How Asian Capital is impacting Global Real Estate

Introduction

Figures from CBRE Research estimate that the total outbound investment into property from Asia totalled US$40 billion in 2014, representing a 23% increase on 2013 figures. This activity is largely driven by five main Asian countries, with Singapore representing the number one source of outbound capital, followed by China, Hong Kong, Malaysia and Taiwan. The research also identified South Korea and Japan as key sources of outbound capital primarily via indirect funds and club deals.

Drivers of Growth

• The market conditions in Singapore and Hong Kong play a vital role in generating further capital outflow, as local investors are forced to look offshore due to the compressed yields and asset shortages available for investment in their domestic markets;
• Other contributors include new sources of capital in China and Taiwan, (e.g. insurance companies and other wholesale investors) where the progressive deregulation of investment activities is allowing greater investment in global real estate; and
• Property companies have been increasingly active in the international real estate market. Based on 2014 figures by CBRE Research, Singaporean property companies spent US$4.3 billion on real estate, with mid-tier firms particularly active in seeking opportunities outside their subdued domestic residential markets. Chinese property companies are also looking to acquire assets overseas in order to diversify their portfolios as development returns in their home market shrink and the operating environment becomes more challenging.

Investors Seek to Diversify Geographically

The research also highlights changes in the investment strategies of the more experienced Asian investors, with a greater focus of geographical diversification, with particular focus on the United States.

Based on research in 2015, the following trends were identified in recent Asian investment strategies:

• An increase in investment in the Americas by 20% (year-over-year);
• An increase in investment in the Pacific region by 33% (year-over-year);
• An increase in investment in Asia on the whole by 58%, (year-over-year); and
• Europe, Middle East, and Africa remained in the number one spot, attracting the highest volume of Asian investment, however with no increase in activity from the previous year.

These trends are understood to be driven mainly by the continuing economic recovery in the United States. Asian investors continue to seek trophy assets in global gateway cities such as London and New York. However, there has been a gradual increase in the flow of Asian capital toward other gateway cities across the United States and Europe as Asian investors look to other markets offering better returns and less competition. The reduction in the percentage of investment allocated to the top five global destinations in 2014 underscores this trend and is expected to continue this year.

The growth in the Pacific is primarily based on the higher yields available in countries such as Australia, which has generated increased interest from Chinese developers in the residential development market. In response to this increase, it is understood that the Australian government is considering whether to introduce a foreign investor fee system, under which foreign investors would be required to pay large fees before buying Australian residential real estate. If such a policy were to be implemented, it is expected to result in a diversion of Asian capital to other western markets such as the United Kingdom and the United States.

Investors Consider a Broader Range of Asset Classes

There has also been a noticeable trend in the investment strategies of Asian investors seeking to diversify their exposure by asset classes. Whilst commercial property remain the most desirable asset class, Asian investors have shown growing interest in other sectors, as they seek to secure stable income streams from new opportunities. These include hotel assets, which saw a significant increase during 2014, with a steady rise in tourism being driven by the growing middle class in mainland China.

The more experienced Asian investors have also diversified their investments into indirect asset classes, including debt investment and commingled funds.

Offshore investors considering investments into Australia should consider whether the Managed Investment Trust regime could be utilised. The Managed Investment Trust regime is a concessional withholding tax regime that is used primarily by Australian REITs and managed funds. The key benefit of the Managed Investment Trust or “MIT” regime is that the rate of withholding tax on distributions of net rental income and capital gains made by an REIT may be as low as 15% in certain circumstance.

There are various re eligibility requirements for the MIT regime however, the critical issues tend to be whether the following requirements are satisfied:

• ownership requirement (the trust must satisfy a widely held ownership requirement and must also not be closely held under the applicable tests); and
• investment management requirement — a ‘substantial proportion’ of the ‘investment management activities’ must be carried out in Australia.

Further information on MIT’s can be found here.

One Investment Group has worked with numerous offshore clients including Insurance Companies, Banks, Pension Funds, Listed REITs and Private Equity Funds to provide trustee, investment management and accounting services to assist in structuring investments as complying MITs. Should you wish to discuss establishing a  MIT, please contact us.