overcautious.
the People’s Bank of China announced Stress is emerging in other markets, too. Anyway, as the political dust settles over
it would cut the reserve requirement ratio In Australia, for example, several Chinese the next six to 12 months, there are going
for most domestic banks by 100 bps in developers may now find themselves to be a lot of opportunities.”
order to support domestic liquidity, lower unable to complete deals for land bought
financing costs, and stimulate growth. The in previous years. According to one local
measure will inject some RMB750 billion developer, “I think the biggest issue over
(US$107 billion) into the economy, CBRE the next eight to 12 months will be people
research estimates. who have optioned-up sites. They’ll have
paid a call option in the event that they’ll
Stress and Distress get a planning outcome, then they’ll start
As liquidity falls and banks regionally begin development within two years and settle
to tighten lending terms, more stressed and on the land. But I think you’ll find a lot of
distressed assets are beginning to appear people in that position no longer have
on Asia Pacific markets. This is welcome the means to settle because of their own
news for investors—not only because it rationing of finance. People will then come
A report from rating agency Moody’s Sources: Bloomberg, Wind, Moody’s Investors Service.
Investors Service said that the top 50 rated
developers will have about US$18.5 billion
of offshore bonds and US$36.9 billion of
Exhibit 2-13 Rated China Developers Refinancing Needs
onshore bonds maturing or becoming due
over the next 12 months. “Most of these
companies will have adequate liquidity
to meet their obligations given their cash
holdings, cash generation from property 11
sales, and our expectation that they will 10 Onshore
maintain access to funding,” the report 9
Offshore
said. However, refinancing risks are set
8
to increase for some small developers, as
their credit quality and subsequently their 7
US$billion
2017, while more than RMB200 billion Embassy Group’s 33 million-square-foot REITs in existence. However, none of
(US$28.7 billion) of residential MBS were business park portfolio, which will be Asia’s them resembles the REIT model familiar to
issued from 2014 to 2017. largest REIT by gross floor area (GFA). investors around the world.
Originally slated to be launched in 2018,
However, DBS believes these structures the IPO is now expected in early 2019. One potential way to kick-start China’s
do not offer much potential for foreign REIT sector may be via rapid growth
buyers of real estate debt. Valuations for The upcoming REIT is generally in the residential rental platforms. The
China MBS have been very aggressive. In considered to be both well subscribed government has now prioritised the
addition, DBS describes China’s system of and conservatively priced. It is targeting creation of a long-lease rental apartment
credit ratings as a “black box” and notes a 6.5 to 7 per cent yield, which on the sector, providing investors a raft of
that the interest coverage ratio for some face of it would create challenges in a incentives, including land supply and
bonds was scarcely above 1x. market where yields are usually significantly tax incentives. In April 2018, the China
higher. Interviewees expect, however, that Securities Regulatory Commission and
Nonetheless, the bank believes “CMBS the REIT will be promoted as a growth the Housing Ministry issued a note
can keep growing rapidly, given its simple opportunity offering opportunity for asset encouraging securitisation of rental
structure,” suggesting also that this would price growth. properties, stating that Beijing soon
be of more benefit to private companies intended to launch a pilot programme
with low credit ratings and good-quality Still, as one interviewee put it: “One REIT for equity REITs.
assets. will not a market make.” So far, only one
other prospective Indian REIT has been However, while Chinese government
REITs registered, and property owners generally support for the rental residential properties
are in no rush to securitise portfolios. has now driven significant capital into the
Asia Pacific REIT performance was modest According to one Indian investor: “We’re sector from both Mainland and overseas
in the first nine months of 2018, with a never going to be first. We’re going wait, investors, the dynamics of China’s real
nine-month return of 1.89 per cent for the and let this thing grow. Our portfolios are estate market make it hard for the finances
MSCI AC Asia Pacific REITs Index, which doing really well. We could hold them for of a prospective C-REIT industry to stack
tracks both developed and developing another five or six years, and just clip very up. Yields for China investment properties
market REITs. high yields.” currently average just 2 to 3 per cent, well
below the cost of debt. At these levels,
Performance for the region’s three Meanwhile, China has been experimenting China REITs would be unable to come
major REIT markets was in line with “quasi-REITs” for nearly two decades. close to the yields offered by peers around
the overall trend, with Singapore REITs However, these vehicles have so far been the region unless the market was repriced.
