In the last 12 months we have seen continued activity in the Asian real estate investment market, with institutional investors from Asia and further afield seeking exposure through direct investments, club deals and wholesale fund structures. In this article we have set out some of the key themes that we have seen in the last year and our expectations for the coming months.
Singapore as a fund domicile
Singapore has developed into a regional centre for financial services and investment management gradually over the last ten years or more. However, its push to promote the fund management industry specifically is more recent, with specific tax incentives designed to attract fund management businesses to the jurisdiction on the basis of a model constructed around appropriate regulatory oversight and sustainability.
The changes to the fund management company licensing regime that were announced in 2012 have raised the bar for smaller start-up managers seeking to operate from Singapore. The increased requirements for substance do not, however, seem to have deterred more established managers from continuing to base their investment teams in Singapore. Singapore still lags behind some offshore jurisdictions in terms of the flexibility of the funds vehicles that it offers, for example in not having a dedicated regime for open-ended or segregated cell corporate structures. However, the combination of having a management vehicle and fund domiciled in Singapore can offer a compelling tax structure, particularly for managers targeting jurisdictions like China and India, where Singapore has double tax treaties that are among the most favourable available.
Investors have also taken comfort from the perceived strength of the regulatory regime in Singapore and this combination of factors has led to more and more fund vehicles being domiciled in Singapore. Offshore centres remain attractive and we would expect offshore vehicles to continue to be used in many structures. However, we expect that Singapore will continue to benefit from global trends favouring investment in regulated onshore jurisdictions.
Asian funds passport
The implementation of the Alternative Investment Fund Managers Directive in the EU has pushed many of our institutional manager clients to consider whether their Asia-focussed products can be structured entirely outside of the EU in order to avoid additional regulatory cost and compliance burden. While we are not expecting a wholesale change in the way that retail focussed funds are structured and distributed in Asia purely as a result of AIFMD, it is inevitable that as the Asian market continues to become more sophisticated, there will be a move to use Asian structures for Asian investments, rather than relying on, for example, European funds platforms.
In this regard, the announcement in September 2013 of the planned Asia Region Funds Passport is an exciting development for managers seeking to access investors across the region on a similar basis to the UCITS model in Europe. While the UCITS model by definition focusses on investment in transferable securities rather than real assets, it will be interesting to see how an Asian equivalent distribution model can be adapted in light of the regional and cultural focus on real estate in Asia. Our colleagues in Australia are similarly excited by the prospect of a mechanism that will in principle facilitate cross-border investment flows between Australia and the rest of the Asia-Pacific.
While our practice covers the Asia-Pacific region as a whole, it is fair to say that the majority of our clients have been focussed on opportunities in the region's more developed markets and, in particular, China, Australia, Japan, India, Singapore and Indonesia (roughly in that order). Office, prime retail, logistics and hospitality properties have formed the bulk of our clients' transactions this year and we continue to get enquiries from foreign institutions seeking to navigate the local requirements and regulatory restrictions in those markets.
We expect to see that high level of activity continue in those markets, in direct deals, joint ventures with local partners, and through club structures established as a means to raise and deploy capital into specific target assets relatively quickly.
Less developed and higher-risk markets remain of interest, but on both the manager and investor sides, we continue to see institutions favouring core jurisdictions and assets. We have been very active in Myanmar over the last 12 months, for example, but the opportunities there have been focussed on discrete hotel and infrastructure assets and it is fair to say that although there is a lot of hype around the market, the investments that we have seen close this year have been part of a very targeted strategy. We believe that it will still be some time before institutions are ready to take the plunge into jurisdictions like Myanmar and, to a lesser extent, Vietnam more generally. Competition for assets in core markets is high and the success of the deals seen this year for Mapletree's China focussed MCOFII and Lend Lease's disposal of its 25% direct interest in the Jem development in Singapore have illustrated the extent of the demand for premium retail and office buildings.