Asia Pacific Retail Investment Market Outlook and 2013 Review

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1 Asia Pacific Retail Investment 2014 Market Outlook and 2013 Review

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3 Welcome to the first annual review of the retail real estate investment market in Asia Pacific (excluding Australasia) from JLL. This review seeks to capture and analyse the data generated by market activity witnessed in 2013, highlight specific transactions and discuss the drivers behind some of the trends observed. The paper also provides an outlook for 2014, exploring what is likely to influence the market and a view as to where investment opportunities are likely to exist. The review is based on transactions data for deals that occurred at a lot size in excess of US$20 million in the Asia Pacific region. Retail investment in Asia Pacific in 2013 witnessed another year of prolific activity from some of the world s largest investors. They proved active in a market of fewer but larger transactions, where total market turnover was significantly up on These transactions indicate a hardening or maintenance of yields in all major markets. However, sentiment might suggest there s a growing divergence in some markets between the owner s expectations of achievable price and the figures to which buyers are willing to stretch. Macro economic and geopolitical factors influenced the market in 2013 and this is anticipated to continue into 2014 as countries continue to manage their way out of the global financial crisis (GFC) Outlook Increasing weight and variety of capital targeting the retail real estate markets in Asia Pacific in Limited availability of investible stock as little distress in the system. Selling activity to be dominated by maturing funds and profit takers. Buyers increasingly looking to move up the risk curve. Expectation of continued positive investor momentum in Japan. Increased investor caution in buying into second- and third-tier China and markets tied to US fiscal policy at current pricing levels. Expected further increase in the number of strategic partnerships between capital and operational expertise Highlights A significantly increased total turnover of US$21.17 billion compared to US$15.01 billion in 2012; however, there was a marked reduction in the number of deals transacted, down from 277 to 226. An increase in larger lot sized transactions, with an average lot size of US$93.67 million reflecting a significant increase from US$54.19 million in Overall, 33% of the market was undertaken in lot sizes above US$250 million. Japan and China dominated turnover, jointly making up 73% of total transactions in the region by volume. Japan saw the highest turnover with US$10.43 billion worth of transactions representing a massive 122% increase in turnover on Major contractions in activity were witnessed in Hong Kong and Singapore with turnover down by 37% and 30% respectively. Buying activity in 2013 was dominated by domestic groups throughout Asia Pacific with the exception of China, which saw a number of platform transactions involving international capital. International investors were net divestors in retail real estate in the region in 2013, with 17% of buying activity compared to 22% sales. Retailers were extremely active as investors, with entities controlled by Tesco, Lotte, Aeon and Takashimaya both buying and selling throughout the year. Tesco was extremely active, selling assets in Korea, conducting a substantial operational sale in China and demonstrating a significant investment commitment to India. CapitaliSation yields for core assets continued to compress or hold firm in all major markets. Malaysia saw a significant upturn in transactions with a similar trading volume to the usually much larger Singapore market. Retail continues to be an important sector of the total real estate investment market in Asia Pacific, making up 24% by total volume. Asia Pacific Retail Investment Outlook and Review 3

4 Outlook for 2014 For investors looking at retail investment in the Asia Pacific region, there will be both challenges and opportunities as the global economy finally appears to be gaining the momentum needed to achieve escape velocity from the GFC. Below we highlight a number of factors expected to accelerate and set to act as headwinds to the markets in POTENTIAL HEADWINDS MARKET ACCELERANTS Rising global interest rates Reduction in global monetary stimulus Continued volatility of financial markets Slowing GDP growth in China with regional consequences Geopolitical relations in the region Potential reallocation of investment capital from Asia Pacific to the US and Europe Rising amounts and sources of capital targeting the Asia Pacific market including freshly raised equity funds Increasing liquidity in international debt markets Sustained Japanese economic recovery Positive retailer sentiment and continued international expansion Increasing allocation of global investment capital to real estate Continued demographic maturity and growing consumer class across the region Political instability surrounding elections: India, Indonesia and Thailand Consumer spending reactions to the consumption tax increase in Japan Tightening credit markets in China affecting consumers and developers/owners Anti-corruption management in China Management of emerging economies current accounts (deficits) Potential introductions of luxury taxes to control inflation in emerging economies e.g. Indonesia Relaxation of FDI restrictions in India Evolution of Hong Kong REIT legislation Japan benefiting from the Olympics effect and the potential legalisation of casinos Increasing wealth of China s middle class, coupled with its move towards a consumption based economy Lower expectations from investors of acceptable risk adjusted real estate returns Expectation of consumer spending growth to continue at higher rates than GDP growth e-commerce / Retailing Technology Internet retailing is a factor that is not considered in the above table. Physical retail space continues to see the influence of technology, with e-commerce a major influence in the success and indeed relevance of retail spaces. This is not showing signs of slowing down it will continue, and all geographies in the Asia Pacific region will feel the effect. But with e-commerce comes risks, and potentially benefits, so landlords and retailers will need to ensure they re prepared. Namely, they need to make sure that their assets are best equipped to manage any impacts, positive or otherwise. This will require specific expertise, and indicates that there may be an emerging trend of existing owners or developers making partnerships that deliver the expertise needed. More specifically, they will align with those who can advise on how best to mitigate and manage risk, and position assets and portfolios for e-commerce-related opportunities. 4 Asia Pacific Retail Investment Outlook and Review