slightly underperforming the market. In largely nonlisted and have also consisted In addition, China has yet to devise a legal
contrast, U.S. REITs have outperformed of debt, rather than equity securitisations. structure and tax framework for REITs that
considerably in recent years, unsurprisingly The Asia Pacific Real Estate Association will satisfy prospective managers.
given that U.S. growth has outstripped estimates that there are around 30 quasi-
that in Asia REIT countries. According
to MSCI, Asian REIT yields average 4.24
per cent. Asian REITs spent US$10 billion
on acquisitions in the first half of 2018,
according to CBRE research, in line with Exhibit 2-14 Global REIT Comparison
2017.
J-REIT US-REIT A-REIT (Australia) S-REIT (Singapore)
Total market capitalisation of Asia Pacific
REITs is less than half that of the United 350
States, though this gap will narrow when
300
China and India develop REIT markets.
Progress towards this has been glacial, 250
however.
200
Oct-10
Oct-11
Oct-12
Oct-13
Oct-14
Oct-15
Oct-16
Oct-17
Oct-18
However, relative to the wider Singapore The Singapore REIT market has also begun Japan
equity market (the main STI index returned to see consolidation amongst smaller
–10 per cent in the same period), S-REIT Japanese REITs have performed strongly in
REITs, the main driver being the need to
performance has been positive. The IPO 2018, with the S&P Japanese REIT Index
gain size and liquidity; broadly speaking, a
market has been quiet, although a few returning 9.3 per cent and sponsors taking
REIT needs market capitalisation of at least
S-REIT IPOs have been trialled. advantage of the market to raise new
S$1 billion in order to get on institutional
equity.
investors’ radars and generate liquidity in
Meanwhile, the US$448 million listing of the stock. Investors also hope that fewer
one new Singaporean REIT offering an Data from DWS show ¥364 billion
sponsors in the market will also mean
11-office portfolio in the United States (US$3.23 billion) of capital raised through
stronger sponsors.
underlines a key emerging trend in the public offerings from J-REITs in the first
S-REIT sector. The higher yields available half of 2018 and ¥38 billion (US$3.4 billion)
Smaller Singapore REITs have been trading
in the United States, Europe, and Australia raised via two IPOs. J-REITs remain an
at substantial discounts to net asset value.
are attractive to Singaporean investors. attractive investment in Japan given that
In principle, this ought to make acquisitions
the spread between their average yield
easier. However, Singapore’s external
Higher offshore yields are also a factor of 4.1 per cent and yields for 10-year
management model makes the process
driving S-REITs to invest in other markets. government bonds was a healthy 404
tougher, said one S-REIT manager.
“REITs have been going offshore for a basis points in June 2018. That compares
“Several of the REITs do not have strong
while,” said one manager. “The availability to just 126 bps for U.S.-based REITs.
enough sponsorship. However, there has
of stock to be securitised here is limited, been a bit of a standoff, because we have
and people have reservations about selling J-REIT activity has also bounced back in
an externally managed system, and in a
2018. With ¥1.024 trillion (US$9 billion)
Exhibit 2-15 Capital Raising and Transactions by REITs in Japan (6 months rolling average)
0.5
0.8
Figures in JPY tn
0.4
0.6
0.3
0.4
0.2
0.2
0.1
0.0 0.0
2002.03
2002.09
2003.03
2003.09
2004.03
2004.09
2005.03
2005.09
2006.03
2006.09
2007.03
2007.09
2008.03
2008.09
2009.03
2009.09
2010.03
2010.09
2011.03
2011.09
2012.03
2012.09
2013.03
2013.09
2014.03
2014.09
2015.03
2015.09
2016.03
2016.09
2017.03
2017.09
2018.03
2018.09E
of acquisitions, J-REITs represented domestic 10-year bond yields and the supported by the fact that since Link REIT
some 57 per cent of all Japanese real A-REIT dividend yield, which had narrowed floated in 2005, Hong Kong has seen just
estate transactions in the first half of to 178 bps by the end of September 2018, 10 further REIT IPOs, while Singapore—
2018. However, some observers of having been above 200 bps earlier in the which saw its first REIT IPO in 2002—now
J-REIT behaviour have been concerned year. has some 50 listed trusts.
