Developers Home in on Asia Investment Opportunities

2012 ULI Asia Pacific Summit

Summarizing key real estate investment opportunities identified on the first day of the Urban Land Institute’s Asia Pacific Summit, a group of heavy-hitting development executives gathered in Beijing on Thursday.

The discussion joined Raymond Chow, executive director of Hongkong Land; Simon Treacy, group chief executive of MGPA; Patrick Phillips, ULI’s global chief executive; Richard T.G. Price, Asia-Pacific chief executive of CBRE Global Investors; with moderator John Fitzgerald, Hong Kong–based executive director of ULI Asia Pacific.

After a morning filled with presentations detailing something of a gold-rush mentality in China’s third- and fourth-tier cities, and in some other developing Asian markets, the panelists asked some tough questions to try to bring the discussion down to earth.

“Who’s going to pay for all of these multibillions in development?” asked Treacy, who said that MGPA’s private equity real estate fund has $12 billion under management. “Where are the debt and equity going to come from in the next three to five years?” he wanted to know, noting that only a few players worldwide might be able to invest more than $150 million in any given project.

Sure, urbanization will continue apace in Asia, Treacy said, emphasizing, however, that the competition for development capital has increased in the four years since the global recession began. “Now, there will be winners and losers,” he said. “It will come down to finding the best thinking and the right public/private partnerships.”

Chow, who manages commercial properties all around Asia that generate $850 million a year in rent, said he was an admirer of Singapore’s government for its clear, business-friendly vision that has attracted several Hongkong Land investments in recent years.

“Even when capital is not as robust as it once was, there are great opportunities,” Chow said, adding that Singapore was especially good at setting developers’ concerns to rest.

“The beauty is that planning and execution in Singapore are under one roof, a unique position that helps to get things done where others cannot,” Chow said. “As developers, the last thing we want is uncertainty.”

Morning summit sessions repeatedly raised the theme of sustainable development, a buzz word that afternoon panelists tried to put into perspective. Price, whose Asia portfolio is $5 billion strong, said that “green” doesn’t necessarily mean profitable.

“The goal is to create something that’s resilient, not just sustainable,” Price said. “You can have plenty of green buildings that are irrelevant to a community’s needs.”

In an MGPA survey, the majority of 70 investor-clients ranked the environment and social responsibility low on their list of investment criteria, Treacy said. While 11 percent said these factors were a “must” and 19 percent said they were “very important,” a full 33 percent said they were only “somewhat important,” 12 percent discounted them if they made a project expensive, and 16 percent said they were “not at all” factors in investment decision making.

Conversely, tenants looking to move into new developments are hypersensitive to green building standards, Treacy said, identifying a disconnect between two sides of the industry: “Global tenants are ahead of global investors in terms of green investment,” he said.

Asked by a member of the audience what measures were necessary to make foreign investors feel comfortable in China’s interior, Price emphasized the importance of having local partners on the ground to help shine a light on far-flung markets.

“If people whose money we’re investing can’t find a city on the map, it’s hard for them to get comfortable, but this may not reflect the fundamentals of an opportunity,” said Price. When CBRE first invested in Changsha, in central China’s Hunan province, it was considered a third-tier market, he said, adding, “Partner selection is key.”

After decades of double-digit economic growth in China, the central government announced that growth had slowed to 8 percent in the first quarter, casting some doubt in investors’ minds.

To this, Treacy said that high-growth regions are but one part of a wise investment mix, noting that some clients these days prefer to make steady money by retrofitting buildings in Europe and Japan, where properties are steeply discounted.

“We’re in plenty of buy-fix-sell properties in Paris and London, where we don’t see any rental growth in the coming three to five years,” Treacy said.

For all the morning summit talk of opportunities in China’s interior, afternoon panelists identified other possible plays in neighboring countries such as Vietnam, Malaysia, and the Philippines.

Treacy had just visited Manila, the Philippines’ capital of some 13 million people, where infrastructure lags well behind that of many other Asian cities, drawing it the unflattering nickname “the Sick Man of Asia,” he said.

With Asia’s vast population growth and continued urbanization (China’s population became 51 percent urban just this year), one thing was certain: information is key to investors’ making smart plans for Asia’s land, its built environments, and its people.

In an era when developers are concerned somewhat less about new development and somewhat more about the performance and improvement of the existing built environment, ULI Global CEO Phillips said it’s important to keep an open mind.

“Perhaps we’re looking here in Asia Pacific at a process related to the building and management of the built environment that is somewhat less efficient but produces better outcomes,” he said.

As each of the globe’s regions is at a different point along a continuum in terms of development efficiency and in terms of expectation of outcome, Phillips emphasized ULI’s ongoing role, evidenced in events like the summit.

“Always at ULI you have to come back to the creation of durable value, of the value of people-to-people information sharing, and the advancement of the state of the art through practical experience that’s layered on, project by project, market by market.”