5 Transactional Expectations for 2014 INCREASING WEIGHT OF CAPITAL TARGETING THE ASIA PACIFIC REGION The amount of domestic and international capital targeting investment in retail real estate in Asia Pacific is anticipated to grow during There will be trends that add to the weight of money looking to acquire retail assets in the Asia Pacific markets namely, successful new capital raises, institutions increasing their allocation to real estate and private sources of capital continuing to favour real estate investment. RELATIVE LACK OF SUPPLY OF INVESTIBLE STOCK There is relatively little visible distress in the system throughout Asia Pacific. Therefore, investible opportunities for the market will be reliant upon profit taking motivations and fund life expiries. Without a large selection of motivated sellers, there is likely to be an excess of demand, which will maintain downward pressure on yields and keep prices high, particularly for core assets. As opposed to looking outside the region or transferring to alternative investment classes, it is anticipated that capital will increasingly be allocated to less core assets in certain markets where perceived good value can be achieved. MATURING PRIVATE EQUITY FUNDS WILL BE A SIGNIFICANT SELLER GROUP Those funds raised during and immediately after the GFC are in their maturing phase. With most showing strong performances, managers will look to crystalise gains early for their investors via sales into buoyant markets. These funds are anticipated to be major sellers this year. INTERNATIONAL EQUITY FUNDS WILL ALSO ACTIVELY ACQUIRE IN 2014 There were some successful fund raisings in 2013, and it s a trend that s anticipated to continue throughout Such funds will be motivated to deploy capital early and are expected to be large net investors over the year. Shopping centre assets are particularly attractive to many of these funds, as with the combination of local and international expertise, it will be easy to implement business plans that reposition and improve assets in order to drive returns. INVESTORS WILL BUY INTO JAPAN S ECONOMIC AND CONSUMER RECOVERY The investor community is anticipated to heavily acquire Japanese retail assets during While international equity funds and arguably the JREITs are likely to be priced out of the market for prime assets, private investors and private property companies (both domestic and international) are expected to maintain downward pressure on prime yields. The suburban and secondary markets are expected to see growing demand from international funds and domestic players, enticed by improving consumer confidence and a lack of available prime assets. More specifically, a significant relative pricing discount has emerged between acquiring suburban and secondary malls compared to prime. Decentralised buying in Japan is also expected to occur, with regional locations expected to enjoy increased attention from investors. INVESTORS BECOMING MORE CONSIDERED WHEN ENTERING CHINA There is an expectation that Chinese investors will increasingly take a forensic approach to how they assess individual assets and their competitive position. The factors influencing this are: the retail market maturing; land value appreciation arguably slowing in certain locations; and the vast development pipeline being delivered. An ability to understand the dynamics of retail assets and the capability to effectively manage assets will be key to achieving success with performance. One potential source of assets to the market may come from domestic developers of mixed use projects. They may opt to sell the retail element of a development to an investor with the requisite skills to manage the retail effectively. This would then allow the developer to raise capital and focus on their core development business. Domestic Chinese investors are anticipated to remain strong buyers as the weight of domestic capital for investment grows. International capital is also anticipated to be focused on China, but it is likely to target the upper tier cities to avoid becoming exposed in remote and less transparent locations, where prices remain relatively high on a comparative basis. Further platform transactions are expected where investors can deploy significant amounts of capital, benefit from access to a portfolio of assets and an existing management platform, and where relative skills can be pooled to improve the competitive position of assets for enhanced returns. INVESTOR CAUTION AT CURRENT PRICING LEVELS IN US TIED MARKETS In the absence of price movement from current owners in markets fiscally tied to the US, such as Hong Kong, the retail investment market is expected to remain in a relatively frozen state the bid/ask margin remains too large. In an environment where interest rate rises are expected, and in which government cooling measures are maintained, this is likely to widen in the short term, particularly for suburban and secondary assets. INCREASED PARTNERING THROUGHOUT THE REGION While owners might be unwilling to dispose of assets in their entirety, strategically-minded owners may engage in tactical partnerships. We anticipate these will broadly fall into two types: 1. Profit taking/diversification motivated partnerships We anticipate this will occur in larger, more mature markets where existing owners can attract a relatively passive capital partner with a long-term outlook, at a high price point in the cycle, for a part interest in an asset. This would occur while also retaining operational control of Asia Pacific Retail Investment Outlook and Review 5