by the ongoing use of short-term debt in
the industry, as well as recent patterns One Australian investor believed that
of buying and selling. One investor A-REITs could be beneficiaries of a future
commented that J-REITs have become downturn in the market due to the strength
net sellers in the second half of 2018. of their balance sheets. “A-REITs are all
“They are selling off a bunch of properties trading well. If you look at the average
because their prices are high. We are REIT now compared to the GFC [global
seeing them selling low-yielding assets, financial crisis], the average REIT [then] was
really core assets, and buying higher- probably trading at a 18x multiple and had
yielding properties such as regional or older gearing of 50 per cent. The average REIT
assets. These have very high cap rates, now is trading at a 10 to 12x multiple and
but I would say they are not ‘REIT-able’ has gearing of 20 per cent. So they’re all
because of age and location.” very low geared—in fact, most of them are
set up for opportunity should opportunity
Nonetheless, interviewees involved in the arise—and if the market does start to fall
sector said that they were not changing and overseas institutions drop out, they’re
strategy and would continue to focus on in a good position to buy.”
buying mature assets from their sponsors.
Hong Kong
Australia
Hong Kong is known for its dynamic real
Office and logistics REITs in Australia have estate market, but not for the vitality of
been the focus of fierce bids in the past 12 its REIT sector. Apart from one very large
months, a reflection of the attractiveness REIT—the largest and only internally
of their underlying assets to international managed REIT in the Asia Pacific region—
capital. the Hong Kong REIT sector has seen little
excitement since the first REITs appeared
The interest in A-REITs from overseas in 2005.
investors comes because recent weakness
in the Australian dollar makes them Nonetheless, in line with rising values in
cheaper in U.S. dollar terms and because the city, Hong Kong REITs returned 6.7
they offer an otherwise rare opportunity per cent in the nine months to September
to acquire portfolios of prime Australian 2018, according to S&P, although the
assets. Merger offers are also being driven sector is trading at a hefty 40 per cent
by A-REITs’ inability to buy new assets in discount to net asset value. Furthermore,
the open market. Those trading at small it recently registered its first-ever hostile
premiums or discounts to net asset value bid, with one fund manager seeking to
will be most prone to approaches from take over a Hong Kong–listed REIT holding
foreign investors or their listed peers. assets in the United Kingdom and China.
Despite the merger-and-acquisition (M&A) Further M&A activity is unlikely given that
excitement, performance for the sector has other externally managed Hong Kong
been weak in 2018, with the S&P Australia REITs have strong sponsors unlikely to
REIT Index down 2.2 per cent in the nine cooperate.
months to September 2018, marginally
underperforming the wider real estate Managers complain that the Hong Kong
index (–1.3 per cent) and the S&P ASX 200 REIT code lags Singapore in both flexibility
(–2.07 per cent). Investors have become and investor-friendliness, and that this has
focused on the narrowing spread between hampered the launch of new REITs. This is
Office
Buy Ho Chi Minh City and Tokyo
Sell Taipei and Auckland
Retail
Buy Ho Chi Minh City and Bangalore
Sell Kuala Lumpur and Auckland
Residential
Buy Ho Chi Minh City and Mumbai
Sell Taipei and Kuala Lumpur
Industrial/distribution
Buy Bangalore and Mumbai
Sell Taipei and Kuala Lumpur
Hotels
Buy Tokyo and Ho Chi Minh City
Sell Taipei and Beijing
5
SHANGHAI
2
SINGAPORE
Top Investment Cities volume in Australia shrank 60 per cent in The residential market has been
2017, according to Cushman & Wakefield, exceptionally resilient, despite cooling
Melbourne (first in investment, first in and has only continued to fall in 2018. measures being in place for several years.
