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REF: PFIA – 8RPS2U
PREI ®
PRUDENTIAL REAL ESTATE INVESTORS
The Case for South East Asia Retail Investment: Structural Opportunity vs. Trading Strategy? FEBRUARY 2013
HENRY CHIN, PHD
HEAD OF RESEARCH AND STRATEGY, ASIA PACIFIC
ALAN CHOW
DIRECTOR OF RESEARCH
PRUDENTIAL REAL ESTATE INVESTORS
7 GIRALDA FARMS
MADISON, NJ 07970
WWW.PREI.COM
ABU DHABI
ATLANTA
BEIJING
CHICAGO
FRANKFURT
HONG KONG
ISTANBUL
LISBON
LONDON
LUXEMBOURG
MADISON
MEXICO CITY
MIAMI
MILAN
MUNICH
NEW YORK
PARIS
SAN FRANCISCO
SAO PAULO
SEOUL
SINGAPORE
SYDNEY
TOKYO
1 REF: PFIA – 8RPS2U
PRUDENTIAL REAL ESTATE INVESTORS
Executive Summary
The Asia Pacific retail market is the world’s largest. The region’s retail sales rose from US$3.2 trillion in 2006
(31% of the worldwide total) to US$3.8 trillion in 2011 (41% of the total).1 The rate of growth during this period
was at least four times faster than in Europe or North America. When we think of the Asia Pacific region, the
big economies of Japan, China, India, and Australia often come to mind first. Within the Asia Pacific
landscape, South East Asia tends to be overshadowed by these bigger and more high profile players that
surround it. So is there a case to be made for retail investment in South East Asia? In this paper, we tackle
this question, and these are some of our findings:
Strong Demographics: The five core markets of South East Asia—Singapore, Malaysia, Thailand,
Indonesia, and Vietnam—had a combined population of 436 million in 2011, more people than either Europe
or the US. And the age structure in South East Asia is relatively young compared to these advanced
economies.
Economic Resilience: South East Asia generally weathered the recent Global Financial Crisis with less
collateral damage than might have been expected. The region’s economic contraction during this period was
short-lived and the subsequent rebound was impressive. Over the next five years the core South East Asian
economies are projected to grow by 4% to 7% per annum, a significantly faster pace of growth than is
expected in advanced economies.
Tourism Potential: South East Asia’s location boosts its prospects for luring tourists. First, China’s 1.3 billion
residents live immediately to the north. As China’s affluence grows, so too will outbound tourism, possibly on
a large scale. Second, Malaysia has already become a popular destination for affluent tourists from the Middle
East and this suggests a strategic direction that other countries in South East Asia could emulate.
Retail Market Maturity: The core markets of South East Asia offer a range of opportunities, depending on
investor appetite for risk and maturity. Global markets can be categorized along a sliding scale of maturity that
ranges from advanced (e.g., Australia, UK, US) to pre-institutional (e.g., Myanmar, Pakistan, Iraq). Within
South East Asia, Singapore is a mature retail market with attributes that are generally comparable to Hong
Kong, France, Japan, and Germany. Malaysia and Thailand are maturing, and they lag somewhat behind
Singapore. Vietnam and Indonesia are still emerging.
Investment Opportunities: South East Asia presents differing retail investment opportunities from country to
country. Opportunities can also vary significantly within countries. In emerging markets like Vietnam and
Indonesia, the focus should usually be limited to the major cities. In maturing markets like Malaysia and
Thailand, urbanization and improving infrastructure bode well for the retail scene in the central and fringe
areas of capital cities, and increasingly in second tier cities and resort areas outside the capitals. In mature
markets like Singapore, both central city and suburban retail are considered core investments which can
attract institutional investors.
1 Canadean and Market Research.com, The Future of Global Retailing to 2016, June 2012.
2 REF: PFIA – 8RPS2U
PRUDENTIAL REAL ESTATE INVESTORS
Table of Contents
Executive Summary .................................................................................................. 1
Part 1: Global Retail Trends and Structure .............................................................. 3
Market Maturity and Evolution ..................................................................................... 3
Global Retail Trends.................................................................................................... 5
Globalization and International Retailing .................................................................. 5
E-commerce ............................................................................................................ 8
Composition and Impact of Sales Growth Trends .................................................... 8
A Conceptual Framework of Factors Impacting Retail Property ................................. 10
Part 2: South East Asia Retail Market Analysis .................................................... 12
The Macro Environment ............................................................................................ 12
Macro Economy ..................................................................................................... 12
Demographics ....................................................................................................... 13
Labor Market ......................................................................................................... 14
Wealth Accumulation ............................................................................................. 15
Tourism ................................................................................................................. 16
Retail Competitiveness .............................................................................................. 17
Real Estate Fundamentals ........................................................................................ 18
Structure of the Regional Market ........................................................................... 18
Supply ................................................................................................................... 20
Demand ................................................................................................................. 20
Pricing ................................................................................................................... 22
Risk Considerations .................................................................................................. 24
Assessment of Retail Attractiveness ......................................................................... 26
Part 3: Opportunities and Conclusions ................................................................. 29
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PRUDENTIAL REAL ESTATE INVESTORS
Part 1: Global Retail Trends and Structure
Market Maturity and Evolution
No assessment of a regional property market can begin without first understanding the market’s
context. All property markets fall along a continuum of structural progression. The least mature
markets are those with a limited stock of investment grade property. These markets consist largely of
small, owner-occupied shops, with few if any organized multi-store domestic retailers, let alone foreign
ones. Government policies in these markets can be both confusing and confounding, with potential
institutional investors deterred from even considering participation. Market information is scant, if it
exists at all. This is the beginning of the maturity spectrum, the starting point for progress. In South
East Asia, this is where Myanmar is today.
Far away, at the other end of the spectrum are a handful of markets—Australia, the UK, and the US
are among them—with high levels of liquidity, transparency, and organized participation by
institutional investors. Retailers are sophisticated and organized, and from their head offices, they
command multi-store formats that span national borders, languages, and local product preferences.
Policy frameworks in these markets offer multiple, clearly-defined modes of entry. Market information
providers are numerous and competitive. Modern, advanced retail centers form deep pools of
investible stock in these markets. The closest South East Asia gets to this level of retail market
maturity is Singapore.
Other markets in South East Asia fall midway along the spectrum. Emerging retail markets in
Vietnam, the Philippines, and Indonesia, for example, are ahead of Myanmar, but they lag behind the
maturing markets of Malaysia and Thailand. Exhibit 1 provides a framework for understanding how
South East Asian markets fit into the maturity spectrum in 2013.
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1: MATURITY OF RETAIL MARKETS
Stage Definition / Features
Trans-parency
Major Formats
Main Entry Method
Retail Stock
Retailers Countries
PRE-INSTITUTIONAL
• Limited investment • Lack of organized shopping formats • Local owner- occupiers dominate
Opaque • Street shops • Domestic retailers dominate
• Difficult path to entry
Non-institutional
• Domestic retailers
Pakistan, Venezuela, Kazakhstan, Iraq, Laos, Myanmar
EMERGING • Middle class growing
• Consumers aware of retail formats
• Shopping districts emerge
Low Trans-parency
• Department stores
• Super-markets
• Modern retail in prime areas
• Local partner needed
Limited institutional grade stock
• Domestic retailers
• Foreign retailers (big cities)
Vietnam, Philippines, Indonesia, Mexico, Russia, India
MATURING • Surge of well-organized malls
• Domestic/foreign chains enter market
• Significant growth in retail sales
Semi-Transparent
• Shopping malls
• Hyper-markets
• Online sales
• Develop / acquire malls
• Local partner preferred
Development expands institutional stock
• Foreign retailers penetrate
• Strong retailer competition
• National brands emerge
Malaysia, Thailand, Poland, South Korea, China, Taiwan
MATURE • Retail property as institutional asset class
• Consumer affluence; liquidity still evolving
• Domestic/foreign retailer sophistication
Transparent • Mature retail formats
• Suburban shopping centers
• Acquire/re-position malls
• Develop without partner
• Indirect (debt, listed stocks)
Institutional grade stock
• Chain retailers expand into secondary locations and cities
Singapore, Hong Kong, France, Italy, Japan, Germany
ADVANCED INSTITUTIONAL
• High liquidity and transparency
• High discretionary spending
• High barriers to market entry (expensive)
Highly Transparent
• Big box / specialty shops
• Entertainment formats
• Competitive online sales
• Acquire malls • Multiple entry
options
Institutional grade stock
• High foreign retailer penetration (big cities)
US, Australia, UK
Source: Prudential Real Estate Investors Note: as of End 2012
The pre-institutional and emerging stages of maturity are less suitable for institutional real estate
investing. Even if an adequate retail opportunity can be identified, investments in these markets
generally involve various risks, including illiquidity, lack of transparency, identification and vetting of
local partners, unfriendly legal structures, and volatile fundamentals, especially on the supply side.