6 the asset. Funds raised from the partial sale can be invested elsewhere, giving the owner diversification benefits. In addition to this, some may like the prospect of partnering directly with some of the most respected and significant global capital sources because of the perceived benefits to their own reputation and future business growth. 2. Operationally strategic partnerships We expect that savvy owners will increasingly wish to partner with groups that have operational expertise and perhaps international experience in retail asset management. This experience means they can leverage retailer relationships to maximise the performance of retail assets. Such a partnership would allow existing owners to learn new skill sets and gain exposure to some of the most advanced and profitable management strategies globally. GLOBAL PENSION FUNDS AND SOVEREIGN WEALTH FUNDS WILL INCREASINGLY TARGET THE ASIA PACIFIC REGION INDIA AND EMERGING ECONOMIES STABILISING AND BECOMING HOT INVESTMENT LOCATIONS The financial market volatility we saw in emerging markets during 2013 is expected to begin to stablise in As global markets recover and show more stabilised growth, this will improve the investibility in emerging markets from a retail real estate perspective. Those investors brave enough to invest first will reap the rewards of first-mover advantage both in quality of assets available and ultimately the level of return. The depth and variety of investor interest in emerging markets is anticipated to grow during While many of the global pension funds and sovereign wealth funds have exposure to the region via indirect investments in existing equity funds and partnership/club investments with fund managers it s anticipated that there will be major strategic direct investment over the course of 2014/15 and beyond as increasingly the Asia Pacific region is considered, core. This is anticipated to take the form of co-investment with existing owners of core assets throughout the region, which will allow those owners to largely continue their existing business and management plans. This has occurred in other regions to great effect, leading to accelerated growth for the domestic partners, where the creation of a successful partnership platform has often led to further joint projects. 6 Asia Pacific Retail Investment Outlook and Review

7 Overall, 2014 is well set to see yet another strong year for retail real estate investment. There will be challenges, though, the most likely being a lack of supply of investible assets. However, there is a strong market for sellers motivated by profit taking, fund life maturity and strategically selling down part interests; the stock they offer will keep investors busy throughout the year. In order to find returns, buyers will need to move up the risk curve in more mature markets where secondary asset pricing is likely to improve. While buyer caution will exist in pockets of the market, the weight of money targeting the sector is likely to make 2014 a seller s market for most retail assets. Asia Pacific Retail Investment Outlook and Review 7

8 Asia Pacific Retail Transaction Volumes (US$) CHINA 5,031 3,312 OTHER 1, SINGAPORE 1,708 1,510 AP (EX AUS) Annual Turnover $21,169 Year on Year Charge 41% Number of Transactions: 226 Average Lot Size: $93.67 million CHINA Annual Turnover $4,936 Year on Year Change: 49% Number of Transactions: 56 Average Lot Size: $88.14 million SOUTH KOREA Annual Turnover $2.322 billion Year on Year Change: 54% Number of Transactions: 14 Average Lot Size: $ million 8 Asia Pacific Retail Investment Outlook and Review