development). Used to playing second At the same time, though, U.S. pension
fiddle to Sydney, Melbourne this year funds have increased their allocations, and Investment Development
prospects prospects
narrowly outstrips it in our 2019 survey as pressure seems set to continue given that
8 GOOD
the best prospect in the Asia Pacific region Japanese pension funds and insurance
for both investment and development. companies have newly started to allocate 7
Apart from reasons already set out above, to overseas real estate. Although their initial 6 5.88
another factor in Melbourne’s assent in focus will probably be primarily on markets
5 5.48
the rankings is that, unlike Sydney, its in the West, Australia is likely to be one
office supply pipeline is constrained. With of the first ports of call in the Asia Pacific 4 FA
AIR
vacancies shrinking rapidly, this is likely to region. 3
provide upward momentum to rents. Singapore
2
Melbourne is actually the weakest market
During 2018, rental growth has been in Australia when it comes to residential 1
POOR
“phenomenal” in both cities. Yields have property, with home prices turning down 0
compressed but are still attractive by ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19
in January and falling all year. They were
international standards, running around off 4.9 per cent for 2018 through October,
4.5 per cent for prime office or prime retail, according to CoreLogic, a real estate data In response to increasing prices, the
and 5.5 per cent for good industrial space. provider. The fall in home prices is largely Singapore government imposed further
Prices are slightly more reasonable in a result of the tightening of bank credit for regulatory cooling steps in July 2018,
Melbourne, again explaining the shift in the both developers and consumers, reflecting which slowed the market to a crawl in the
center of attention. concern among both regulators and following months. Over the next 12 months
Australia’s big four banks that the market the outlook for the residential market
Both Australian cities are core markets at has become overheated. Over the long remains clouded as both developers and
heart, but with the number of investable term, however, ongoing migration patterns homebuyers have become more cautious
assets significantly lower than in Japan are a positive for residential real estate, so as a result of the government tightening
there is strong competition to place capital, a prolonged downturn seems unlikely. policies.
especially with so many international
players looking to buy. Logistics and big- Singapore (second in investment, Meanwhile, rents and yields for prime
box retail also have their fans, but investors eighth in development). The retail space have been firming across the
are wary of the “barbell effect” in which improvement in Singapore’s office market city after years of poor performance as
only dominant regional malls and specialty has seen the city-state comprehensively Singapore landlords struggle to adapt to
local retail space win at the expense of rerated by respondents, after falling to 21st new models of retailing. Solid economic
mid-market and neighbourhood shopping place in our 2017 report. growth and high visitor numbers have
centres. supported the market in 2018.
Office rents have been rising strongly
Investment Development
since then due to a lack of supply and The logistics market continues to be
prospects prospects
rebounding demand from tenants. Co- plagued with oversupply, which has
8 GOOD suppressed rents, but there are signs that
working and other flexible office space
7 operators have become amongst the excess space is now being taken up, and
6
5.89
biggest leasers of office space, while tech rents are predicted to improve slightly in
5.79 firms have also been active in the market. 2019.
5
4 FAIR A number of major office deals have Sydney (third in investment, third in
3 been sealed in the past 12 months, with development). Office vacancies are low
domestic investors the biggest buyers. in both Sydney and Melbourne, running
2 around 4 per cent. Only Hong Kong’s
Melbourne However, one fund manager active in the
1 market says: “It is possible the market is downtown Central district and major cities
POOR
0 overly bullish towards the office sector, in Japan now have tighter commercial
’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 markets in the Asia Pacific region.
as 2019 could be a challenging year for
the Singapore economy and new supply Meanwhile, rental growth at an annual pace
The surge in interest from Chinese is expected in 2020 and 2021.” While of 20 per cent or more in Sydney has been
developers and investors has disappeared the CBD will see no supply until 2020, remarkable.
in 2018 as Beijing clamped down on decentralised office markets will see new
overseas purchases. Chinese transaction office openings next year. While Sydney is Australia’s largest office
foreign investors, either by providing debt rises and prove a drag on the sector going has great potential. There is basically no
or potentially by participating in distress forward. logistics space countrywide that’s up to
situations, although historically this has not international standards, but this is a sector
been a fruitful exercise for foreign capital Osaka remains a very tight market—there investors are watching since there’s also
in China. are fewer sellers of office and residential little indication that the economics work
assets than just about anywhere in Asia, for the rents such facilities would charge at
Towards the end of 2018, there were signs according to the survey. Not surprising, this stage.
