WEB FEATURE: Global Market Report – Asia

In the first of this three-part report on the challenges of investing and developing multifamily real estate abroad, MHN dissects impediments and opportunities in the Asian market.

In the United States, the multifamily sector of commercial real estate has been hot, fairing extremely well coming out of the global economic meltdown and looking promising for the foreseeable future. There are more people ready to rent than there are units to put them in. However, the rental market seems to be flourishing strictly within the confines of the U.S. borders. Opportunities do exist for U.S. investors and developers looking to penetrate foreign markets, but the number of hindrances they meet along the way is staggering.

For starters, far fewer people in other countries want to rent. This of course varies dramatically from region to region, country to country, city to city, but the pool of renters in general is much shallower than in the United States. Also, the investment structure for large-scale U.S.-style apartment developments simply doesn’t exist, partly because of that shallow renter pool and partly because that structure has never taken off and isn’t understood. And on top of those general challenges, a blockade of governmental and bureaucratic impediments pop up in myriad places as a company wades through the approval processes.

When it comes to the rest of commercial real estate abroad, such as office development, there is very little difference from the U.S. model. Jones Lang LaSalle’s Global Market Report for the second quarter of 2011 describes the global real estate recovery as “characterized by strengthening investment markets, increasing corporate optimism and robust price growth for prime assets across multiple markets.” The report notes the continuing emergence of BRIC countries (Brazil, Russia, India and China), which now account for 13 percent of global investment volumes, up a long way from approximately 2 percent in 2007. But tapping these markets on the apartment front tells a different story.


Global sales volume by region in billions. Americas in blue; Europe, the Middle East and Africa in green; and Asia Pacific in orange. (Source: Real Capital Analytics)

Despite its burgeoning economy, differences in income, differences in consumer perspective and knots in its infrastructure make India a tough room to enter. “For foreign developers it’s very difficult,” Richard Green, director of the USC Lusk Center for Real Estate Development, tells MHN, “because there are laws about who can own property. You can invest, but you’re almost certainly going to be a minority in the property. Another pitfall is, the court’s enforcement of leases is spotty. If you have a tenant you want to kick out, it might take six or seven years in the courts before you actually get resolution.”

Green adds that yields are tiny in India, running in the neighborhood of 1 to 2 percent. “The second thing,” Green says, “is that vacancies are high because it’s hard to build down to the bulk of the Indian market. To put India in some perspective, if you look at the cutoff for the top 10 percent of income in India, it’s about the same as the bottom 10 percent of income in the U.S. It’s just a little higher than that.” For those who might want to build large-scale, U.S.-style communities, this presents obvious difficulties.

Indians are also of a different mentality than the average American renter, in that they typically stay at home and save their money until they can buy a condo. These differences in mentality and infrastructure are evident in other countries as well, keeping many U.S. companies understandably at bay. Green says, “People kind of kick the tires on this, and then they realize how hard it is and they don’t do it.”

China presents its own challenges. Patrick Phillips, CEO of the Urban Land Institute (ULI), tells MHN that China doesn’t particularly need foreign capital to house its population, as there is no shortage of capital in the country. “There’s probably an appetite for international investment in China,” Phillips says, “although it’s still fraught with risks—political risks associated with a communist dictatorship with a market economy, or at least the semblance of a market economy.”

However, ULI recently conducted a survey focusing on investment in second and third-tier markets in China and found that most of these markets are largely unfamiliar to Western investors. “With the exception of Chongqing, there’s a list of very large cities that nobody’s ever heard of in the West,” Phillips says. “So we have a long way to go before there’s the kind of investment or capital flows to and from China that there are between the U.S. and many other countries.”

Stan Harrelson, CEO of the Pinnacle Family of Companies, has done work in China as well as Japan and Korea. In comparison to the environment in Tokyo or Seoul, Harrelson tells MHN, “China is not nearly as easy to navigate. The least open, not from a standpoint of being eager but from a standpoint of assuring some level of fidelity, is China. China has an appetite and a desire, but the government is a very big challenge. Many times contracts mean little.”

Again, these things vary from city to city, but anywhere in China, the government plays a heavy hand. When asked what the biggest surprise has been in dealing with a government of questionable ethics, Harrelson responds, “the unilateral decision not to pay you, and the absence of consequence. It has tempered our enthusiasm, not to the point of taking us out of an interest level, but certainly of how much we’re willing to risk.” This is a government that is used to control, so relinquishing any control to an outsider creates resistance.

“For anything that we have been discouraged by in China,” Harrelson says, “we have been encouraged by in Korea.” He attributes this to having the right partners, a paramount component of dealing anywhere abroad. “It’s so critical when working anywhere outside of your own backyard to have the right partners,” he says. “You can’t emphasize enough the need for due diligence on those partners, to make sure you’re not doing for them more than they’re doing for you.” Nurturing those relationships at the local level can be the best way to navigate your way through governmental impediments.

Although Harrelson believes that Tokyo and Seoul represent cities of size and substance where there is an opportunity and need for a rental industry, “the challenges are several fold. One of them is that they have very definite notions as they relate to security deposits or what they call ‘key money,’ frequently requiring a year’s worth of rent in commercial spaces and near that much in residential spaces for the occupant to take possession. That’s a tough model to build to. There’s also not much of a competitive nature. I think there is an opportunity to go in there and define a rental sector, but as yet nobody has done it in consequence.”

To read part two of this three-part report, which breaks down the market in Europe, click here. Part three, which examines the South American market, is available here.

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