But maturity is a constantly evolving concept. Of course, markets themselves move through the
continuum of maturity, but even our definition of advanced maturity is a moving target. Downtown
department stores once sat at the top of the retail spectrum. Then came suburban malls. Today our
notion of advanced retail markets has moved toward specialty shops, retail warehouses, and
entertainment-themed centers.
South East Asia currently lacks markets that are recognized as advanced institutional, but fast-paced
economic development is definitely pushing the region up the maturity spectrum (Exhibit 2). South
East Asian markets are quickly becoming more urbanized and consumers have more disposable
income to spend. Organized retailers, both domestic and international, are watching South East
Asia’s progress closely, as are institutional investors. Incremental institutionalization is creating new
opportunities. In the maturing markets, for example, where institutionalization is nascent, a convenient
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point of entry is development of modern retail stock. In those markets that are already considered
mature, optimal strategies might also include acquisition of existing malls.
Advanced maturity may eventually become widespread in South East Asia, but for now the
opportunities in this segment of the market—things such as the development of retail ―big box‖
stores—remain limited. South East Asia’s retail properties, both prime and suburban, are often tightly
held by their owners. This translates to fewer market transactions, and thus constraints on liquidity.
2: EVOLUTION OF RETAILING
Source: Prudential Real Estate Investors
Global Retail Trends
Globalization and International Retailing
More than half of the world’s 250 largest retailers sell fast-moving consumer goods (FMCG). Deloitte
defines these as consumer staples such as food, beverages, drugs, and general mass merchandise.2
The low-margin, high-turnover product mix of these retailers pulls in about two-thirds of revenues
produced by the top 250 global chains (Exhibit 3). FMCG retailers are surprisingly insular, especially
North American ones, and have so far been the least likely of major retailers to enter markets abroad.
Those FMCGs that have stepped across borders, especially European hypermarkets, have
significantly broadened their revenue streams.3 These types of price competitive retailers dealing in
basic necessities tend to do best during sluggish economic times. Other types of retailers, especially
those dealing in luxury-type goods, tend to perform better when discretionary incomes are expanding.
2 Deloitte, Switching Channels: Global Powers of Retailing 2012, January 2012, p. G25.
3 Deloitte, Switching Channels: Global Powers of Retailing 2012, January 2012, p. G26.
domestic
Economic development & foreign
Urbanization domestic
Consumer spending capacity & foreign
Retail market
domestic
& foreign
domestic
domestic
ADVANCED
Retailers
LIFESTYLE← →INDEPENDENT ← → CHAIN
↓
↑
NECESSITIES Consumers
Shopping malls
High street shops
LOW / IMMATURE
HIGH / MATURE
PRE-INSTITUTIONAL EMERGING MATURING
← potential for institutionalization →
Grocery stores
Street shops
High street shops
Department stores
Shopping malls
(prime & suburban)
Specialty shops
Retail warehouses
Themed centers
MATURE
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3: DISTRIBUTION OF TOP 250 GLOBAL RETAILERS BY PRODUCT SECTOR, 2010
by number of companies by sales volume
Source: Deliotte (2012) Note: as of Jan 2012
Globalization among the world’s top 250 retailers can be measured by the level of foreign market
penetration. According to Deloitte4, these top retailers brought in nearly a quarter (23%) of their
revenues from outside their domestic markets, and on average, their store operations spanned at
least eight markets (Exhibit 4). European retailers were among the most active in this group. They
have reduced dependence on domestic markets. Given the recent economic situation in Europe,
diversification across global markets is probably not a bad thing. Take Spain’s apparel retailer Zara,
for example. Even though Spain has recently been mired in recession, Zara operates more than
1,700 stores in 87 different countries.5 Zara’s Spanish parent company, Inditex, S.A., ranked 49
th on
Deloitte’s list of the top 250 retailers, with compound annual global sales growth of 13.2% over the
2005-2010 period.6
Zara’s strategy is typical but not universal among the top 250 global retailers. At least two in five of
these companies (40%) generate no revenues outside their own domestic markets. Many of Japan’s
largest retailers have chosen this path. On average, the leading Japanese retailers operate in only 2
or 3 countries and bring in just 6.7% of retail sales from their overseas operations. Compared to
European retailers, both Japanese and US retailers have shown more reluctance to expand their
footprints abroad.
4 Deloitte, Switching Channels: Global Powers of Retailing 2012, January 2012.
5 http://inditex.com/en/who_we_are/concepts/zara accessed 20 December 2012.
6 Deloitte, Switching Channels: Global Powers of Retailing 2012, January 2012, G31.
Fast-Moving
Consumer Goods53.2%
Fashion15.2%
Hardlines & Leisure
21.6%
Diversified10.0%
Fast-Moving
Consumer Goods66.6%
Fashion8.0%
Hardlines & Leisure
15.6%
Diversified9.8%
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4: FOREIGN PENETRATION OF TOP 250 GLOBAL RETAILERS
Source: Deliotte (2012) Note: as of Jan 2012
CBRE surveyed 326 major international retailers in 73 countries in 2012.7 Exhibit 5 shows 18 of the
retail markets where penetration rates among international retailers were highest. Four Asian markets,
including one South East Asian market, were among this group. Advanced economies like the UK and
the US have among the highest shares of international retailers present. In the Asia Pacific region,
China ranks highest, followed by Hong Kong, Singapore, and Japan. Relatively strong retail sales
growth (and an increasing level of personal income) will continue to attract international retailers to
China. Russia, Hong Kong, Turkey, Saudi Arabia, Singapore, and Poland are among the other
markets with retail sales growth of at least 3% per annum during 2000 to 2012.
5: LEADING MARKETS FOR GLOBAL RETAILER PENETRATION
Note: Size of bubble represents disposable income per head. Asian markets are shown in blue. Source: CBRE; EIU. Note: as of 4Q 2012
7 CBRE, How Global is the Business of Retail?, April 2012.
Region/Country Number Foreign Sales (%) Mkts./Retailer (avg.) Domestic Only (%)
Global 250 23.4% 8.2 40.4%
North America 91 ██████████████████ 14.3% ███ 7.0 ███ 53.8% █████████████
USA 81 ████████████████ 14.3% ███ 7.6 ███ 49.4% ████████████
Europe 88 █████████████████ 38.9% █████████ 14.9 ███████ 18.2% ████
Germany 19 ███ 42.6% ██████████ 13.6 ██████ 10.5% ██
UK 15 ███ 24.1% ██████ 16.6 ████████ 20.0% █████
France 13 ██ 44.6% ███████████ 30.3 ███████████████ 0.0%
Asia Pacif ic 53 ██████████ 10.4% ██ 3.3 █ 58.5% ██████████████
Japan 38 ███████ 6.7% █ 2.6 █ 68.4% █████████████████
Latin America 10 ██ 19.3% ████ 2.1 █ 50.0% ████████████
Africa / Middle East 8 █ 15.0% ███ 9.8 ████ 40.4% ██████████
CAN
ESP
AUT
BEL
CHN
CZEFRA
DEU
HKG
POL
RUS
SAUSGP
CHE
TUR
USA
ITA
GBR
JPN
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
11
12
13
30% 35% 40% 45% 50% 55% 60%
Share of Global Retailers Present (%)
Retail Sales Growth, % p.a.