that Shanghai was turning the taps back then, that transaction volume is a fraction
on with credit in response to the gathering of that in Tokyo, similar to Guangzhou in The Vietnamese government encourages
trade war with the United States. Should China. foreign investment, and imposes fewer
the Chinese economy enter a deep or barriers to foreign participation in the real
prolonged downturn, real estate is likely to Office vacancy rates are the lowest in estate sector than other Southeast Asian
benefit from further credit easing. Asia for all of Japan’s secondary markets. developing markets. Foreign capital is
Osaka and also Nagoya, Yokohama, and supplemented by the reshoring of money
Osaka (sixth in investment, sixth in Fukuoka have very little space available, by Viet Kieu, the overseas Vietnamese
development). The lack of reasonably and little on the way, either. However, population. Finally, Vietnam has always
priced core assets in Tokyo continues to prices of office assets in these destinations been a strong tourism destination, and
push investors into regional Japan, where are now high and provide little relative value is witnessing a boom in visitors from
local economies are now more mature, compared with those in Tokyo, according neighbouring China, leading to extensive
providing some assurance to investors to one investor. hotel development along the coast.
that liquidity will not drop off in the event of
a correction. Osaka, as Japan’s second- Ho Chi Minh (seventh in investment, Shenzhen (eighth in investment,
largest city, continues to be popular. One second in development). Vietnam’s seventh in development). The growth of
head of Japan real estate says that while biggest city and business capital continues the tech sector has turned Shenzhen into
office rents in Tokyo are approaching 11 to rate as the most-attractive emerging China’s Silicon Valley, which has drawn
o’clock, they’re still only at 8:30 a.m. in market destination for investment startups and the venture capital chasing
Osaka and other regional cities. and (especially) for development. The them. Incomes are higher than anywhere
population is young, incomes are on in China, drawing ambitious university
Investment Development the rise, and growth is forecast at an graduates, and decent office space is at a
prospects prospects annual 6.6 per cent for each of the next premium. That all bodes well for the long-
8 GOOD three years by Standard & Poor’s. For term prospects for Shenzhen property.
7 opportunistic investors, there are plenty of
plays. Investment Development
6 5.70 prospects prospects
5 8 GOOD
5.52 Investment Development
prospects prospects 7
4 FAIR
8 GOOD
3 6 5.46
7
Osaka 5 5.50
2
6 5.69
1 4 FAI
AIR
POOR 5 5.72
0 3
’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 4 FAIR
2
3 Shenzhen
With office cap rates at some 4.5 per cent 1
POOR
(compared to sub–4 per cent in Tokyo), 2 Ho Chi Minh City
0
yields still have room to run, especially ’13 ’14 ’15 ’16 ’17 ’18 ’19
1
POOR
given that rents in Osaka remain low.
0
With supply lacking, the city is probably ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 Recently, official influence over the property
the top market beyond the capital. On market has also been higher here than
the residential side, cap rates in Osaka Incomes are three times the national anywhere in the country.
have compressed to below 4 per cent, at average, so housing affordability is much
which point they now sit at similar levels to higher, encouraging aggressive investors to Developers are showing increased price
residential yields Tokyo. Although recent target mass-market, middle-class homes. sensitivity when it comes to their land
wage rises across Japan have given a Modern office space is in short supply, too, banks, bidding only on attractively priced
boost to residential rents, a likely increase leaving rents far higher than, for instance, lots. The government is loath to open
in the consumption tax to 10 per cent will Bangkok, and encouraging investment into commercial land to public bidding and
probably end prospects for any further rent commercial property, which investors say has preferred to tailor-make auctions for
prompting developers to delay launch of led business parks and special economic Investment Development
new projects. They are also increasingly zones than is the case in Bangalore and prospects prospects
targeting foreign buyers, as residents Delhi. Still, India’s rapidly growing capital 8 GOOD
from Hong Kong and Singapore look for markets mean demand for high-quality 7
cheaper cities to invest savings. offices is booming in Mumbai, so despite
apparently high vacancies, ongoing 6
5.16
Beijing (12th in investment, 16th in shortages of modern office stock mean 5
5.03
development). The Chinese capital has new supply tends to be absorbed quickly. 4 FA
AIR
few land lots left for purchase in prime Activity is not confined to the CBD, with
parts of the city, though plots that do come strong leasing momentum also surfacing 3
to market tend to attract plenty of bidders. in fringe areas. As in other Asia Pacific 2
The Beijing government has effectively markets, Mumbai is seeing strong growth Hong Kong
1
shut down new development opportunities in coworking assets. In fact, according to POOR
within the third and fourth ring roads, one local consultant, “almost 15 per cent 0
’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19
pushing developers into the far suburbs of office space absorption across large
to do business. This makes it “very hard cities in India is now accounted for by co-
still expensive despite two years of falling
to access opportunities that make sense,” working operators”.
rents and values.
one developer said.
