Ticking the boxes in Asia

As real estate investors look to the emerging economies of Asia, they would do well to build up their local contacts—and brush up on their tax law. By Jeremy Choy of Macquarie Global Property Advisors

Over the past several years, the rise of China and India as well as the re-emergence of the world's second-largest economy, Japan, has attracted a significant number of real estate investors to Asia. According to a recent report, global direct real estate investments reached $475 billion in 2005 with the Asia-Pacific region accounting for $67.5 billion, or about 14 percent. While North America continues to attract the bulk of capital, Asia is rapidly gaining prominence and growing in popularity.

Yet, as with any emerging market, there are challenges to be faced, not the least of which is managing a real estate investment strategy within the context of different cultures, languages and regulatory frameworks. To begin with, there are substantial information costs associated with entering the Asian market. Apart from the lack of market transparency that typically exists in the region, the language barrier is the most obvious obstacle to capturing and interpreting market information. In addition, the diverse legal, cultural and business structures that exist in Asia make investing in the region all the more difficult for offshore investors. The challenges are best illustrated by the variety of land title arrangements that are available in the different countries across Asia (see table).

In general, the real estate market in Asia is dominated by domestic players. Until the late 1990s, when the level of bad real estate debts threatened the Japanese banking system, the bulk of property was owned by Japanese institutions and property companies. Even now, the culture of Japan requires that investors spend a period of time to patiently understand the market and forge meaningful business relationships. For example, MGPA entered the Japanese market in late 1999, but we did not acquire our first asset there until 2001. In another example, when we acquired an eight-building office portfolio in Tokyo from a distressed developer in 2003, it was the result of a relationship that had taken more than two years to develop. Initially the seller, an 80-year-old renowned Japanese developer, was reluctant to deal with a foreign firm.

In South Korea, as recently as ten years ago, legal restrictions against foreign ownership of real estate meant that the market was comfortably dominated by the large Korean chaebols. The restrictions were removed in response to the Asian debt crisis of the late 1990s and since then the market has grown in leaps and bounds, with the entry of a large number of offshore institutional investors.

In other parts of Asia, including the city-states of Singapore and Hong Kong, authorities have always taken a more open-minded view on foreign ownership, but the markets still remains dominated by well-entrenched local developers and property companies.

In China, where all land is owned by the government, foreign capital is at a serious disadvantage, as relationships forged between local players and government authorities are a difficult hurdle to surmount or understand. After ten years spent researching and networking the market, MGPA entered mainland China last year through the acquisition of a grade A office building in Shanghai. However, this opportunity would never have been available had we not had an on-the-ground presence that allowed us to take advantage of a well established network of contacts.

Though real estate market analysis is necessary to provide potential developers and investors with a certain level of comfort before embarking on a project, such analysis can prove to be a very challenging process in Asia. The key challenge relates to the transparency of the data. While investors in Europe, for example, can get timely and relevant information on a pan-European basis, there is no such equivalent in Asia. Therefore investors have to source a greater amount of data in order to gain an equivalent level of understanding. The most effective way of achieving this level of understanding is to have an on-the-ground presence in the market, to carefully select local sources of information and to have it interpreted by local people who understand your specific needs.

There are exceptions depending on the state of development and the size of the real estate market in question. In the city-states of Singapore and Hong Kong, good data is typically provided by government-related statistical agencies and international real estate consultancies and the market analysis is often strong enough to substitute for an actual market presence.

In China, government efforts to improve transparency in the real estate market have resulted in the availability of more information, but the bulk of it is still largely provided in Mandarin. This language disadvantage is also present to a certain extent in Japan and South Korea, but the growing presence of foreign investors in these countries has alleviated some of the difficulties. Where there are language barriers to overcome, it's essential to engage reliable local operators to interpret the material for you.

In most cities in Asia, land is typically sold on leasehold tenures of time periods ranging from 30 to 99 years. Probably the shortest tenures are those of Hong Kong, where all government leases are now granted for terms up to 30 June 2047, less the last three days. In a similar vein, all land in China is owned by the government, and land is sold on leasehold tenures depending on use. In Singapore, a mixed variety of land tenures are available, but all land purchased from the government is typically provided on a leasehold tenure of 99 years. Lastly, in Japan and South Korea, land is available on freehold tenures. As a result of title often being on leases from the government, the government approvals that are required to gain development approvals or even sales and transfers are much more complex than in markets where governments are not involved in title and only have a regulatory role. For example, when MGPA bought a building that was under development in Shanghai we needed to obtain 189 different approvals in order to certify clear title to the land and the building.

Despite the relatively short time frame that foreign investors have been active in the Asian real estate market, the capital markets are developing rapidly. REITs have now been established in Japan, South Korea, Singapore, Hong Kong and Malaysia. The growth of this tax-efficient structure encourages investment in real estate and has given birth to a growing institutional market in real estate fund management activities and other related developments, like securitization and private equity real estate investments. REITs have also shown themselves to be an aggressive acquirer of income-producing properties, and the presence of a viable and liquid exit route is a precursor to the continued development of the private versus public real estate landscape.

NAVIGATING THE TERRAINA country-by-country look at types of tenure and ownership restrictions in Asia

Country Regulations
Singapore • Land/property tenure on freehold title or
leasehold title of 30, 60 , 99 and 999 years
•Restrictions on foreign ownership apply only
to residential zoned land and buildings encom-
passing landed property or non strata-titled
Malaysia •Property tenure on freehold title or leasehold
title of 30, 60 and 99 years
•Foreign ownership is generally allowed on all
types of residential, commercial and retail prop-
Hong Kong •All land in Hong Kong belongs to the govern-
ment. No freehold estate is alienated.
Government leases are now granted for terms up
to 30 June 2047, less the last three days
•No restriction on property/land ownership by
any persons or corporations, whether they are
domestic or overseas
China •All land belongs to the government, which
grants ownership of “land use rights” to pur-
– Lease period for residential use: 70 years
– Lease period for commercial use: 40 years
– Lease period for industrial or mixed use:
50 years
•Generally no restrictions on foreign ownership
South Korea •Fee simple or freehold title
•No restriction on foreign ownership since 1998
Japan •The only type of land tenure is of freehold title
•Property owner holds freehold title with leases
applicable for ownership of building but not the
•Ownership of land is perceived as a separate
entity from ownership of the buildings
•There is no restriction on the ownership of land
and buildings by foreign investors