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E-commerce
Another force transforming the retailing sector is e-commerce. As internet access and usage has
surged around the world, there has been a corresponding rise in online retail sales (Exhibit 6). This
does not necessarily mean that retail space along the world’s high streets is shrinking, but e-
commerce is forcing retailers to rethink the way they manage their traditional retail space in this new
environment of cross-channel sales. Asset managers have become more aware of ―show rooming‖ as
a key feature of high street retail spaces. Meanwhile, structural change in retail supply-chain
management has contributed to a rise in logistics demand for large, built-to-suit properties. In South
East Asia, the limited capacity and quality of local logistics service in the near term has become an
emerging opportunity for property investors.
6: ONLINE SALES IN SELECTED MARKETS
USA Europe China
Source: U.S. Department of Commerce Note: as of End 2011
Source: www.marketed.com Note: as of End 2011
e= estimate Source: Knight Frank, CEIC Note: as of Nov 2012
Composition and Impact of Sales Growth Trends
In the US, non-store retail sales—this includes both online sales as well as catalog sales—have
outpaced the growth of traditional retail sales for many years. These non-store sales, however, tend
to be more volatile than traditional sales, most likely reflecting a heavier reliance on discretionary
consumer products. By comparison, US retail sales growth of foods and beverages over the same
period showed greater inelasticity, with year-over-year changes rarely moving outside the narrow
band of 0-5%, regardless of economic conditions (Exhibit 7).
Over the past 20 years, a similar pattern has emerged in Japan’s post-bubble environment. Sales
growth for foods and beverages has held up better than more discretionary choices such as
restaurants. This trend in the US and Japan is harder to discern in Singapore, where retail sales
across categories have tended to move with the changing economy. In the near term, Singapore’s
softening economy will likely limit overall retail sales growth, as consumers temporarily become more
selective. As Singapore’s retail market matures, it is likely to see its structural sales patterns converge
more distinctly with advanced markets like the US and Japan. In other words, necessity-driven sales
0
50
100
150
200
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
USD (billions)
0
50
100
150
200
250
300
350
400
450
2006
2007
2008
2009
2010
2011
EUR (billions)
0
200
400
600
800
1000
1200
2007
2008
2009
2010
2011
2012e
RMB (billions)
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growth is likely to become more stable in the future than discretionary-driven sales growth. These
trends should, in turn, be reflected in the retail property market. (In fact, there is some evidence that
this is already happening in Singapore. This is discussed more in Exhibit 8.)
7: RETAIL SALES GROWTH BY FORMAT IN SELECTED MARKETS, % p.a.
USA Japan Singapore
Source: U.S. Census Bureau; Moody’s Analytics Note: as of Sep 2012
Source: Japanese Ministry of Economy; Japan Council of Shopping Centers Note: as of End 2010
Source: CEIC Note: as of Sep 2012
Retailers (and the specific products they sell) impact the success of retail properties. For owners and
managers, the tenant mix is a fundamental consideration. High-margin, low-volume fashion retailers,
for example, pay higher rents than low-margin, high-volume retailers like supermarkets. Property
owners and managers play a delicate game of finding the right tenant mix of discretionary and non-
discretionary retailers. To stabilize incomes in sluggish economic conditions, property managers have
an incentive to minimize volatility and lease up with retailers selling consumer staples. During
economic booms, it may be more tempting to attract retailers of apparel or luxury goods since they
can pay higher rents.
These trends play out in an example from Singapore’s Hougang Mall. There was a clear shift in the
tenant mix between 2004 and 2012 that reflected changing economic conditions. Favorable economic
conditions between 2004 and 2007 cleared the way for ample discretionary spending. As a result,
Hougang Mall attracted more fashion stores. But after the global financial crisis in 2008, consumer
spending shifted to more necessity driven products, so leasing at Hougang Mall began tilting toward
food and beverage retailers as the economy shifted. In a direct comparison of the tenant mix between
2004 and 2012, both of these patterns can be observed. Food and beverage retailers held just 14% of
the net leasable floor area at Hougang Mall in 2004, but this had climbed to 24% by 2012.
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Non-store retail (online/mail order)
Clothing & accessories
Food & beverages
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Restaurants & cafés
Clothes
Food & beverages
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
2005
2006
2007
2008
2009
2010
2011
2012
Department stores
Supermarkets
Food & beverages
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Similarly, fashion retailers held just 10% of the mall’s space in 2004, but a surge of new leasing in
2004-2007 still left these tenants with more space (14%) in 2012 than they had before the full property
cycle began in 2004. As of 2012, food and beverage retailers were the most common type of tenant at
Hougang Mall. A quick comparison to CapitaMall Trust’s retail portfolio in Singapore shows a similar
pattern with food and beverages being the leading tenant type. In CMT’s case, the tenant mix is
calculated on gross rents rather than net leasable area, but the same basic pattern still prevails
(Exhibit 8).
8: EXAMPLES OF TENANT MIX IN SINGAPORE
Hougang Mall (retail asset example)
Distribution by net leasable area, 2004 vs. 2012
CapitaMall Trust (retail portfolio example)
Distribution by gross rent, 2011
Source: Prudential Real Estate Investors, CMT Note: as of 2Q 2012
A Conceptual Framework of Factors Impacting Retail Property
This paper has so far focused on the structural context of global retailing. Before analyzing and
assessing the potential of the South East Asian retail markets, a conceptual framework is necessary
to explain the process for evaluating retail real estate attractiveness. The drivers of performance fall
into three distinct dimensions (Exhibit 9):
The structural drivers are normally associated with the long-term changes. This includes the
macro environment as well as some retail-specific drivers of market competitiveness.
Cyclical factors—real estate fundamentals and performance—also impact the attractiveness of
retail property markets. Like other property sectors, retail real estate markets follow cyclical
patterns, with periods of constrained supply tending to be followed by bursts of new construction.
Before engaging in any transaction, the cautious and pragmatic investor must first understand a
market’s position in the current cycle, both in terms of market fundamentals (demand, supply,
vacancies, and rents) as well as market performance (pricing and returns).
14%
29%
10%
20%
8%
19%
Food & beverages
24%
Lifestyle & entertain-
ment20%
Fashion & related
14%
Depart-ment
stores & super-
markets13%
Beauty & health-
care12%
Other18% 2012
2004
Food & beverages
27%
Lifestyle & entertain-
ment12%
Fashion & related
20%
Depart-ment
stores & super-
markets11%
Beauty & health-
care9%
Other22%
2011
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PRUDENTIAL REAL ESTATE INVESTORS
Beyond the structural and cyclical drivers of performance, investors must understand the risks
associated with investing in different retail markets. These risks include the volatility and pricing
of market performance. Institutional risks involve the economic and political maturity of sovereign
markets, as well as property-specific considerations such as transparency, liquidity, income
security, asset management, tenant relationships, and property positioning issues.
9: FRAMEWORK OF FACTORS THAT IMPACT RETAIL REAL ESTATE
Source: Prudential Real Estate Investors Note: as of End 2012
The remainder of this paper includes an analysis of the South East Asian retail property market
following the framework outlined above in Exhibit 9.
Short-term cyclical driversLong-term structural drivers
Real estate cycles
Infrastructure Access/convenience
Affordability Retail space per capita
The macro environment Retail competitiveness
Supply New construction
Demand Take up Retail sales Retailer strategies
Market pricing Yields Spreads
Macroeconomy GDP
Demographic factors Working population Urbanization rates
Labour factors
Unemployment Job growth
Wealth indicators Disposable Income
Tourism indicators Country risk
Risk considerations
Volatility Pricing
Institutional risks Country risk Political / legal risk Transparency
Liquidity Retail real estate risks
Asset management Positioning
Retailer relationship Catchment area Trade mix
FRAMEWORK OF VARIABLES TO EVALUATE REAL ESTATE ATTRACTIVENESS
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Part 2: South East Asia Retail Market Analysis
The Macro Environment
Macro Economy
The South East Asian economies are projected to grow by 4% to 7% per annum over the 2012-2016
period. This is a significantly faster pace of growth than is expected in advanced economies.
