What keeps international real estate investment managers in Asia up at night with worry these days? PERE opened this year’s Asia roundtable, hosted at law firm Morrison & Foerster’s new Singapore office, with this 'curveball' question.
Predictably, sourcing deals in increasingly crowded and well-capitalized markets, particularly for core strategies, was one major concern. Less predictable, however, was that corruption today is more apparent and consequently an increasing number of deals are not even making it to the investment committee stage of due diligence.
On the surface, it seemed odd that a region that is becoming so sophisticated so quickly, including some of its more opportunistic jurisdictions, still should be facing such a problem. At the roundtable, senior executives of Morgan Stanley Real Estate, CBRE Global Investors, SEB Asset Management and M&G Investments, as well as a senior lawyer of the hosting law firm, offered up their explanations.
The participants agreed that, in fact, the instances of corruption they are encountering probably are not growing in number, nor are they necessarily taking on a different complexion than previously. Still, instances of corruption have become more visible as the various vetting practices adopted by international real estate managers become more advanced. Furthermore, their scrutiny is fuelled by increasingly better information, thanks in no small part to better available technology and, specifically, the ever-improving Internet.
Added to those factors, the regulations that govern either the managers and/or their capital have constricted somewhat. In other words, deals that might have made it through the diligence gauntlet before are not getting through in quite the same bulk today.
Roundtablers reminisced about a period 10 years ago when counterparty due diligence in Asia was a hugely difficult task and, subsequently, was regarded as less of a concern, especially when deals were getting done regardless. The implication was that, in those days, ignorance was bliss. “Now, there’s a massive onus on who you are transacting with,” one participant remarked.
Naturally, much depends on the jurisdiction. The participants agreed that instances of corruption were rare in markets like Japan and Australia and that even China was improving. India remains a quagmire of potential pitfalls, however, and few would touch Southeast Asia ex-Singapore (although one manager is flirting with Indonesia).
Furthermore, development remains the riskiest investment type. In China, for example, CBRE Global Investors is only working with listed developers, claiming their reporting requirements are similar in nature to those of the Los Angeles-based manager, enabling it to “eliminate” most risky encounters.
Generally speaking, Asia is clearly a far more sophisticated region to invest today than it was 10 years ago, thanks to some extent to the ever-improving diligence methods of international managers that invest in the region. Unfortunately, one price for such improvements is a greater appreciation of just how much corruption there was and, regrettably, still is.
Lingering corruption concerns was just one of multiple topics discussed during the 2.5-hour roundtable. To read about what else was discussed, be sure to check out the December issue of PERE magazine.