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2014 Expectations vs Reality
Asia Retail Investment
Last year’s JLL Asia Pacific Retail Investment review published in January 2014 made a series of a predictions / expectations on the year ahead. The overall prediction for 2014 was that favourable conditions for selling assets would continue from the record breaking year of 2013. This proved correct, with 2014 remaining a ‘seller’s market’, with pricing remaining firm or improving in all markets. We examine the specific predictions from last year below.
CORRECT PREMATURE INCORRECT
4 | 2014 Expectations vs Reality
1. INCREASING WEIGHT OF CAPITAL TARGETING THE ASIA PACIFIC REGION
Although final turnover numbers for 2014 throughout the region are being calculated, it is our expectation that overall, turnover levels for retail asset transactions were
significantly down in 2014 compared to 2013. However it is our strong belief that the amount of investment capital targeting acquisitions in the region increased over this period. Anecdotal evidence suggests that there is greater amounts and types of capital targeting investment in the Asia region than ever before.
2. RELATIVE LACK OF SUPPLY OF INVESTIBLE STOCK
As predicted, there were very few motivated or distressed sellers in the market in 2014. It is this lack of sellers that, in our opinion, accounted for pricing remaining firm or
improving in most markets and resulted in the relatively low turnover levels. Owners were faced with the concern of where to reinvest capital if assets were sold and as such many opted to hold assets with buyers left disappointed by the lack of stock availability. Such disappointment has led to a significant overhang of capital targeting investment going into 2015.
3. MATURING PRIVATE EQUITY FUNDS WILL BE A SIGNIFICANT SELLER GROUP
On reflection, this prediction was arguably twelve months too early. Whilst this investor group was a major seller, many of the assets held in the portfolios of private equity
funds at the start of 2014 remained intact at the year end. Following a number of successful ‘fresh’ capital raises and as funds get even closer to their expiry, we expect 2015 to be an active selling (but also buying for fresh funds) year for private equity funds.
4. INTERNATIONAL EQUITY FUNDS WILL ALSO ACTIVELY ACQUIRE IN 2014
2014 witnessed some of the leading global equity funds once again flex their muscles in the retail investment market in Asia. The post GFC ‘hangovers’ seem to have
recovered and this investor group was once again actively buying, with motivations arguably shifting to being driven by positive future returns as opposed to solely looking to acquire ‘distress’. Among others, funds managed by Blackstone, Carlyle Group, Gaw Capital and LaSalle Investment Management were all active buyers of retail assets throughout the region in 2014.
5. INVESTORS WILL ‘BUY INTO’ JAPAN’S ECONOMIC AND CONSUMER RECOVERY
Investors have undoubtedly ‘bought into’ Japan throughout 2014, with turnover higher in Japan than in any other Asian market. The buying motivations for some investors are
different than predicted however. Whilst there has been some long term strategic investors ‘buying into’ the economic and consumer recovery in Japan, there has also been more short term, speculative investment from international groups to accompany the undoubted strength of the domestic buyers. Investors going in to 2015 will want to see more tangible evidence of Prime-minister Abe’s and BoJ Governor Kuroda’s efforts working in order to invest for the long term. Japan however remains a hot and arguably the hottest investment market going into 2015.
6. INVESTORS BECOMING MORE ‘CONSIDERED’ WHEN ENTERING CHINA
This prediction was certainly correct. Throughout the year, buyers became increasingly forensic when reviewing China retail assets and an increasingly sophisticated approach
was taken by both international and domestic buyers. No longer are investors blindly willing to ‘buy growth’ through appraising assets based solely on land price plus build cost plus a premium. Buyers are, rightly in our opinion, considering the operational success, competition, catchment demographics and repositioning opportunity of specific assets when investing. All these are indicators that the market is becoming more mature. We expect these trends to continue going forward. Upon final calculation, China turnover figures are anticipated to show a marked decline in 2014 compared to 2013. Looking forward, the government policy adopted to stimulate the economy should prove beneficial to real estate and particularly retail real estate if, as expected, the government continues to re balance the economy towards a consumer based as opposed to an investment orientated model.
7. INVESTOR CAUTION AT CURRENT PRICING LEVELS IN US ‘TIED’ MARKETS
Capital continued to flow into US ‘tied’ markets in 2014, despite the conclusion of the five year US Quantative Easing stimulus and increasing indications of imminent
interest rate rises for the first time in five years. Hong Kong, arguably the most ‘tied’ market to the US due to its currency peg, witnessed an uptick in turnover as investors digested 2013’s cooling measures (stamp duty rises) as ‘the new normal’. Being a relatively lowly leveraged market, small interest rate rises are unlikely to have a significant effect on Hong Kong, especially as investors are finding comfort in holding trophy, ‘real assets’ even at historically low yields and high rental levels. In this respect our prediction was wrong.Looking forward, it is our expectation that Hong Kong will continue to attract vast sums of local and some international capital. Given this excess of capital chasing such limited stock, we anticipate that
2014 Expectations vs Reality | 5
it will require either an external shock or for alternative investment destinations to offer significantly enhanced risk adjusted returns to adjust the status quo of the market.