Singapore’s productive capacity—in essence, its wealth—has already pulled in line with the US,
Japan, and Western Europe as measured by GDP per capita. And Malaysia's GDP per capita
exceeds China and India by a relatively wide margin. Given these trends where are international
retailers likely to be seeking growth opportunities in the years ahead? Clearly, a fertile environment
exists for prime retail demand to grow in South East Asia in the years ahead. Add to this a surprisingly
massive population base. South East Asia’s 436 million residents in 2011 exceeded both the US and
Western Europe in size. Moreover, the region’s large population base tends to be younger than either
the US or Western Europe, where age cohorts are skewed in the other direction (Exhibit 10).
10: SOUTH EAST ASIA COMPARED TO THE REST OF THE WORLD
GDP 2011 (US$bn)
GDP per capita 2011 (US$)
GDP growth 2012-2016 (% p.a.)
Population 2011 (millions)
Population growth 2012-2016 (% p.a.)
Urban share 2011 (%)
South East Asia
Indonesia 847 3,448 6.3% 245.6 1.00% 54.9%
Malaysia 279 9,737 5.2% 28.6 1.30% 73.2%
Singapore 260 49,963 4.6% 5.2 2.64% 100.0%
Thailand 346 5,067 5.0% 68.2 0.64% 34.4%
Vietnam 124 1,400 6.9% 88.7 0.98% 29.3%
Rest of Asia Pacific
China 7,053 5,343 8.1% 1,320 0.44% 45.9%
Japan 5,871 46,409 1.3% 126.5 -0.36% 67.0%
India 1,897 1,578 7.9% 1,202 1.46% 30.4%
Australia 1,487 66,010 3.0% 22.5 1.42% 89.3%
Korea 1,092 21,998 3.8% 49.6 0.14% 82.1%
Taiwan 467 20,235 3.9% 23.1 0.14% 80.0%
Hong Kong 243 34,107 4.1% 7.1 0.38% 100.0%
Other regions
Western Europe 17,288 42,186 0.9% 409.8 0.38% 77.1%
USA 15,094 48,208 2.2% 313.1 0.96% 82.6%
Source: EIU Note: as of 3Q 2012
Indonesia and Vietnam, only marginally integrated with the rest of the world economy, have easily
weathered recent external disruptions, including the global financial crisis and Europe’s sovereign
debt crisis. These same events had a different impact on South East Asia’s more mature economies.
External shocks, for example, contributed to sharp, but relatively short, corrections in Singapore and
Thailand. Looking forward, recent forecasts for medium-term economic growth in South East Asia
appear favorable. (Exhibit 11).
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PRUDENTIAL REAL ESTATE INVESTORS
11: GDP GROWTH
Source: EIU Note: as of Nov 2012
Demographics
Increasing rates of urbanization bring profound structural changes across a number of fronts:
Economic. Urban labor pools are larger, denser, and more diverse, something that works to the
advantage of employers as well as those seeking jobs. In this environment, productivity and
incomes rise and so does spending.
Social. Urban areas integrate diverse groups of residents and visitors, creating a social and
cultural environment that can influence fashions, entertainment, and ultimately spending
patterns.
Political. Urban areas also wield political power, providing a voice for concentrated public
investments in infrastructure such as airports, transit systems, hospitals, and universities.
All of these structural impacts stem from urbanization, and all of them—economic, social, and
political—shape the retail property markets in one way or another. If higher urbanization, for example,
translates into more retail spending, then there is likely to be an increase in demand for retail space.
The urbanized share of South East Asia’s population jumped from 25% in 1980 to 50% today. If
current population trends continue, the urbanization rate will reach 75% by 2050 (by comparison, the
urbanization rate in the US is currently 83%). At this rate, the size of the urbanized population in
South East Asia would grow by a net 300 million over the next four decades. The city-state of
Singapore is already fully urbanized, but other countries within the region hold a great deal of
potential for urban expansion (Exhibit 12).
0
2
4
6
8
10
12
14
16
2010
2011
2012e
2013f
2014f
2015f
2016f
%
Indonesia
History
Forecast
0
2
4
6
8
10
12
14
16
2010
2011
2012e
2013f
2014f
2015f
2016f
%
Malaysia
History
Forecast
0
2
4
6
8
10
12
14
16
2010
2011
2012e
2013f
2014f
2015f
2016f
%
Singapore
History
Forecast
0
2
4
6
8
10
12
14
16
2010
2011
2012e
2013f
2014f
2015f
2016f
%
Thailand
History
Forecast
0
2
4
6
8
10
12
14
16
2010
2011
2012e
2013f
2014f
2015f
2016f
%
Vietnam
History
Forecast
0
2
4
6
8
10
12
14
16
2010
2011
2012e
2013f
2014f
2015f
2016f
%
Asia Pacific
History
Forecast
0
2
4
6
8
10
12
14
16
2010
2011
2012e
2013f
2014f
2015f
2016f
%
China
History
Forecast
0
2
4
6
8
10
12
14
16
2010
2011
2012e
2013f
2014f
2015f
2016f
%
US
History
Forecast
14
REF: PFIA – 8RPS2U
PRUDENTIAL REAL ESTATE INVESTORS
12: KEY DEMOGRAPHIC INDICATORS
Urbanization rates Working age population (% of total)
Source: EIU Note: as of Nov 2012
Labor Market
With solid rates of job growth projected for South East Asia in the coming years (all of the markets in
the region except Thailand are expected to add jobs at a faster pace than the US), retailers have
reason to be considering expansion. Singapore and Malaysia are expected to lead the region’s job
growth over the 2012-2016 period. Corresponding unemployment rates are expected to be below the
historical averages experienced since the mid-1990s. Emerging markets like Indonesia, and to a
lesser extent Vietnam, are expected to experience significant improvements in their respective
unemployment rates (Exhibit 13).
60
62
64
66
68
70
72
74
76
78
80
2007
2008
2009
2010
2011
2012e
2013f
2014f
2015f
2016f
%forecast
20
30
40
50
60
70
80
90
100
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012e
2013f
2014f
2015f
2016f
%
Indonesia
Malaysia
Singapore
Thailand
Vietnam
China
US
forecast
15
REF: PFIA – 8RPS2U
PRUDENTIAL REAL ESTATE INVESTORS
13: KEY LABOR INDICATORS
Employment growth (% per annum ) Unemployment rate (% per annum )
Source: EIU Note: as of Nov 2012
Wealth Accumulation
Disposable incomes provide a reasonable basis for measuring and comparing consumer spending
power. Singapore’s disposable income per capita (estimated by the Economist Intelligence Unit at
around US$23,700 in 2012) is on a scale that is out of line with the rest of South East Asia. Compare,
for example, Singapore’s disposable income level to Vietnam’s US$600 in 2012. Nevertheless, the
vector is the same across the entire region. Disposable incomes are projected to grow in all five major
markets in South East Asia over the 2012-2016 period. Some markets are expected to see significant
improvements in disposable income growth rates (Indonesia, Malaysia). Others will maintain steady
growth (Singapore, Thailand). Only Vietnam is expected to see gradual deceleration of in the pace of
annual growth (Exhibit 14).
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2011
2012e
2013f
2014f
2015f
2016f
%
IndonesiaMalaysiaSingaporeThailandVietnam
Asia PacificChinaUS
forecast
0
1
2
3
4
5
6
7
8
2012e
2013f
2014f
2015f
2016f
2012e
2013f
2014f
2015f
2016f
2012e
2013f
2014f
2015f
2016f
2012e
2013f
2014f
2015f
2016f
2012e
2013f
2014f
2015f
2016f
Indonesia Malaysia Singapore Thailand Vietnam
%
ForecastHistorical average (1995-2011)
16
REF: PFIA – 8RPS2U
PRUDENTIAL REAL ESTATE INVESTORS
14: DISPOSABLE INCOME PER HEAD (US$)
Source: EIU Note: as of Nov 2012
Tourism
Markets that generate increases in disposable incomes and domestic consumer spending can expect
to see their retail markets grow. Adding in the extra spending from cross-border tourists is an added
bonus for the tourism sector. Singapore, constrained by its size and lack of natural features, has
opted for a Las Vegas-style tourism strategy that centers on casinos and the luxury resort experience.
