Heterogeneity means complexity in Asia-Pacific

As the most diverse region for real estate investors, the differing regimes of Asia-Pacific present a challenge for managers, especially where global capital is involved.

This article is sponsored by SANNE

The huge geographical and cultural range of Asia-Pacific makes it an inherently complex region for private real estate managers and investors to negotiate, especially when trying to match the needs of global capital with local regulations. Furthermore, the regulatory pressure of a range of environmental, social and governance (ESG) issues is being brought to bear by both investors and governments.

However, new fund management regimes in Hong Kong and Singapore are expected to boost Asia-Pacific real estate investment managers, especially smaller players.

“In Asia, we definitely see more regulations coming from OECD initiatives and new legislation, which create an ongoing cost for regulatory compliance,” says Catherine Law, head of business development, Asia, at fund services group SANNE. “For CFOs, it is definitely getting tougher because these regulatory changes really affect how they practice corporate governance and their fiduciary duties. This means they need to deal with more communications between lawyers, tax advisors, fund administrator and even their company secretaries.”

Cost burdens

Naturally, one of the burdens of regulation is cost. “Regulation doesn’t come free and that is one of the drivers for consolidation in the private real estate funds industry,” says Carsten Kebbedies, managing director and head of APAC products and solutions, at investment manager Nuveen Real Estate.

Historically, many real estate managers with operations in Asia have not been regulated, some keeping regulated activities offshore, while global asset managers have long been regulated in multiple jurisdictions and have created a globally compliant infrastructure covering their Asian real estate advisory businesses. However, “more Asian boutiques across the region are now registering their businesses, one driver being the enactment of new manager substance laws in the Cayman and British Virgin Islands, and they need to think about how they deal with the regulatory burden and the costs involved,” says Paul Walters, partner, real estate and asset and wealth management at PwC and chair of the professional standards committee at ANREV.

Asian real estate investment manager Gaw Capital Partners is headquartered and licensed in Hong Kong and also has a Singapore investment management license. “It makes sense for Asia-focused managers to be licensed in both jurisdictions,” says Kenneth Chiu, Gaw’s chief financial officer.

However, he notes that “a lot of governments want to promote the private equity industry but not necessarily real estate”. This means that local real estate investment is usually carved out so: “If we use a Hong Kong fund to invest in Hong Kong real estate it is not favorable from a tax perspective, which is the same case in Singapore as well.”

Meet the roundtable

Paul Walters
Partner, real estate and asset and wealth management at PwC and chair of the professional standards committee at ANREV

Paul Walters audits and advises clients in the real estate and asset and wealth management industries, and takes a prominent role in lobbying to develop and promote those industries through his role at PwC, and through ANREV, HKVCA and AIMA.

Catherine Law
Head of business development, Asia region, SANNE
Catherine Law is based in Hong Kong and has responsibility for business development and the delivery of relationship management and product services for Asia. She has experience working with financial institutions, SWFs, asset managers and family offices.

Carsten Kebbedies
Managing director and head of APAC products and solutions at Nuveen Real Estate

Carsten Kebbedies is responsible for the development and implementation of real estate funds, JVs and clients solutions in Asia-Pacific. He is a member of the APAC leadership team and executive officer of Nuveen Singapore. His role involves targeting partners and client, and underwriting M&A opportunities to grow the APAC business.

Kenneth Chiu
Chief financial officer, Asia, Gaw Capital Partners
Kenneth Chiu oversees all finance functions and private debt investment at Gaw Capital in Asia, and is responsible for private debt origination, acquisition financing, financial due diligence, tax structuring, FX risk and liquidity management. He is a member of Gaw Capital’s credit and valuation committees.

Domicile is a more complex issue for Asia-Pacific real estate investment managers then, depending on where their assets and clients are. Walters notes: “Domicile selection is all about where your capital is likely to come from. A recent ANREV roundtable found managers preferred Cayman because of lower costs and investors’ comfort with it. Managers don’t want to use Luxembourg, primarily due to the impact on expense ratios, but sometimes they must use it because it is the only viable option for open-ended funds. However, the costs are substantial; one manager stated that a new Luxembourg fund had an expense ratio of three times their prior funds domiciled in Bermuda.”