9 JAPAN SOUTH KOREA 2,446 10,431 2,339 4,886 HONG KONG 2,719 TOTAL (US$ Billions) ,713 22, DEALS 15, DEALS HONG KONG Annual Turnover $1,713 Year on Year Change: 37% Number of Transactions: 45 Average Lot Size: $38.07 million Capital cascading SINGAPOREeffect Annual Turnover $1,183 record level of investment in Year on Year Change: 30% sub-regionals, Number of Transactions: neighbourhoods 8 and bulky goods Average Lot Size: $ million JAPAN Annual Turnover $10,431 Year on Year Change: 122% Number of Transactions: 93 Average Lot Size: $ million OTHER MARKETS 1 Annual Turnover $1,303 Year on Year Change: 32% Number of Transactions: 10 Average Lot Size: $ million 1 Other markets refers to all markets outside of the 5 major markets: China, Japan, South Korea, Hong Kong and Singapore Asia Pacific Retail Investment Outlook and Review 9

10 Market Review 2013 TURNOVER Total retail real estate investment turnover in the Asia Pacific region (excluding Australasia) totaled US$21.17 billion in 2013, showing a 41% increase compared to US$15.01 billion in There was a significant decrease in the number of transactions over the year, with 226 recorded compared to 277 in Average lot sizes increased accordingly to US$93.67 million, significantly higher than the US$54.19 million average in Japan topped the turnover table with transactions totalling US$10.43 billion, beating China with a turnover of US$4.94 billion into second place. Japan and China dominated turnover, making up 73% of all the region s transactions. Turnover in each of the major markets showed an increase in 2013 compared to 2012 with the exception of Hong Kong and Singapore, where turnover fell markedly from US$2.72 billion to US$1.71 million and US$1.70 to US$1.18 million, respectively. Activity outside of the five major markets of Japan, China, South Korea, Hong Kong and Singapore was low, making up just 6% of total turnover. Activity outside the major markets was dominated by Malaysia, which saw turnover rise from US$318 million in 2012 to US$725 million in 2013, and some significant assets trading. Malaysian pension fund EPF made acquisitions in Kuala Lumpur the Quill Retail Mall for US$379 million in Q3 and the Sultan of Johor bought Berjaya Times Square for $136 million in Q4. Outside of Malaysia, VIPD Group acquired the Vincom Center A in Ho Chi Minh City, Vietnam for US$314 million in Q2 and Mitsui Fudosan bought the Linkou Outlet Center in Taipei, Taiwan for US$184 million in Q4. Figure 1: Major markets: Retail Transaction volumes, 2012 & 2013 Figure 2: Asia transaction volumes by value and number (deals > 20M) Tokyo Hong Kong Seoul Osaka Shanghai Guangzhou Beijing Singapore Kuala Lumpur Fukuoka Shenyang Taipei USD Billions Deals USD Billions Average lot size (rhs) Total Transaction Volumes Source: JLL Source: JLL Figure 3: Quarterly Transaction Volumes by Value Figure 4: Annual Transaction Volumes by Value and Number USD Billions USD Billions DEALS 113 DEALS 100 DEALS 181 DEALS 208 DEALS 277 DEALS 226 DEALS Q1 Q2 Q3 Q Japan China Hong Kong South Korea Singapore Others Japan China Hong Kong South Korea Singapore Others Source: JLL Source: JLL 10 Asia Pacific Retail Investment Outlook and Review

11 Unusually, turnover was weighted towards the first half of the year and particularly within the second quarter where each of the major markets saw significant activity. By contrast, Q3 saw a drop-off in transactions. While it s not unusual to see volatility in quarterly turnover, this slowdown did coincide with a number of other factors that caused markets to pause for a break Such factors included: the fear of a credit contraction in China, increased expectation of short-term US Federal Reserve tapering, equities market volatility particularly in emerging economies and a concern surrounding the effectiveness of Japan s Abenomics strategies. Turnover had recovered by Q4 for most markets, however Hong Kong witnessed a drop-off in activity, an unintended consequence of the Hong Kong government s measures in late 2012/early 2013 to cool the residential real estate market. More specifically, the government introduced a Buyers Stamp Duty (for overseas buyers of residential only assets) and doubled the cost of stamp duty for all properties that sold for more than HK$21 million (US$2.8 million). Asia Pacific Retail Investment Outlook and Review 11