8. INCREASED PARTNERING THROUGHOUT THE REGION
A degree of partnering did occur during 2014, with a series of strategic joint ventures being formed. As with any marriage of partners, the courtship tends to take time and
we anticipate this trend (as opposed to a one off event prediction) to continue evolving as a theme going forwards. We were surprised by the relatively few partnerships which were formed or were active, however examples included:
• Link REIT and China Vanke announcing a proposed co-ownership of a shopping centre in Shenzhen, following the formation of a framework agreement to work together agreed in late 2013.
• China Vanke also formed a joint venture with the Carlyle Group on nine of its shopping centres throughout China. This joint venture is owned 80% / 20% in Carlyle’s favour.
• Online retailers Tencent and Alibaba separately acquired stakes in asset owners China South City Holdings and Intime Retail, respectively. In addition to being retail investment plays, this arguably shows the importance that top internet retailers place on bricks and mortar stores.
• LReal Estate partnered with Mori Building, Sumitomo Corp and J Front retailing to develop a prime Ginza retail site in Tokyo.
• Taubman and Shinsegae announced an additional partner joining their partnership to develop the Hanam Union Square in South Korea.
9. GLOBAL PENSION FUNDS & SOVEREIGN WEALTH FUNDS WILL INCREASINGLY TARGET THE ASIA PACIFIC REGION
An increasing weight of capital from Global Pension Funds and Sovereign Wealth Funds did indeed target Asia in 2014 along with many other capital sources. These investors are significant players in both the direct and indirect market. The capital raised by the ‘opportunity funds’ during 2014 illustrate how important Asia is to these investor groups.
Capital raises in 2014 included the closing of the largest ever Asia focused real estate fund, where Blackstone raised $5 bn of equity. Looking specifically at the direct, retail real estate market however, there were relatively few acquisitions made. This was largely due to the lack of availability of high enough quality assets and the fact that the office sector is likely to be the initial beneficiary of this significant capital. One example which did occur towards the year end was NPS (in partnership with Carlyle) acquiring EC Mall, Beijing.
10. INDIA AND EMERGING ECONOMIES STABILISING AND BECOMING HOT INVESTMENT LOCATIONS
An increasing number of investors became focused on India along with other non China emerging economies during 2014. Indonesia and Philippines proved especially challenging for investors to access opportunities as both economies stablised during 2014 following the relative volatility of 2013 and these tightly held markets saw little
or no distress to motivate owners to sell. India saw surprisingly few transactions despite buyers once again targeting investment in the country with the world’s second largest population. Investment into Indian retail real estate is anticipated to grow significantly in 2015.
EXTERNAL FACTORS:
External factors that were not known or were missed in our predictions that affected or might be considered to have affected the market in 2014 include:
• Hong Kong ‘Occupy Central’ protests – sales turnover suffered in isolated locations in Hong Kong, during the protests in October and November however, this is not believed to have had a dampening effect on investors perception or indeed future outlook for Hong Kong.
• Graft Crackdown in China – in addition to the effect of some real estate company executives being implicated, the crackdown on graft in China is believed to have had a significant effect on specific retail sales. Sales of some luxury brands in Hong Kong together with the Macau gaming industry appear to have been the most severely hit. Whether this is short term phenomenon or a long term change to trend remains to be seen.
• Oil price – the year end dramatic fall in global oil prices has yet to fully affect the real estate market. Potential implications could include fueling growth in emerging economies both in terms of consumer spending but also permitting greater capital to flow into infrastructure projects boosting growth however is likely to have a further deflationary effect on the Japanese economy.
• Geopolitical events e.g. Russia / Ukraine – the geopolitical shocks witnessed in 2014 which included the fallout from Russia’s military action in Ukraine and the subsequent economic sanctions have further emphasized the motivation of investors looking for safe haven investments. This is likely to maintain further upwards pricing pressure on perceived safe haven real estate markets.
Overall, the 2014 predictions made were broadly correct, even if some are slightly premature with hindsight. We will challenge ourselves to form some further and perhaps more contrarian predictions for 2015.
The Asia Pacific Retail Investment, 2015 Market Outlook and 2014 Review will be released later this month providing an objective review of 2014 together with making predictions for the year ahead.
The JLL team wishes all our clients a happy and successful 2015.
David Raven Regional Director Asia Pacific Capital Markets +852 2846 5255 [email protected] www.ap.jll.com
Nicholas Wilson Senior Manager Asia Pacific Capital Markets +65 6494 3883 [email protected]
Alexandra Ingram Senior Analyst Asia Pacific Capital Markets +852 2846 5280 [email protected]
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