Singapore could be a potential alternative to Luxembourg for Asian managers, says Chiu. “For an Asia-based company, Luxembourg is a very costly location to set up and maintain but we find that European clients are reluctant to invest through so-called tax havens such as Cayman and BVI. However, we find they are happy to invest through Singapore and so I can see that jurisdiction having a bigger role to play in future.”

Singapore-based Kebbedies also sees local fund regimes taking a much bigger role in the future. “I think the climate is very, very positive in the region, with new fund schemes in Singapore and Hong Kong. I think there are a lot of movements, which are going to make it easier for small managers to take advantage of schemes that they probably could not utilize before.

“For regulators in this region, the main focus they have is to support their market and trying to achieve growth of the fund management industry. Real estate and real estate funds in essence were never a regulated business here in Asia, they just became one over time in order to accommodate investors. If Singapore or Hong Kong ever got a distribution license or a distribution passport for Europe, that would be the biggest blow to Luxembourg, but I’m not sure if that’s ever going to happen.”

The direction taken by China’s young but growing investment management industry could also be crucial to the success of the Hong Kong fund management regime, says Walters. “I also understand that many China managers which currently have funds domiciled in offshore locations like the Caymans are considering flipping these back to Hong Kong as soon as is practical, as the local authorities are not keen on them using these offshore locations. This will give important traction and be a big boost to the acceptance of Hong Kong as a viable domicile when it happens.”

We are seeing a lot of the regulators focusing on anti-money laundering and non-financial risks
Catherine Law

Nonetheless, a plethora of regimes and regulations contributes to making life more difficult and expensive for managers. “One of the biggest conflicts I see is that regulators are not working together for the collective benefit of investors but seem to be driven more by local motives such as employment. There is huge expense in setting up ornate structures, which need to be flexible enough to allow for further regulatory changes, particularly for evergreen funds. Currently, managers may have a parallel fund each for EU and non-EU investors, then underlying investment platforms in say Singapore or Hong Kong, which then need to fully comply with rules beneficial to investment into countries such as Australia where physical assets reside,” says Walters.

In-house, out house

Managers are taking different approaches to how they deal with these complexities, particularly with regard to whether to outsource and if so, how much?

Law says: “A lot of our clients might have a large team based in Hong Kong or Singapore but because of costs they are also looking to outsource, especially if they are expanding across the region. If they are investing into Japan or into Europe, they need to have a trusted service provider with the proper global footprint and expertise on the ground to help them.

“It is a balancing act for a lot of managers to balance the cost of outsourcing versus in-house. As regulatory framework changes increase costs, managers which are expanding need to consider if their time is well spent on value-add tasks, rather than hiring a large team on delivering administrative tasks.”

Gaw Capital has taken the in-house, approach, says Chiu. “Investment managers cannot just rely on external administrators. My view is that you need to keep a certain number of staff in-house so as to ensure quality of work. Some may outsource for this, but we do it in-house mostly at the moment because we think that we can analyze the data in a more efficient way. I can outsource more administrative and accounting functions, but I cannot outsource the responsibility!

“We are lucky that we have quite a lot of investments both in Singapore and Hong Kong, and as such we have quite a large number of staff in both cities, which can help us to satisfy the substance requirements under the tax regimes and to have enough resources to deploy between these two cities. For smaller players my advice is to focus on at least one city, and you need to invest in people and infrastructure there.”

Kebbedies says: “I think you need to have a balanced approach toward outsourcing/in-house. I think investors would like to rely on a strong regulatory and corporate governance structure. But I don’t think that they necessarily see the value of having this in-house, assuming that everything runs according to plan. No one will complain about having some functions outsourced as long as it all works and the manager takes ultimate responsibility.”

A sustainable push

For often densely populated and resource-hungry Asian nations, sustainability is an important topic, while matters of social responsibility and governance are becoming more important. This means a range of regulatory pressures on managers. For example, Singapore and Australia have strict green regulations, while Japan and China have been evolving their sustainability requirements. There is also pressure from investors over these topics, especially from European funds.

Domicile selection is all about where your capital is likely to come from
Paul Walters

“Many real estate managers are already active on the ESG agenda,” says Law. “However, more work is needed and I think they will probably need to incorporate measurable non-financial disclosure of ESG into investment decisions and have it form part of the risk management review. This is a push from both regulators and investors to encourage a best practice for managers.