For the rest of the region, the prospects for tourism are quite solid as well. South East Asia’s location
boosts its prospects for luring tourists for at least two reasons.
First, proximity to China will become a bigger factor in the competition for tourists in the years ahead.
A growing level of affluence among China’s 1.3 billion residents is already impacting tourism across
the Asia Pacific region, most notably in Hong Kong. By proximity alone, South East Asia is likely to
capture some of this growing market in the years to come.
Second, only the Indian subcontinent separates South East Asia from the Middle East. Malaysia has
already become a popular destination for affluent tourists from this region. With more than 25 million
visitors annually, Malaysia is the region’s top tourist destination. By capitalizing on its Islamic heritage,
perhaps Indonesia is suited to capture some of this growing market in the future. (Exhibit 15).
0%
3%
6%
9%
12%
15%
18%
21%
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
2011
2012e
2013f
2014f
2015f
2016f
%US$
SingaporeDisposable Income(US$ per head, LHS)
Disposable Income Growth
(%, RHS)
-8%
-4%
0%
4%
8%
12%
16%
0
1,000
2,000
3,000
4,000
5,000
6,000
2011
2012e
2013f
2014f
2015f
2016f
%US$
IndonesiaDisposable Income(US$ per head, LHS)
Disposable Income Growth
(%, RHS)
-8%
-4%
0%
4%
8%
12%
16%
0
1,000
2,000
3,000
4,000
5,000
6,000
2011
2012e
2013f
2014f
2015f
2016f
%US$
MalaysiaDisposable Income(US$ per head, LHS)
Disposable Income Growth
(%, RHS)
-8%
-4%
0%
4%
8%
12%
16%
0
1,000
2,000
3,000
4,000
5,000
6,000
2011
2012e
2013f
2014f
2015f
2016f
%US$
ThailandDisposable Income(US$ per head, LHS)
Disposable Income Growth
(%, RHS)
-8%
-4%
0%
4%
8%
12%
16%
0
1,000
2,000
3,000
4,000
5,000
6,000
2011
2012e
2013f
2014f
2015f
2016f
%US$
VietnamDisposable Income(US$ per head, LHS)
Disposable Income Growth
(%, RHS)
17
REF: PFIA – 8RPS2U
PRUDENTIAL REAL ESTATE INVESTORS
15: TOURIST ARRIVALS & GROWTH
Source: EIU Note 1: as of Nov 2012 Note 2: It should be noted that for the consistency across various countries, we are using EIU’s estimates. EIU's data source is the World Tourism section of the World Development Indicators, and international sources tend to bring in the latest data with a lag, compared to national releases.
Retail Competitiveness
The macro environment described in the previous section—a mix of demographic, economic, labor,
income, and visitor dynamics—provides context for South East Asia’s retail demand. All of these
factors are long-term and structural. Yet there are other long-term, structural factors that can stimulate
retail property growth. These are loosely connected to the macro environment, yet they do not fit
neatly into that framework. For lack of a better term, we call them ―retail competitiveness factors‖ in
this paper. Singapore provides a good illustration of retail competitiveness. It lures tourists to its two
integrated resorts, Sentosa and Marina Bay. Tourists spend their retail dollars within these resorts, but
the on-site retailers have external competition. Retailers in prime high street districts like Orchard
Road recognize the potential of this tourist market and move further upscale to attract a share of non-
resident spending. This drives up demand for prime retail space, and over a longer period of time, it
pushes rents up more than they would have increased otherwise. In this sense, a number of
competitiveness factors, including infrastructure, accessibility, affordability, and retail capacity impact
the structure of the retail market over the long term. Both Malaysia and Thailand are keen to emulate
this entertainment-led model of retail competitiveness.
A recent study of cross-border shopping patterns in the Asia Pacific region attempted to measure the
competitiveness of 25 major cities across the region, including cities in South East Asia, for attracting
tourists.8 Though the study was a comprehensive look at tourism spending, it included various retail-
specific variables. Singapore, for example, ranked high in the Asia Pacific region on factors such as
transport infrastructure, accessibility, and the diversity of the shopping experience but it fell short on
affordability. Other cities in the region like Jakarta and Ho Chi Minh City were deemed affordable, but
fell short in the areas where Singapore ranked high. Kuala Lumpur tended to rank relatively high
across all categories. The cities with the highest overall scores in South East Asia (Kuala Lumpur,
8 Economist Intelligence Unit and Global Blue, The Globe Shopper Index Asia-Pacific, April 2012.
0%
1%
2%
3%
4%
5%
6%
7%
8%
0
5
10
15
20
25
30
35
40
2011
2012e
2013f
2014f
2015f
2016f
%mils
Indonesia
Arrivals(millions, LHS)
Growth(%, RHS)
0%
1%
2%
3%
4%
5%
6%
7%
8%
0
5
10
15
20
25
30
35
40
2011
2012e
2013f
2014f
2015f
2016f
%mils
Malaysia
Arrivals(millions, LHS)
Growth(%, RHS)
0%
1%
2%
3%
4%
5%
6%
7%
8%
0
5
10
15
20
25
30
35
40
2011
2012e
2013f
2014f
2015f
2016f
%mils
Singapore
Arrivals(millions, LHS)
Growth(%, RHS)
0%
1%
2%
3%
4%
5%
6%
7%
8%
0
5
10
15
20
25
30
35
40
2011
2012e
2013f
2014f
2015f
2016f
%mils
Thailand
Arrivals(millions, LHS)
Growth(%, RHS)
0%
1%
2%
3%
4%
5%
6%
7%
8%
0
5
10
15
20
25
30
35
40
2011
2012e
2013f
2014f
2015f
2016f
%mils
Vietnam
Arrivals(millions, LHS)
Growth(%, RHS)
18
REF: PFIA – 8RPS2U
PRUDENTIAL REAL ESTATE INVESTORS
Singapore, and Bangkok) are the ones considered best prepared to compete for external tourism
spending. The implication for the other cities is that broad improvements in overall amenities—things
like airports, transit systems, public spaces—could enhance the value of local retail markets (Exhibit
16).
16: THE GLOBE SHOPPER INDEX (ASIA PACIFIC)
Overall Ranking Infrastructure (Transport & accommodation)
Access (Convenience)
Diversity (Shopping & product mix)
Affordability
1 Ho Chi Minh City
2 Kuala Lumpur
Kuala Lumpur
3 Singapore Kuala Lumpur
4 Kuala Lumpur
Jakarta
5 Singapore
6 Singapore
Bangkok
7 Bangkok
Singapore Bangkok
8 Kuala Lumpur
Manila
9 Bangkok
10
Manila
11 Manila
12 13 14 15 16
Manila Bangkok Jakarta
17 Jakarta
18 Jakarta
Manila
19 Ho Chi Minh City
Singapore
20 Ho Chi Minh City
21
Ho Chi Minh City
Ho Chi Minh City
22 Jakarta
23 24 25
Source: Globe Shopper Index Asia Pacific (2012); Prudential Real Estate Investors
Real Estate Fundamentals
Structure of the Regional Market
The structure of a local real estate market establishes a foundation for fundamentals and
performance. Emerging markets like Vietnam and Indonesia, for example, offer only marginal diversity
across retail formats. There are other important clues to a retail real estate market’s structure, such as
property ownership (is property held by institutions or by the occupiers?) and land supply (is it tightly
controlled by the government or freely traded?) and lease structures. Retail leases in South East Asia
are typically shorter than in Western countries. This has an upside in that it enables property owners
to exert more active management control, but it also carries the risk of quickly losing lease renewals if
economic conditions deteriorate or if the property does not perform well. Another important issue is
the level of foreign participation permitted in property ownership. Emerging markets tend to impose
various restrictions on foreign investments. All of these issues feed into the overall maturity and
structure of the market (Exhibit 17).
