HOT MARKETS: Pick of an emerging bunch

When it comes to adopting a strategy for emerging property markets in Asia, private real estate investors have their work cut out for them. With few commonalities between markets like Vietnam, the Philippines and Myanmar, sewing together a strategy for the region is impractical for a good number of investors.

“There are huge distances between most of these countries,” comments John van Oost, managing partner of Yishan Capital Partners, a Southeast Asia-focused private equity real estate firm. “To supervise the buying of the land, construction and the tenants, you need teams on the ground. Doing that in multiple countries is tough and resource-intensive.”

Yishan’s answer therefore is to focus its energies on what it determines to be the region’s most promising market, and that market currently is Indonesia. His view about the real estate market of the world’s fourth- and Asia’s third-most populated country increasingly is being assumed among Asia-focused institutions and other managers alike.

Last November, Singaporean sovereign wealth fund GIC Private Limited made its first investment in Indonesia since 2009, acquiring a 47-story office development in the heart of Jakarta’s central business district in a deal worth $350 million. While investments by foreign buyers at that scale have been few in recent years, evidence of firms adopting an investment strategy for Indonesian real estate is gathering momentum via certain key hires and fund allocations. 

Last September, The Blackstone Group, the world’s biggest private equity real estate firm, relocated its Asia acquisitions head Alan Miyasaki to Singapore with a view to expanding its Asia portfolio to include Indonesia, among other Southeast Asian markets. In another example last year, Hong Kong-based Phoenix Property Investors brought aboard Raj Katimansah as head of Southeast Asia. In the wake of his hire, the firm is understood to be closing on its first transaction in the country. 

In addition, PERE understands that those firms will be joined shortly by Europe- and Asia-focused private real estate and infrastructure firm InfraRed Capital Partners, which, like Phoenix, already is engaged with its first investments in the country. Other groups have announced plans to invest in Indonesia as well, such as Singapore’s Ascendas and Capital Land.

Such instances of firms mobilizing their resources are the seeds laid by offshore investors looking to break into a market that brings with it many promises of an institutional-grade future. Indeed, there is a growing school of thought that suggests 2015 could be the year Indonesia joins Asia’s more established property markets as a location for unprecedented levels of private institutional capital.

Points of attraction 

Indonesia’s points of attraction for private real estate investors are plain to see, just as they have been for investors in the country’s other sectors like consumer goods, financial services and infrastructure. Already, there is a current GDP growth rate of 5 percent and growing young and middle-class populations. And, with president-elect Joko Widodo’s incoming pro-business government, like in India, the expectation for further trade-friendly regulation and support for inter-national capital is gathering momentum.

Indonesia’s property laws, meanwhile, are more transparent than that of certain other emerging Asian markets. “Indonesia cannot be compared to countries like Myanmar or Cambodia,” says Oost. “Those are more like frontier markets, where the rule of law can be questioned. In reality, Indonesia is a fairly straightforward country for real estate.”

Commonly agreed is that Jakarta – with its population of 10 million – is the destination of choice for commercial real estate buyers, while the popular resort island of Bali offers an alternative for those seeking luxury residential or hotel investments. When it comes to specific property types, however, there is less of a universal preference.

Yishan, which has chosen logistics property, is in the midst of raising $500 million for its current opportunity fund, the Asia Real Estate Fund, and intends to put between $200 million and $300 million to work in the sector. “Despite the economic growth, there is a lack of modern logistics space in Indonesia,” he says. “The market is poorly valued, unlike in other Asian markets that are either overpriced or extremely competitive.”

Phoenix, on the other hand, is placing its bets on Jakarta’s residential and office sectors, according to Samuel Chu, the firm’s founder.

One sector unlikely to receive much attention immediately, however, is retail. A combination of domestic conglomerates holding tightly to assets and a rare instance of restrictive government policy denying the construction of new centers in Jakarta has left little room for new market entrants. The government is said to be concerned about overcrowding caused by malls, although that may change in time as the city’s expanding underground system eases the problem. For now, though, it remains a restricted sector. 

Home ownership 

Indonesian property is predominantly held by local investors, many of them private high-net-worth families or individuals. That has made tracking transactions and indexing returns tricky, but such opacity can offer advantages for those institutions looking to be among the first to come into the marketplace, argues Todd Lauchlan, head of the Indonesian office of property services firm Jones Lang LaSalle (JLL). “Indonesia is an untapped story, and investors will have a first-mover advantage,” he says.

Chris Chiang, a senior director at CBRE Capital Advisors, the capital advisory arm of JLL’s main rival CBRE, adds that domestic developers are amenable to working with offshore capital – as in the case of GIC’s investment, in which the sovereign wealth fund is working alongside conglomerate Rajawali Group. However, he notes that there may be some reconciliation needed before such partnerships become prevalent in terms of return expectations. “A lot of local groups are well capitalized, so they see little value in giving away a stake in their projects to foreign investors who are offering expensive money,” he says.

Chiang notes that Jakarta offices, for instance, could yield a return of 8 percent to 9 percent, while industrial property might yield 10 percent. While institutions like GIC might accept that level of return if it is sustainable, private equity groups generally would look for opportunistic returns at the 20 percent level in order to deploy capital in Indonesia. 

Chiang says a further issue might come from the size of deal that foreign institutions typically require and that which is on offer. “The size of the deals available in most emerging countries is too small for them to consider,” he adds.

More importantly, for distressed property deal seekers, Chiang points out that there are few transactions displaying such characteristics at present. “A lot of people got into these markets thinking they will get distress deals, but there are no distress deals here,” he says. “Most of the vendors have been holding prime land for a number of years. Because land is so scarce, there is no real pressure to let it go at the kind of price points those investors expect.” 

Local know-how 

As with any overseas market, tying up capital with best-in-class domestic partners is of paramount importance for international institutions. Dougie Crichton, managing partner of Farpoint Prima, an Indonesian real estate firm, says local experience offered by groups like his is essential in areas such as securing fit and proper land title and project licensing as their relationships with local counterparties is vital to getting deals done. “Debt financing also is based on long-term relationships with local shareholders,” he points out.

Given the nascent interest currently being shown by international investors in Indonesia, the choice of domestic partners is vast, given how few overseas players have committed to the market thus far. However, Oost warns that, despite a lack of overseas money chasing Indonesian property, domestic players are not clambering for international capital. “Some investors feel that this country needs capital, but it doesn’t,” he says. “Indonesia has a huge pool of domestic capital.”

Still, Oost concedes that, just as international investors need partners with excellent domestic market knowledge, they in turn will want capital partners that can make their business more sophisticated. “What they need is know-how and people who understand real estate products and how they fit into the requirements of the country,” he says. 

International investor movement in Indonesia is at a tentative stage at the moment, but it is increasing. The country’s market is inward looking for now, but that could well change if these early movers carefully select their plays and their partners. In so doing, they just may bring the country into the same arena as Asia’s more international markets.