There is also significant activity in Mumbai’s
High prices make it hard for investors to
Investment Development retail sector. Although high-end malls
prospects prospects get the underwriting to add up, but there
continue to perform well if properly
8 GOOD is a core of regional and international
managed, mid-tier facilities are in general
investors that has been active throughout
7 poorly positioned and often unprofitable
the current cycle, either carefully timing
6 given that increasing numbers of Indian
5.23 strata office acquisitions or taking on value-
consumers are migrating online. Some
5 Beijing add office, retail, and mixed-use projects.
5.10 malls are therefore attempting to revive
4 FAIR
R their businesses by buying back strata
One such fund manager said that despite
3
space sold in previous years, vacating
rocketing prices, “Hong Kong cap rates
malls and then refurbishing to create
2 are no lower now than they have been
more experiential environments. These
since any time in the last 10 years, since
1 efforts follow the example set by some
POOR the global financial crisis,” making the case
0
large foreign asset managers who in the
’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 for adding value through refurbishment
last 18 months have partnered with local
and repositioning. While Hong Kong’s
developers with the intention of revamping
prime Central offices are tightly held and
The Beijing government’s delayed well-located but poorly performing assets
attracting world-record rents, the city has
response to the initiation of a trade war in retail portfolios across the country.
a seemingly inexhaustible supply of B- and
with the United States has made large
C-grade offices ripe for improvement.
Chinese companies reticent to purchase. Investment Development
prospects prospects
Uncertainty over future constraints on
8 GOOD At the top of the market, Mainland China
exports has in some cases put office
financial services companies continue
expansion plans on hold, while slowing 7
to move to Hong Kong and to demand
Chinese growth is in some cases forcing 6 5.23 the best space, while multinationals
corporate consolidations.
5 find themselves moving to fringe or
5.38
decentralised areas. Coworking operators,
Several older hotels are currently being 4 FAIR
both international and home grown, are
redeveloped into office towers. Retail 3 Mumbai also taking more office space.
space in the capital has also been trading
actively. Tight credit has meant “cash 2
Given their lower profitability, a number
is king,” and has made foreign partners 1
POOR of hotels are now being converted to
more popular than they were in a market 0
’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 office space. Some hotels are also being
previously dominated by locals.
converted to co-living spaces for students
Hong Kong (14th in investment, 18th or young professionals.
Mumbai (13th in investment, ninth in in development). Hong Kong is the most
development). As more of a financial expensive real estate market in the world, The retail sector appears to be bottoming
hub than a technology centre, Mumbai’s with residential and office values at their after two years of plummeting rents and
office market is less oriented towards IT- highest-ever levels and retail space that is values, and a number of foreign private
On the commercial side, prospects are them “secondary cities” with populations
Investment Development
more positive. Office space continues to around the size of the Netherlands. prospects prospects
perform well across the board, with yields 8 GOOD
in the area of 8 per cent for quality assets, “If you’re brave, that’s where you should
7 Manila
according to JLL. In particular the sub- be investing,” one family-office head with
district of Noida “has been a star performer holdings in Chongqing said. “They’re like 6
across the country,” according to one Leeds in the U.K. or Kansas City in the 4.99
5
local investor, with more than 10 per cent U.S.” Only 40 times that size. 5.03
4 FAIR
year-on-year growth in grade-A IT park
and office space absorption following the 3
Investment Development
government’s announcement of a new prospects prospects 2
airport for the area and other ongoing 8
1
improvements to local transportation 7
POOR
infrastructure. With grade-A space still 0
6 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19
renting for around US$0.80 per square foot
5.01
per month, it represents a “sure-shot equity 5
5.06 What’s more, one fundamental issue that
investment opportunity.”
4 FAIR
R
China – second-tier cities has long acted as an indirect barrier for
Investment Development 3 foreign capital remains in place—local
prospects prospects asset markets are overflowing with cheap
8 GOOD 2
domestic capital. Foreign players who
7 1 demand risk-adjusted returns in the high
New Delhi POOR
0 teens are therefore priced out of the market
6 ’13 ’14 ’15 ’16 ’17 ’18 ’19
5.03 by local banks offering financing at 2.75
5 per cent.