“ESG is a big topic and it is going to be a bigger topic going forward,” Kebbedies agrees. “I think the initial pressure came from European investors, then followed by Australian and US investors, and it’s now becoming more and more a topic here in Asia-Pacific. It is becoming a topic also for regulators and it will become a bigger topic for them.”

With the exception of Australia, which has been using measures such as brown taxes to incentivize asset owners for some time, Asian regulators have tended to favor landlords, often a powerful lobbying group, says Walters. “However, we see this changing as more investors and citizens challenge the status quo.”

More regs to come

Looking ahead, the panel felt that the covid-19 pandemic would not have any regulatory impact on the Asia-Pacific region. Kebbedies says: “Covid-19 is different than the global financial crisis because the global financial crisis brought a big push of new regulation due to a feeling – probably rightly so – that something was missed. This is not the case now.”

However, all expect a greater weight of regulation at both local, regional and local level, not to mention the regulatory and compliance requirements of investors. Law says: We are seeing a lot of the regulators focusing on anti-money laundering (AML) and non-financial risks.

These focuses are probably increasing greater need for oversight for outsourcing of AML and technology risk management, due to perceived risks arising from people working from home.”

Kebbedies says: “Compliance is going to be a more and more important part of the real estate investment management business and it is an area where we have been hiring more people.”

Security concerns

When it comes to maintaining data security and privacy, managers are under pressure from all sides – local regulations, investors and tenants. And doing business across different jurisdictions makes life even more complicated.

Catherine Law, head of business development Asia, at SANNE, says: “There are definitely going to be more controls in terms of gathering and use of information. Data privacy is also strongly linked to cybersecurity; managers need to protect and manage their data diligently with smarter use of technology solutions, which some fund administrators offer to managers and investors as part of the fund administration service.”

Different nations have different rules and often a requirement that data collected in a nation’s territory cannot be easily shared overseas.

Kenneth Chiu of Gaw Capital Partners, says: “Historically, we had more flexibility, in terms of geographical location, to choose which cloud servers to use and locate, but now at least we need to maintain one in Hong Kong due to regulatory reasons.

“In future, when we expand into other countries – for example Singapore, where we have a new office – then we also need to have another set of data to be stored locally as well. Fund managers definitely need to invest more in IT infrastructures to cope with technology changes, particularly in the cybersecurity and data protection areas.”

PwC’s Walters adds: “Data regulation is becoming a problem because local regimes don’t always take account of the logistical operations of global businesses. For example, we have global clients operating cross-border that need to manage data globally, but must dump data from the cloud to a physical local server every night in order to stay within electronic data storage regulations.

Europe shows the way

Data security and privacy are also subjects where Europe has taken a lead and so where European investors are leaning on Asian managers. Carsten Kebbedies of Nuveen Real Estate, says: “There is regulatory pressure on data privacy and ESG from regulators in Asia-Pacific but the first pressures in this regard came from European investors.

“It started in Europe with the General Data Protection Regulation (GDPR); that was when people began to take data regulation more seriously. From there it moved over to the US and now it’s arriving in Asia. However, the investors brought these concerns to Asia even before the regulators took it into their own hands.”

There is also a political aspect to data and privacy laws. China recently imposed a national security law on Hong Kong, which could have an impact on data management for companies operating in sensitive sectors. However, Chiu says: “This law actually covers many different activities and they also talk about data assessment; the government may want to access the data. In real estate we are OK in this regard because we are not in a very sensitive industry.

“Our main concern is about banking service; for instance, some international banks are under pressure from both the Chinese and UK government. As a responsible manager, we need to ensure our treasury functions are smooth and safe, and be able to move money as needed in extreme situations.”

The amount of data collected by the real estate industry, if not quite in ‘big data’ territory, is increasing exponentially and dealing with it in a manner which pleases clients and regulators is going to be a vexing ongoing topic for managers, although not uniquely in Asia-Pacific.

“Data is a problem everywhere in the world,” says Kebbedies. “Sometimes it seems as if we will have to print and store it locally to comply, as if we were back in the 1980s!”