19
REF: PFIA – 8RPS2U
PRUDENTIAL REAL ESTATE INVESTORS
17: STRUCTURE OF SOUTH EAST ASIAN RETAIL MARKETS
Dominant Retail Format
Ownership Supply Risk (2013/14)
Typical Lease Length
Maturity Stage
Foreign Investments
SINGAPORE Shopping malls; department stores.
Local developers; S-REITs.
Moderate. Centrally planned by the government.
Typically 2 to 3 years.
Mature. Yes.
MALAYSIA Shopping malls; department stores; suburban malls.
Developer-owned; increasingly institutional (M-REITs).
Moderate to Considerable. Increasing level of supply for suburban malls in major cities.
Typically 2 to 3 years on fixed rent; longer leases must be registered with the relevant local land office.
Maturing.
Yes, but conditional; foreign investors would need to obtain state government approval.
THAILAND Department stores; shopping malls; street shops.
Predominantly retailer-owned; local developers.
Moderate. Less institutional grade stock outside Bangkok.
Typically 3 years on fixed rent.
Maturing. Yes.
VIETNAM Department stores; street shops; shopping malls.
Local developers; retailer-developed and owned.
Considerable. Concentrated in HCM City; significant level of new supply (double the existing stock) will enter the market over the next 3 years.
Typically 3 years on fixed rent; longer term lease also available with flexible terms and market rental cap.
Emerging.
Yes. but conditional; the most common route is through joint ventures.
INDONESIA Department stores; street shops.
Local property companies; retailer-developed and owned.
Minimal. Strong pre-leasing commitment for new malls in Jakarta. Developers are focusing on office and residential sectors.
Typically 5 years on fixed rent; longer leases are available for negotiation.
Emerging.
Yes, but conditional.
Source: DTZ, Prudential Real Estate Investors Note: as of End 2012
20
REF: PFIA – 8RPS2U
PRUDENTIAL REAL ESTATE INVESTORS
Supply
With the exception of prime retail space in Singapore, the pipeline throughout the rest of South East
Asia ranges from adequate to abundant, depending on the market. Despite the large new supply
expected in Singapore’s suburban areas, demand is expected to be robust, and vacancy rates
already reflect full occupancy. The retail market in suburban Kuala Lumpur faces a similar situation,
i.e., ample supply but with relatively low vacancy. Pre-commitment ratios are above 70% for planned
retail construction in the suburbs of both cities.9
In the major cities of Vietnam significant supply risks loom ahead. Both Ho Chi Minh City and Hanoi
are expecting to add more than one million square feet of supply in the coming four years.10
The
addition of this much modern shopping stock—in cities where such space hardly exists—will be a
challenge for retailers to absorb, particularly in Hanoi which has been less responsive to market
conditions than Ho Chi Minh City. Still, it is difficult to tell if or how much pent-up demand may exist in
these markets. Vietnamese cities are different from the rest of the region because they are at such an
early stage of retail investment. A surge of new supply is not uncommon when retail markets are
moving up the maturity continuum. For now, Vietnamese retail vacancy rates remain far above the
rest of the region (Exhibit 18).
18: RETAIL SUPPLY OVERVIEW
Source: CBRE, JLL; Prudential Real Estate Investors Note: as of 4Q 2012
Demand
As outlined in the macro environment section of this paper, increasing levels of domestic income and
inbound tourism boost the potential for retail demand. Steady growth in disposable income translates
into greater volumes of retail sales over time, but in the short term, retail sales growth can be quite
volatile, depending on economic issues such as job growth, inflation, and consumer confidence. Major
new tourist destinations in Singapore—Marina Bay Sands, Universal Studios, and Resorts World
Sentosa—helped to re-establish the market’s retail sales growth in the wake of the global financial
crisis. Despite Singapore’s weaker economic outlook, its retail sales growth is expected to keep pace
with past trends.
9 Jones Lang LaSalle, as of Q3 2012.
10 CBRE Research, as of Q2 2012.
Supply Risk
Outlook
Singapore Prime 5.5% ██ 2.2% █ Low
Suburban 34.2% █████████████████ 0.6% Low
Kuala Lumpur Prime 29.9% ██████████████ 8.3% ████ Medium
Suburban 22.5% ███████████ 5.4% ██ Medium
Other Malaysian Cities — — — Medium / High
Bangkok Prime 13.4% ██████ 9.5% ████ Medium
Suburban — — Low / Medium
Jakarta Prime 18.9% █████████ 3.9% █ Low
HCM City Prime 538.6% █████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████► 39.8% ███████████████████ Medium / High
Hanoi Prime 427.6% █████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████► 30.0% ███████████████ High
Total New Supply 2013-
2016 / Current Stock 2012 4Q Vacancy Rate
21
REF: PFIA – 8RPS2U
PRUDENTIAL REAL ESTATE INVESTORS
Malaysia was perhaps influenced by Singapore’s recent success in attracting big-spending visitors.
Already a major destination for Middle Eastern tourists, Malaysia has launched a new initiative to
attract both investors and visitors. Dubbed Iskandar Malaysia, the mixed-use initiative is located in the
southern region of the country across the border from Singapore.
Liberalization of the retail sector in Vietnam and Indonesia will push retail sales growth up over the
next five years. Indonesia is expected to sustain the upward momentum in sales growth over the five-
year forecast window. Although Vietnam may lose some of its retail sales momentum in the latter
years of the forecast window, it will still see some of the fastest growth in the region (Exhibit 19).
19: RETAIL SALES GROWTH (%)
Source: EIU Note: as of Nov 2012
Retail rents in Malaysia, Bangkok, and Jakarta share solid prospects for growth in the near term, Over
the past few years rental performance in these markets has remained relatively sheltered from
external disturbances in the Eurozone or elsewhere.
Recent new deliveries of retail space boosted Singapore’s retail stock and provided retailers with a
new array of options. In the process, the new supply also muted the market’s recent rental growth.
With economic conditions in Singapore looking cloudy in the near term, retailers are likely to sit on
their expansion plans until prospects improve, thus delaying the retail rental recovery.
A massive excess of modern supply will overwhelm Vietnamese cities in the near term. Despite an
upbeat outlook on the demand side, the supply pipeline will disrupt retail fundamentals in Vietnam and
send rents down in the near term. From a longer term perspective, however, this pattern is hardly
unusual. When incomes and retail sales are increasing rapidly, as they are in Vietnam, large new
stocks of modern space are needed for the market to transition into greater maturity. It is inevitable
that some short-term imbalances in supply and demand will occur as this transition plays out. (Exhibit
20).
-2
0
2
4
6
8
10
12
14
2002
2004
2006
2008
2010
2012e
2014f
2016f
%
IndonesiaHistoryForecast
-2
0
2
4
6
8
10
12
14
2002
2004
2006
2008
2010
2012e
2014f
2016f
%
MalaysiaHistoryForecast
-2
0
2
4
6
8
10
12
14
2002
2004
2006
2008
2010
2012e
2014f
2016f
%
SingaporeHistoryForecast
-2
0
2
4
6
8
10
12
14
2002
2004
2006
2008
2010
2012e
2014f
2016f
%
ThailandHistoryForecast
-2
0
2
4
6
8
10
12
14
2002
2004
2006
2008
2010
2012e
2014f
2016f
%
VietnamHistoryForecast
22
REF: PFIA – 8RPS2U
PRUDENTIAL REAL ESTATE INVESTORS
20: RETAIL RENTAL OVERVIEW
Source: JLL; CBRE; Prudential Real Estate Investors Note: as of 4Q 2012
Pricing
Retail assets in Singapore and Kuala Lumpur are currently trading at the lower end of their respective
historical yield bands. The historical yield bands for these markets are rather narrow, reflecting their
relative maturity and stability.
Contrast this with Bangkok and Jakarta, where yields have ranged much wider over time. These retail
markets are still evolving and maturing. As a result, investors in Bangkok and Jakarta demand higher
risk-adjusted returns. (Exhibit 21).
