Real estate investors in Asia’s emerging markets need to adopt a focused strategy and disciplined approach to deploying capital, two of the region’s seasoned investors told delegates at the MIPIM Asia 2013 conference in Hong Kong.
Ronnie Chan, chairman of Hong Kong developer Hang Lung Properties, told how aggressive local investors and a plethora of developments have made passive real estate returns in Asia less viable for international competition. He began his opening keynote address to the conference with the story of a competitor opening a 3 million square foot shopping mall next door to a Hang Lung mall of comparable size – something he said happens nearly “every day” in China.
Chan estimated there are approximately 30 to 40 large-scale retail projects already built or being built in almost every city of China. However, Chan insisted he was not worried, because he could count the number of good developers in the retail space on one hand. There may be about 20,000 Chinese developers of different levels, but few have the discipline and know-how to make projects work, Chan explained. The ‘competitor’s’ mall, for example, had a leak in the ceiling and generally wore down after just two years.
The need for local knowledge is one of the reasons SC Capital has taken a cautious approach to China, added Suchad Chiaranussati, managing director of fund manager SC Capital Partners, on one of the conference’s panels. The only way to get a 20 percent IRR is to find joint venture partners in lower-tier cities, he said, and the quality of such partners varies widely.
“Most of the time in emerging markets, it’s not the market that kills [the investor], but the JV partner,” Chiaranussati said. He warned investors in Asia to be cautious about choosing JVs, and to take the time to pick and choose the investments most suitable – an approach he said the firm has taken in Southeast Asia.
“Our job is to buy the best quality assets with the best liquidity options,” Chiaranussati said. “You need the discipline to walk away from certain deals if they don’t add up – there are other markets.” Oftentimes, Chiaranussati said this takes meticulous comparisons of cities suburb by suburb, from Southeast Asia to China to Japan.
The way to win against 20,000 competitors, Chan said, is to be in full control of the “genetics” of a real estate project: its design, its location, and the regulatory framework it is subject to. If even one of these elements is not to his liking, Chan said he would walk away from the deal.
The Asian real estate market, particularly Chinese retail, is also one where “winner takes [substantially] all,” he said. Oftentimes, the third and fourth best “players” will lose their place in the market to the first and second best players. “So we have no choice but to fight to be number one,” Chan said.