Asia Pacific - A real estate sector in major transition

Implications: I am sure you do not need me to tell you of the growing significance of the commercial real estate industry in the Asia Pacific region, both from a development and investment perspective, and the part that both local and international designers and advisers are playing in bringing a greater level of order, professionalism and sophistication to the market place. I could spend the time writing about the weight of capital chasing real estate, the deals that have been done, supply/demand statistics and the health of the various markets. However, I thought I would take the opportunity just to share one or two thoughts with you about some of the pluses and minuses as I see them going forward.

Analysis: We have in reality in Asia Pacific a real estate sector in major transition brought about not only by the amount of liquidity chasing limited opportunities but also by the arrival in significant numbers of the institutions and large funds who traditionally have been risk averse but whose investors and shareholders will no longer allow the fund managers to put Asia Pacific into the too difficult tray. The arrival of the institutions, coinciding with the evolution of a REIT infrastructure is, bringing with it the rigour, the requirement for transparency and the flight to quality that all of us as property professionals believe to be fundamental if a market is to function effectively and efficiently.
At the same time, of course, it puts us all under the microscope to deliver but I am sure that the professions can and will respond to the challenge and step up to the plate. Clearly, there is going to be greater need for due diligence, for valuation skills, for master planning, creative design and engineering solutions, for project delivery services and for marketing, and facilities and asset management and I am sure that I have missed a number of added value services along the way. However, we can be sure that the new round of institutional investors will expect services delivered to an international standard and best practice to be applied throughout.
One interesting phenomenon that I can already see emerging is the change in the pattern of ownership of real estate with, over time, the institutions and the funds becoming the major owners of commercial property across the region and the emergence of a more mature market model where the developer is in effect “a delivery agent” and is able to exit by selling on to an institution rather than by strata title sub-sales.
The institutions, of course, will bring with them a culture of enhanced asset and property management and over time I believe we will see the emergence of benchmarking and the production of industry accepted Indexes and in time the regular trading of derivatives based on such Indexes.
All this is positive and bodes well for the future. Where therefore do I see the challenges going forward? Firstly, I have to say it concerns me when I see institutions taking development risk. Granted in today’s market, with limited choice, many have no option, if they are to make headway and to meet investors/shareholders aspirations, than to buy into semi-completed schemes. I accept that in such cases the acquisition, compensation and land use planning risks have been eliminated but there is still construction risk – risk to complete as it might better be described – and in many cases also market risk. Institutions are in my experience not best equipped to deal with such situations and are very dependent on their local partner and advisers. Also, with the pressure to invest, we are seeing institutions buying into projects at an earlier and earlier stage and this increases the potential for something to go wrong.
Secondly, there is the issue of project delivery and be you developer, institution or advisor all of us are facing the challenge of resourcing and finding suitable talent. There simply is not enough talent to go round, particularly as much of project delivery requires input at a senior level. Over time, I am sure the market will respond through training, transfers of knowledge and the introduction of even more sophisticated planning and monitoring systems, but short term it is a quandary. What I do see happening, however, is a move to the formation of strategic alliances where large developers and investors form alliances and even just ventures with key service providers and even contractors and material suppliers to ensure access to a dedicated team/set of resources in return for a dedicated work flow. Positive in one sense, but difficult for those who are either spread geographically or who cannot offer continuity of projects.
Finally and I think this is my biggest concern. It is all about what I call the rationalization factor and to my mind, this is always the signal that prices or rents have outpaced market fundamentals. It is where your buyer, be he/she fund manager, investor or end-user, rationalizes what previously were challenges and even difficulties and now describes them as opportunities. Not long ago, a half empty building was seen negatively and the value marked down accordingly but now it is presented as an opportunity to secure an open market rent. Similarly, weakness in tenant mix or in covenant strength is now portrayed as an opportunity to improve matters in the future and any form of uncertainty, far from being an issue, is seen as a value play. Granted it may be if you finesse the situation successfully, but there always two sides and two potential outcomes to any argument of this nature and when the market begins to rationalise or worse still chooses to ignore risk, I sense, certainly as property professionals, we ought to be stepping back and putting up the appropriate markers.