5.19
4 FAIR
The Chinese cities are crying out for Still, local developers are now increasingly
3
international-grade office, industrial, and open to working with foreign players in
2 retail space. The challenge is delivering that order to leverage operational expertise
1 at the right price point, while avoiding the as well as their international connections.
POOR oversupply that often exists in lower-quality In addition, good opportunities are
0
’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 space. Product differentiation and branding increasingly available for investors able
will be key, requiring deep understanding to find reliable local partners and to
China’s second-tier cities (18th in of the specific city in question. think out of the box, in particular by
investment, 17th in development). targeting alternative or emerging sectors.
Confidence is particularly shaky in China Manila (19th in investment, 19th in While growth in the BPO industry has
when you move beyond the four Tier 1 development). The steep fall in sentiment now levelled off as automation and
cities. The slimmer the existing institutional in last year’s survey towards Manila artificial intelligence (AI) technologies eat
stock, the more investors and developers has persisted this year. The problem is into market share, new opportunities
rely on the local government to ensure probably partly one of optics, because are opening up in other areas. The
an affordable stream of land and supply. fundamentals continue to be strong. government’s infrastructure push is
That is not happening, as provincial Office rents and capital values have risen one theme. Another is the logistics and
and municipal officials adapt to tighter relentlessly, vacancies have fallen to a low industrial park sectors, not only because of
restrictions from Beijing. Liquidity is poorest 2 per cent, yields are in the area of 8 per the shortcomings of existing facilities, but
in these secondary cities, with banks cent, and strong absorption of new stock also because Chinese manufacturers are
hamstrung by new lending policies, the continues based on activity from the online increasingly moving operations into Asian
bond markets tough to access, and trust gaming and BPO industries. emerging markets in an effort to avoid the
banks and the “shadow banking” system fallout of an impending trade war with the
closed off. At the same time, however, foreign United States.
investors are deterred by domestic political
Yet if you believe China will be the new concerns, regulatory barriers to entry that Auckland (20th in investment, 21st
champion of free trade, active along and restrict foreign equity interests in local in development). Although the market
building new Silk Roads, the industrial property assets to a maximum of 40 in Auckland is small, it is in many ways
heartland is likely to get the biggest per cent, and most recently by potential perfectly formed. While New Zealand’s far-
boost from China’s rise. Cities such economic consequences of capital flung location ensured for years it remained
as Chongqing, Chengdu, and Wuhan outflows caused by rising interest rates off the radar, investors from Australia,
approach 20 million people each, making both domestically and in the United States. Singapore, China, and the United States
Property Types in Perspective foreign-backed deals pick up again. Minister Shinzo Abe is the longest-
serving post-war leader—is encouraging
OFFICE Ho Chi Minh City is again the standout exploration into other markets. Run
Office remains the target of choice for development market, although the size down the list of Japan’s largest cities
investors into Asia. The vast majority (86 of the opportunity is small. Opportunists by population, and you’ll find the top
per cent) of survey respondents are already say Vietnam has many merits, particularly targets for commercial investment and
active in the asset class, or intend to be. when it comes to the young, energetic development, proponents arguing that
workforce. With a lack of high-quality office these metro giants are the beneficiaries
Office provides stable yields, the promise space, it’s lazy thinking to call this “China as rural and provincial Japan ages and is
of capital gains, and demand linked to the in miniature.” But there’s no doubt that hollowed out.