12 Capitalisation Yields Knightsbridge, Singapore, Singapore JLL, on behalf of Park Hotel Group, sold the retail podium to Bright Ruby Resources for US$595 million Yields for prime retail assets in each of the major markets remained firm throughout the year, with significant yield compression experienced in some, most notably Japan. A lack of supply continues to underpin prime yields in the major Asia Pacific markets, a few dominant owners, strong trophy buyer demand, little or no ownership distress and a healthy occupational market. The ultra-prime retail markets saw relatively few transaction during or vendors had to substantially reduce their price expectations in order to achieve a sale. This perhaps indicates a softening in part of the market as investors begin to pay greater attention to development supply, the occupational e-commerce threat, macro-constraints and retailer performance. However, investment in suburban and secondary assets will however be seen as an opportunity for many investors going forward. Suburban and secondary markets also generally maintained strong yields though, arguably, in some markets there was less downward pressure on yields because buyers were able to be stock selective. Some markets saw assets of a suburban and secondary nature being withdrawn from sale as owners price expectations were not met, 12 Asia Pacific Retail Investment Outlook and Review

13 Benchmark Retail Yields 2 The table below illustrates JLL s opinion on where the best assets in each sub category would trade if offered to the market, as well as the yield movement in 2013 compared to year-end COUNTRY / CITY CENTRAL SUBURBAN SECONDARY Yield % YoY + / - Yield YoY + / - Yield YoY + / - Tokyo Japan 3-% -50 bp 4.5% -50 bp 7+% -25 bp Shanghai China 4.25% -25 bp 5% -25 bp 6+% +25 bp Beijing China 4.25% -25 bp 5% -25 bp 6+% +25 bp HK 3% % - 6% - Singapore 4.25% % - 5.5% - Seoul South Korea 4% - 5% % - Taipei Taiwan 2.8% - 5% - 7% - KL Malaysia 5% -50 bp 6.5% % - HCM, Vietnam 9% +50 bp 10% +50 bp 12% +100 bp Bangkok Thailand 7% - 10% - 12% - Jakarta Indonesia 7% -25 bp 10% -100 bp 12% -100 bp Manila Philippines 6% - 7% - 9% - Mumbai India 9% +50 bp 11.5% +50 bp 12% +100 bp Delhi India 9% +50 bp 11.5% +50 bp 12% +100 bp 2 The above yields are based on the assumption of assets being fully let at a current market rent, for a market acceptable lease term. It also reflects that an asset is of a desirable lot size to investors. While it is titled as a benchmark yield table, each asset based on its individual characteristics is unique and, as such, it is appropriate that assets are valued independently at either a discount or a premium to these indicative yields. Lifespace, Qingdao JLL, on behalf of Tesco, sold the mall to Macquarie for US$68 million Asia Pacific Retail Investment Outlook and Review 13

14 Buyers / and Sellers Regionally, both buying and selling activity during 2013 saw a great variety of market participants, with no particular category of buyer or seller truly dominating. However, the results would be different on an individual country basis. For example, Japanese REITs dominated buying activity in Japan and private investors dominated both the buying and selling activity in Hong Kong during the year. Private equity and institutional funds were large net investors during the year, acquiring 21% and selling 13% of the market. Private property companies and high net worth investors were net divestors and the largest seller by category, selling 35% of the market compared to buying only 22%. Public property companies including REITs remained relatively static on a net basis however represented the largest buying investor category, acquiring 31% of the market. Retailers, or entities they controlled, made up a significant proportion of buyers during In fact, buying activity was up more than 50% up on 2012 levels. In total, retailers acquired 14% and sold 17% of all stock in 2013 compared to 8% and 19% in 2012 respectively. Overall, retailers were involved in US$7.14 billion of transactions in Figure 5: 2013 Buyer Type by Volume Gates, Fukuoka JLL, on behalf of Barclays, sold the shopping centre to Fukuoka Standard Oil for US$101 million Figure 6: 2013 Seller Type by Volume 9% 12% 31% 1% 12% 6% 29% 12% 17% 14% 22% 35% Source: JLL Public Private Retailer Equity Fund Institutional Unkown Source: JLL Public Private Retailer Equity Fund Institutional Unkown HIGH NET WORTH INVESTORS DOMINATED PRIME BUYING The transaction of prime retail assets in the region was dominated by buying activity from private, ultra high net worth investors. Two prime high street/retail podium transactions in 2013 consisted of Asia Pacific Land s sale of the Tiffany store in Ginza, Tokyo, and the Park Hotel Group s sale of the Knightsbridge retail podium on Orchard Road, Singapore. The Tiffany building was bought by private investor Masayoshi Son, of the technology group Softbank. The Knightsbridge retail podium was acquired by Bright Ruby Resources, which is controlled by the Du family of China. While the acquisition included a hotel that sits above, at a total transaction size of SG$1.16 billion (US$921 million), it is understood that the retail component made up approximately SG$750 million (US$595 million) of the purchase price. Much like investment in the hotel sector, prime retail assets appeal to investors emotions as well as offering sound investment returns and wealth conservation qualities. The amount of private wealth that is targeting prime retail real estate investment at lot sizes that historically have only been achievable by large pension funds and listed entities is growing. This is particularly true for prime assets in global retail cities. 14 Asia Pacific Retail Investment Outlook and Review