21: RETAIL PRICING OVERVIEW
Source: JLL, Prudential Real Estate Investors. Note: as of 4Q 2012
Cumulative Retail Rental Growth, 2008-2012 10-Year Historical
Average Retail Rental Rental
Growth Rate, 2003-2012 Outlook
Singapore Prime 0.0% ◄►
Suburban 1.0% ||||||||| ◄►
Kuala Lumpur Prime 4.2% |||||||||||||||||||||||||||||||||||||||||| ◄►
Suburban 5.5% |||||||||||||||||||||||||||||||||||||||||||||||||||||| ▲
Other Malaysian Cities — — ▲
Bangkok Prime 1.6% ||||||||||||||| ▲
Suburban — ▲
Jakarta Prime 2.6% |||||||||||||||||||||||||| ▲
HCM City Prime 4.4% ||||||||||||||||||||||||||||||||||||||||||| ▼
Hanoi Prime 3.9% |||||||||||||||||||||||||||||||||||||| ▼
-100 -80 -60 -40 -20 0 20 40
Cumulative Percent (%) Change
2008 2009 2010 2011 2012
Other
Malaysia Jakarta HCM City Hanoi
Prime Suburban Prime Suburban — Prime Suburban Prime Prime Prime
Yield Trend ▼ ▼ ▼ ▼ ◄► ◄► ◄► ▼ ▲ ▲
BangkokSingapore Kuala Lumpur
0
2
4
6
8
10
12
14
16
% Historical yield range, 2001-2012 (as available) Current yield at 4Q 2012
23
REF: PFIA – 8RPS2U
PRUDENTIAL REAL ESTATE INVESTORS
The previous chart (Exhibit 21) showed yield movements over time. The following chart shows yield
spreads, past and present (Exhibit 22). The patterns are essentially the same: only marginal historical
changes to spreads in Singapore and Kuala Lumpur, but wide variations in Jakarta and Bangkok.
Look closely at Exhibit 22 and it shows that Singapore’s yield spread is slightly higher than its long-
term average. Low government bond yields in Singapore have more than offset the market’s
historically low cap rate. Ownership of Singapore’s retail property is closely protected, with few
transactions occurring. If and when a retail property does become available in Singapore, local
institutions and S-REITs often acquire the assets with aggressive underwriting assumptions. (See
again Exhibit 1, which shows Singapore as a mature market rather than an advanced institutional
market. One of the features separating these two types of maturity is liquidity. In mature markets like
Singapore, liquidity is still evolving. Advanced institutional markets tend to be highly liquid.) This may
help to explain why, despite Singapore’s modest outlook for rental growth, yields are unlikely to move
out, and are instead expected to remain fairly stable. In Malaysia, the retail markets are maturing
quickly. The country’s M-REITs have become a major force driving cap rate stabilization.
Meanwhile, yields for maturing markets like Jakarta and Bangkok are relatively healthy and the
spreads are attractive. Cap rates could compress further in these markets, but the drivers will be
different from Singapore and Malaysia. The Jakarta retail market is experiencing structural change in
its fundamentals. Strong demand from domestic and international retailers has been met with a dearth
of new modern supply. This is likely to drive cap rate compression until Jakarta’s retail fundamentals
can rebalance. In Bangkok, demand for retail assets is increasing, and the Thai market recently
welcomed the successful launch of Tesco Lotus REIT. As the Bangkok market matures, yields are
likely to compress further.
22: YIELD SPREADS
Source: JLL, CBRE, Prudential Real Estate Investors. Note: as of 4Q 2012
0
1
2
3
4
5
6
7
8
9
10
Singapore Prime
Singapore Suburban
Kuala Lumpur
Prime
Kuala Lumpur
Suburban
Jakarta Prime
Bangkok Prime
%
Long-term average spread, 2001-2012
Most recent 5-year spread
Current spread at 4Q 2012
24
REF: PFIA – 8RPS2U
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The outlook for unadjusted total returns on retail assets over the next three to four years varies market
by market based largely on the progression of maturity in each country. In the more mature markets of
South East Asia, income will be the primary driver of total returns in the near term, as cap rates in
these markets—currently at historically low levels—are unlikely to compress significantly in the major
cities of Singapore and Kuala Lumpur. The outlook for capital appreciation in Bangkok is a bit better.
Solid economic growth and tourism expansion are encouraging greater institutionalization of the
market, and this is likely to stimulate new tenant demand from retailers. Retail yields in Bangkok are
relatively high, so the current dynamics of the market leave room for further compression. But liquidity
issues complicate retail returns in the emerging markets. The lack of investment grade assets and
transactions tends to amplify capital appreciation. When a transaction occurs, the yield is typically low,
making it difficult for foreign investors to justify the acquisition on a risk-adjusted basis. In markets like
Hanoi and Ho Chi Minh City, the infrequency of transactions and the limited stock of modern retail
assets make it impractical to forecast capital appreciation in any meaningful way (Exhibit 23).
23: TOTAL RETURN OUTLOOK
Income Return
Capital Appreciation
Annualized 2013-2016
Annualized 2013-2016
Min Max
Min Max
Singapore Prime 4% 5% 3% 4%
Suburban 5% 6% 1% 2%
Kuala Lumpur Prime 6% 7% 2% 3%
Suburban 7% 8% 3% 4%
Bangkok Prime 7% 8% 5% 7%
Jakarta Prime 8% 10% 3% 5%
Ho Chi Minh City Prime 10% 12% Outlook Uncertain
Hanoi Prime 11% 13% Outlook Uncertain
Source: Prudential Real Estate Investors, JLL, CBRE Note: as of 4Q 2012
Risk Considerations
Investors face a wide range of country and political risks across South East Asia. Singapore presents
a low risk environment but in countries like Vietnam the risks are much more daunting. Stable
governments and sound financial and credit markets have ushered in noticeable improvements in
country risks across the region, especially in Indonesia, Singapore, and Malaysia. Meanwhile, country
risks in Vietnam have actually worsened over the past decade due to weaker credit markets and
rampant corruption (Exhibit 24).
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24: VOLATILITY AND COUNTRY RISK
10-year rental volatility Country risk / Corruption index (0=lowest, 100=highest)
Note: Corruption scores on a 100 percentile scale have been inverted to be comparable with risk scores Source: CBRE, JLL REIS, EIU; Prudential Real Estate Investors. Note: as of 4Q 2012
The following are among the other specific risks retail property investors face:
Liquidity risk. Liquidity varies across the South East Asian markets with Singapore and
Malaysia posing fewer challenges. Liquidity risks are higher in markets like Vietnam and
Indonesia.
Development / counterparty risk. Again, there is a higher level of risk in markets like Indonesia
and Vietnam.
Asset management risk. This type of risk is often a function of maturity. Less mature markets
lack a deep pool of talent, local knowledge, and market information.
Property positioning / tenant mix. Many South East Asian markets are in the throes of
structural change. This has brought a surge of new modern retail construction projects in various
locations. As the modern retail stock increases, asset competition will be heightened. As a result,
owners and managers will spend more time considering how to position assets and optimize the
mix of retail anchors and tenants.
Site selection. As urbanization increases, cities extend mass transport services further into the
outlying markets. Retail catchment areas outside of prime districts are subject to rapid change as
0 10 20 30 40
Singapore Prime
Singapore Suburban
KL Prime
KL Suburban
BKK Prime
Jakarta Prime
Ho Chi Minh City Prime
Hanoi Prime
Standard deviation (in percentage points) of annual
historical rental growth
0
10
20
30
40
50
60
70
80
90
100
Sin
gap
ore
Mala
ysia
Ind
on
esia
Th
ailan
d
Vie
tnam
Ch
ina
US
2001 country risk
2011 country risk
2012 corruption
2001 country risk average for Asia Pacific
2011 country risk average for Asia Pacific
Higher
scores =more risk /
more
corruption
Lower scores =
less risk / less
corruption
1
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PRUDENTIAL REAL ESTATE INVESTORS
infrastructure is extended. As a result, catchment areas in secondary or suburban locations must
be chosen with caution.