generally strong economics of the region. the command-driven economy makes
Core locations in gateway cities are still life easier, particularly under a newly With credit tightening raising questions
seen as bullet-proof choices, and above business-friendly administration. Vietnam’s about the direction of the Chinese
all other assets, office buildings provide government, in contrast to China, needs economy, India has attracted significant
the opportunity to put a large amount of the money provided by foreign investment, big-money backing. Business-park
money to work in one go. and is far more welcoming to outside development is creating whole new
players at the moment. suburbs around cities such as Mumbai
The worry is that it is taking larger and and Bangalore, although it pays to keep
larger amounts of money to do so. You Many an investor has said that Japan is tabs on where new university graduates
have to have a very long time horizon, really only one market: Tokyo. Its popularity are heading, bringing second-tier cities
as insurers and pension funds do, to remains as steady as its monetary policy such as Pune into the conversation. India’s
stomach some of the low yields and high is easy. But the county’s steady economic transparency has gotten a boost from the
capital values on offer. Even then, those expansion and stable politics—Prime implementation of new real estate laws that
players are far pickier than they might
previously have been, micro-managing Exhibit 3-4 Office Assets Buy/Hold/Sell Recommendations for 2019,
location selections and building choice. by City
They may expand their search beyond the
primary business district to find the right Buy Hold Sell
opportunity. Ho Chi Minh City 46 41 12
Tokyo 37 49 14
Nimbler owners and investors say there are
Singapore 37 47 16
still trading opportunities, and cheap land
if you know how to look and have capable Sydney 35 49 17
and trustworthy local connections. Value- Mumbai 34 52 14
add, opportunistic, and development plays Osaka 34 52 13
provide entryways into markets where Bangalore 34 50 16
locals may pay over the odds for prestige
Shanghai 34 47 19
assets.
Melbourne 33 51 16
With far more money looking for access Seoul 30 54 16
into Asia than there are core assets Shenzhen 30 48 22
available, “develop to core” is a popular Manila 30 44 26
strategy even for the most risk-averse China – second-tier cities 27 41 32
investors.
Jakarta 26 53 21
Some retail landlords argue that Asia, Exhibit 3-6 Retail Assets Buy/Hold/Sell Recommendations for 2019,
especially China, is dealing with the by City
e-commerce challenge better than
developed markets in the West because
retail real estate is a newer concept in Asia. Buy Hold Sell
The United Nations World Tourism Ho Chi Minh City remains a popular suggests the best time to invest in the
Organisation expects Asia Pacific tourist choice, even though Tokyo took the top sector there has passed.
numbers to rise again in 2018, and spot, and the growth in visitor numbers to
according to CBRE, Asia Pacific hotel Japan suggests there is underlying growth Sydney remains undersupplied with hotels
occupancy increased 120 bps to 71.3 to support the city as a target for hotel and existing assets have been taken out
per cent over the 12 months to end-June investors. However, the small size of the and converted to serve the booming office
2018. However, mature markets such city and the lower capital values mean that and residential sectors. It will be hard for
as Hong Kong, Singapore, Sydney, and most will struggle to deploy capital there. hotel investors to compete with potential
Tokyo saw occupancy above 80 per cent, redevelopers for some time, at least in core
CBRE said. Singapore shot into the top five cities areas of the city. However, Sydney lacks
for hotel investment this year, but it has five-star and good-quality four-star hotels,
Nonetheless, a lot of investor attention is already seen a number of new hotels so there ought to be opportunities in the
focused on developing tourism markets, developed over the past few years, which future.
seen as an opportunity to create value.
One regional adviser says: “Everybody
wants to be in tourism and leisure
because it is seen as a way of kick-starting Exhibit 3-8 Hotel Assets Buy/Hold/Sell Recommendations for 2019,
economies. It is a way of developing less by City
well-developed areas because you can be
in a remote area, but if you have a really Buy Hold Sell
nice beach or some fantastic scenery you Tokyo 42 45 13
will get tourists.”
Ho Chi Minh City 41 46 13
PwC’s real estate practice assists real estate investment advisers, The Urban Land Institute is a global, member-driven organisation
real estate investment trusts, public and private real estate comprising more than 42,000 real estate and urban development
investors, corporations, and real estate management funds in professionals dedicated to advancing the Institute’s mission of
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ULI’s interdisciplinary membership represents all aspects of
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appraisers, attorneys, engineers, financiers, and academics.
Established in 1936, the Institute has a presence in the Americas,
Global Real Estate Leadership Team Europe, and Asia Pacific regions, with members in 80 countries.
Craig Hughes The extraordinary impact that ULI makes on land use decision
Global Real Estate Leader making is based on its members sharing expertise on a variety
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K.K. So demographic and population changes, new economic drivers,
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Jane Reilly and Josh Cardwell benefit of communities around the globe.
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India Real Estate Tax Leader W. Edward Walter
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Nguyen Thanh Trung 202-624-7000
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Front cover photo: Sino-Ocean Taikoo Li Chengdu is a retail-led, mixed-use development around
a bustling open-plan, lane-driven mall and grade-A office tower.
Image courtesy of Swire Properties Ltd.
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