15 RETAILERS WERE PROLIFIC BUYERS AND SELLERS Retailers were actively involved in significant property transactions in 2013 across many different markets in the region. UK retailer Tesco was an active seller in China in addition to substantially selling its trading business in a deal with China Resources (including some real estate assets), following nine years of independent operations, it also sold a standalone shopping centre in Qingdao to an international institutional investor. In Korea, while keeping its independent trading status, Tesco also undertook a sale and leaseback of four of its 550-store portfolio to Samsung SAR for a combined price of US$581 million. From a strategic perspective, it was interesting to observe Tesco announcing its substantial exit from China in the same year that the group became the first major global food retailer to get approval to invest in India (in partnership with TATA) since the government relaxed Foreign Direct Investment (FDI) regulations in mid South Korean retailer Lotte undertook one of the most significant transactions of the year, acquiring the Incheon Express Bus Terminal in Incheon, South Korea, for US$806 million. Not to be outdone, Shinsegae, another Korean retailer and Lotte s principle competitor, was also active acquiring the Seoul Express Bus Terminal, incorporating their Gangnam store for US$197 million. CROSS BORDER ACTIVITY Cross border activity continued to be a significant factor across the region in all markets except for Hong Kong where almost all activity was domestic. Japan was characterised by an increase in both domestic buying and selling, with international groups being net divestors overall. China witnessed strong international buying activity with the numbers highly influenced by three significant platform investments undertaken by international investors: Blackstone, Brookfield and the Carlyle Group. South Korea saw significant net divestment by international investors with some groups including GE Capital, LaSalle Investment Management and Tesco all undertaking major sales. International investors were net investors in the emerging markets, whereas domestic owners dominated sales activity. In contrast to bond and equity investment in emerging markets during 2013, which saw a flight of international capital, global players were net investors in emerging market retail real estate. This demonstrates the longer-term nature of real estate investment and the confidence of the international investor community in the demographic and consumer growth trends experienced to date and expected to continue in Asia Pacific s emerging markets. Japanese retailers were also active buyers during 2013, with Aeon, Parco and Takashimaya each acquiring assets to gain control of and flexibility in their occupational space; they also had strategic investment purposes in mind. In October, Japanese retailer Aeon launched its own REIT, raising close to US$1 billion while effectively maintaining operational control of the portion of its store and shopping centre portfolio that was injected into the REIT. Aeon REIT Investment Corporation also broke new ground by becoming the first JREIT to contain an overseas asset, perhaps a further sign of things to come from the JREIT market. Figure 7: 2012/2013 International and Domestic Transactions by % 100% 80% 60% 40% 20% 0% -20% -40% -60% -80% 89% 11% 19% 82% 18% 15% 45% 55% -29% 65% 35% -29% 100% 86% 87% 100% -100% Japan China Hong Kong South Korea Singapore Other Foreign Seller Domestic Seller Foreign Buyer Domestic Buyer Source: JLL 60% 40% -1% 14% 13% 21% -11% -52% -81% -85% -99% -100% -100% -89% -71% -71% -48% 79% 80% -61% -39% 20% -4% -96% 61% 39% -51% -49% Figure 8: 2012/2013 International and Domestic Transactions by Volume USD Billions Japan China Hong Kong South Korea Singapore Other Foreign Buyer Domestic Buyer Foreign Seller Domestic Seller Source: JLL Asia Pacific Retail Investment Outlook and Review 15