Retailer relationships. Domestic retailers dominate the tenant mix in many South East Asian
cities. Even though international retailers continue to expand their footprints into these markets,
business relationships with domestic retailers are crucial for success. Without local knowledge or
local networks, the risks will be greater.
Assessment of Retail Attractiveness
All of the variables described thus far in this paper as contributing to retail attractiveness were scored
and assigned a value of Attractive, Fair, or Unattractive based on that score. The results are shown
in Exhibit 25. Ho Chi Minh City and Hanoi scored poorly across many of the variables. The only other
cities that received Unattractive scores in any variable were Singapore (for affordability) and Kuala
Lumpur (for retail capacity, a measure of stock per capita). Ironically, the Unattractive scores for both
Singapore and Kuala Lumpur reflect to some degree their own success. Like most high-amenity
developed markets, Singapore’s overhead costs are high, and this makes it appear unaffordable
relative to other cities in the region. Malaysia is the biggest tourist draw in South East Asia (and by a
wide margin). Malaysian retailers cater to a larger market than just domestic consumers. This drives
up retail space per capita, despite relatively healthy retail vacancy rates in Kuala Lumpur. (Exhibit 25).
25: RETAIL ATTRACTIVENESS MATRIX
A Attractive
F Fair
U Unattractive
Macro Environment Competitiveness Real Estate Risks
City Sectors Ma
cro
eco
no
my
Dem
og
rap
hic
s
La
bo
r
Wealt
h
To
uri
sm
Tra
ns
po
rtati
on
Access
Aff
ord
ab
ilit
y
Infr
astr
uctu
re
Reta
il c
ap
acit
y *
Su
pp
ly
Dem
an
d
Ren
ts
Pri
cin
g
Co
un
try r
isk
Mark
et
matu
rity
Pro
pe
rty s
up
po
rt
Singapore Prime F A A A F A A U A A A F F F A A A
Suburban F A A A F A A U A A A F A F A A A
Kuala Lumpur Prime F A A A A A A F A U F F F F A F A
Suburban F A A A A A A F A U F F A A A F A
Other Malaysian cities F A A A A F F F F F F F A A A F F
Bangkok Prime F F F A A A F F F F F F A A F F A
Suburban F F F A A F F F F F A F F A F F F
Jakarta Prime A A F A A F F F F A A A A A F F F
Ho Chi Minh City Prime A F U F F U F A U A U A U A F U U
Hanoi Prime A F U F F U F A U A U A U F F U U
* Note: Retail floor space per capita is used to assess the capacity of the market. Relatively underserved markets (i.e., low per capita retail floor space) appear more attractive than those with an above-average retail capacity. Source: Prudential Real Estate Investors Note: as of End 2012
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Next, the scores in Exhibit 25 were weighted. Long-term structural factors received preference, with a
weighting of 60%. Of this, 35% was attributed to the macro environment and the other 25% for the
contributions to retail market competiveness. Short-term cyclical factors (i.e., real estate fundamentals
and performance) were weighted at 30%. Risks were assigned a weighting of 10%. (Individual
investors might choose to vary these weights, depending on their respective circumstances and
objectives.)
The results are shown in Exhibit 26. Despite sluggish demand-side fundamentals and performance in
the near-term, Singapore came out on top of the rankings because it scored so well in most other
categories. Jakarta scored well for the opposite reason. Near-term fundamentals of constrained
supply and ample demand offset Jakarta’s moderate risks and limited competitive amenities like
infrastructure and accessibility.
Ho Chi Minh City and Hanoi in Vietnam ranked last in the region due to high risks oversupplied stock,
and limited amenities for retail competition.
26: RETAIL ATTRACTIVENESS RANKINGS
Rank Retail Market Submarket
1 Singapore Suburban
2 Singapore Prime
3 Kuala Lumpur Suburban
4 Jakarta Prime
5 Malaysian cities (other than KL) Prime
6 Kuala Lumpur Prime
7 Bangkok Prime
8 Bangkok Suburban
9 Ho Chi Minh City Prime
10 Hanoi Prime
Source: Prudential Real Estate Investors Note: as of End 2012
Very soon after Prudential completed its analysis of retail markets in South East Asia, the Urban Land
Institute and PricewaterhouseCoopers released their annual outlook for the Asia Pacific real estate
markets.11
In their 2013 survey of investors, four South East Asian markets were deemed to be
among the 10 best investment prospects in the Asia Pacific region for 2013. Most notable in the 2013
survey is the shift in preference from 2012. Most South East Asian cities climbed significantly in the
annual ULI rankings, boosted by solid economic growth and relatively healthy fundamentals. The
exception was Ho Chi Minh City, which was pulled down in ULI’s list by supply issues, transparency
problems, and legal risks (Exhibit 27).
11
PricewaterhouseCoopers and Urban Land Institute, Emerging Trends in Real Estate, Asia Pacific 2013, 29 November 2012.
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27: ULI 2013 SURVEY RESULTS
Source: Urban Land Institute (2012) Note: as of Dec 2012
2013 Retail Trading Preferences
Retail Market 2013 Rank 2012 Rank
Jakarta 1 11
Singapore 3 1
Kuala Lumpur 5 17
Bangkok 6 14
Manila 12 18
Ho Chi Minh City 18 10
Retail Investment Prospects
54%
37%
38%
35%
40%
41%
39%
53%
58%
55%
51%
47%
7%
10%
4%
10%
9%
13%
Buy Hold Sell
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Part 3: Opportunities and Conclusions
This paper opened by asking a simple question. Is there a case to be made for South East Asian
retail investment? Macro factors such as strong demographics and economic resilience leave little
doubt that the broad answer is yes. But these trends alone do little to inform the execution of an
investment strategy. In this paper, we take a step beyond the macro factors to weigh other issues
both structural (long-term retail competitiveness) and cyclical (real estate fundamentals and
performance). A wide range of risk factors was also considered. Our conclusion is that the
opportunities vary, depending on the individual strategies of investors and their appetite for risk.
Several options are described below.
Structural Opportunities: The focus should be on the capital cities of emerging markets or
secondary locations in maturing markets.
Development of retail malls in emerging markets: Retail assets in Singapore and Kuala
Lumpur are trading at the lower end of their historical yield bands, thus reflecting the region’s
highest levels of market maturity and stability. Retail markets in Indonesia and Vietnam, in
contrast, show greater volatility and have less transparency and liquidity. Development strategies
within these emerging national markets should be limited to prime locations in the major cities of
Jakarta, Ho Chi Minh City, and Hanoi. Local partner relations, rampant supply, and regulatory
burdens are among the many significant risks offsetting potentially high returns.
Suburban retail malls in secondary locations in Thailand: Urbanization, improving
infrastructure, and rising wealth levels are among Thailand’s attractive attributes. Affluent
residential suburbs of Bangkok as well as second tier Thai cities and resort locations offer
potentially attractive retail investment opportunities. An encouraging milestone is Thailand’s
successful launch of Tesco Lotus REIT in 2012, which perhaps paves the way for wider
introduction of suburban retail malls outside central Bangkok. Although transparency and local
market knowledge are improving in Bangkok, they continue to be significant risks outside core
areas.
Cyclical Opportunities: The focus should be on prime locations in mature economies. The high
streets of mature markets offer the greatest potential for reliable cyclical rebound. In South East Asia,
Singapore’s Orchard Road is a potential match for this strategy. Downturns in economic cycles pose
challenges that impact rental performance, making well-timed cyclical investment opportunities
attractive. Of course, the major risks to such a strategy involve the timing and price point of market
entry.
Core/Defensive Strategies: The focus should be on suburban malls in mature or maturing
markets. Suburban malls offer a balance of consumer staples and discretionary items, and the
shorter retail lease cycles in South East Asia can offer a degree of management flexibility in shifting
the tenant mix as economic cycles turn. Investors should focus on those cities where governments
are committed to the maintenance and expansion of public transport networks. Suburban malls in
Singapore fit neatly with this strategy. Second tier urban areas in Malaysia such as Penang and Ipoh
might also prove attractive considerations. Major risks are related to retail-specific factors, such as
property positioning, location and catchment, tenant mix, and present and future transport
connections within the urban area.
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