16 SHOPPING CENTRES Buyer demand for shopping centre assets throughout the region remained strong throughout the year with a number of significant transactions occurring. One of the most significant transactions and the largest in Q1 was the sale by Morgan Stanley s Real Estate Fund VII (MSREF) of its interest in the Lifehub@ Jinqiao in Shanghai, to a joint venture between Alpha Investment Partners and Keppel Land. This transaction illustrated the sale of a core, but non-cbd asset, by a maturing equity fund to an offshore investment joint venture, which combined capital and operational expertise. The 80% interest traded for US$424 million, reflecting a capitalisation yield of approximately 4.75%. Elsewhere, shopping centre trading activity in Japan increased significantly in 2013, with retailers and JREITs dominating as buyers. All the retail assets traded in Japan above US$200 million, with one exception, were acquired by retailers or JREITs. The one exception was Mallage Shobu, a suburban shopping centre in the Saitama Prefecture, acquired by Croesus Retail Trust (CRT) for US$211 million. CRT, backed by Daiwa House (the vendor of Mallage Shobu), is the first Asia Pacific retail business trust with a Japan-only portfolio listed on the Singapore stock exchange. In total, CRT acquired four shopping centres in Japan for a combined price of US$523 million in While the pick-up in Japanese activity commenced at the start of 2013 in Tokyo and the core CBDs of the major cities, confidence in regional Japan grew throughout the year, with investors competing for shopping centre assets in decentralised cities. The sale of the Gates shopping centre in Fukuoka was proof of this, with UK bank Barclays selling the former AIG-owned asset significantly above its quote price to local corporate entity Fukuoka Standard Oil. This followed extensive competition from domestic and international bidders. The sale closed at a price of US$101 million in December. It s anticipated that the decentralisation of buying activity and the growth in suburban and secondary asset sales will accelerate further in 2014, both in Japan and elsewhere in the region. 16 Asia Pacific Retail Investment Outlook and Review

17 Key Trends Observed in 2013 MSREF 80% interest in Shanghai - Sold by JLL to Alpha Inv Partners & Keppel Land for US$424 million A number of trends emerged in the retail investment market in Some of these are highlighted below, with a brief explanation as to their relevance to the market. STRATEGIC PLATFORM TRANSACTIONS IN CHINA DEMONSTRATE RE-EMERGENCE OF INTERNATIONAL FUNDS North American domiciled: Blackstone, The Carlyle Group and Brookfield each acquired strategic and active stakes in portfolios/platforms in Chinese retail assets in Carlyle announced the acquisition of a 49% interest in SCP s (SZITIC Commercial Property) Suzhou In-City Mall and Hangzhou Gudan In-City Mall in May. In November, Blackstone acquired a 40% stake in SCP for US$340 million at entity level, making them the largest investor in SCP and giving them exposure to 19 shopping centre assets, including those invested into at asset level by Carlyle. Brookfield s entry into China was marked by acquiring a 22% initial interest with a commitment to further extend in Shui On Land s China Xintiandi entity, which owns a portfolio of predominantly retail assets in Shanghai, and has an ambitious wider development program. Each of these transactions reflect the post GFC re-emerging influence of international funds in China, as well as the evolution of the Chinese market, where the capital, the land/asset owner, and the operational expertise are combining to compete more effectively and produce superior returns as the market matures. This trend is expected to continue. CONSUMER SPENDING AND RETAILER SENTIMENT STRONG DESPITE HEADWINDS Consumer spending throughout the Asia Pacific region grew consistently in 2013, although rates of growth in some markets were lower than in Japan saw a marked improvement in consumer sentiment as the economy improved and the rise in equities enhanced the wealth effect on consumers. Japan remains the largest market in Asia Pacific; annual consumer spending figures sit in excess of US$3.5 trillion, in comparison to China at c. US$3 trillion. Sales growth in China, despite a slowing GDP, also remained strong, with monthly reported sales growth exceeding 13% year on year, compared to a three-year average of 15.1% and a GDP growth rate of 7.7%. Consumer sales growth in China is anticipated to consistently outstrip GDP growth as the country purposely rebalances towards a consumption-led economy. Hong Kong, one of the key bell-weather retail markets in the region saw annual consumer spending growth of 11% in 2013, with annual sales of HK$494.5 billion (US$64 billion). Growth, however, slowed towards the year-end, with December sales up only 5.7% on 2012 with sales of HK$49.7 billion (US$6.4 billion). Surprisingly, and despite exchange rate volatility and, ultimately, currency devaluations, consumer spending in emerging markets remained robust in Indonesia enjoyed double digit annual sales growth, with international fashion sales contributing significantly to the uplift. International retailer expansion remains prolific with US and European brands expanding to the Asia Pacific region to enhance overall sales growth as domestic markets languish. While China remains an important target for many international retailers, plans are being established for region-wide expansion of most of the global brands targeting Asia. It is estimated that more than 40 international brands entered the Asia Pacific market in 2013, opening flagship stores in Hong Kong, including Top Shop, Desigual, Victoria s Secret and Michael Kors. While luxury brands spearheaded international expansion, it is the fast fashion brands that led the market by expansion volumes in This is a trend set to continue as the luxury market becomes saturated and mass market brands start to dominate retailer growth. INDIA FDI SOFTENING OFFERS LATENT OPPORTUNITY India has relaxed FDI regulations for retailers, an initiative implemented in This will change the retail landscape, with some of the global mega brands including H&M, Zara, Ikea, Walmart and the Richemont Group, among others, on the sidelines waiting to enter the subcontinent directly. Many of these brands will observe Tesco s experiences very carefully before committing. It is anticipated that the relaxation of FDI rules and the expansion of international retailers will encourage international investors to return to acquiring Indian retail real estate. Asia Pacific Retail Investment Outlook and Review 17

18 GOVERNMENT ACTIONS HIGHLY INFLUENTIAL ON MARKET ACTIVITY The implementation of Abenomics policies by Japan s government was undoubtedly the key impetus to the significant upswing in market activity in 2013, where total turnover was up 122% compared to 2012 levels. Prices for Japanese retail real estate also improved substantially in The relaxed monetary policy fuelled an equity market rally, which in turn improved consumer sentiment and spending. Investors followed suit, with JREITs in particular benefitting from a very low cost of capital and leading buyer demand throughout the year. Other positive influences of governments included the continued infrastructure investment in the Johor region of Malaysia where improved connectivity to Singapore is creating an increased investor interest in this localised region. In 2013, two significant transactions closed in Johor Bahru, and further transactions are anticipated for The latest 10-yearly transition of China s government occurred in While the effects of the slow changes in policy are yet to be witnessed, certain factors will influence the retail real estate markets in China and elsewhere in the region. More specifically, the stated aims to move China towards a consumption-based economy, to crack down on corruption and to monitor the banking/shadow banking markets. A sign of the close monitoring occurred in mid-2013 where, following rhetoric to crack down on the shadow banking markets, a mini credit crunch occurred that was only resolved when the central bank stepped in and provided additional liquidity. This period, however, indicated the potential vulnerability of some institutions in China to a tightening in credit markets, which may yet prove to be the source of assets to the stock-starved investment markets. The cost to insure credit default of Chinese debt has remained relatively high since mid-year, arguably a sign of potential future distress. Figure 10: Major Asian Equity Indices 2013 Elsewhere, government activity served to choke the market. Hong Kong provides the best example where, as described earlier in this report, cooling measures were introduced to manage the housing market. The government s actions stifled commercial real estate market activity, as it created a stand-off between buyers and sellers on transaction prices. The management of emerging market economies also tested real estate investors resolve. In the mid-year, central banks found themselves having to undertake drastic fiscal measures to manage domestic currencies in an aim to control inflation and current account deficits. Big swings in emerging market currencies and unstable economic prospects made real estate investment challenging for many investors in these markets, with investors waiting for the return of stability before evaluating investment. Figure 9: Trade Weighted Foreign Exchange Rate 2013 Source: JLL EQUITY FUNDS SUCCESSFULLY CAPITAL RAISING In 2013, there were a number of successful and significant capital raisings for funds targeting investment exclusively in Asia. Blackstone s Asia Fund broke through the US$3 billion level by year end and is expected to exceed US$3.6 billion in Q Gaw Capital also successfully raised for its China focused Gateway Fund IV, with over US$1 billion raised at final close. Both of these investors were active in China retail in 2013, with Blackstone s SCP transaction and Gaw s purchase with Morgan Stanley of the Metropolitan Plaza in Guangzhou for US$420 million from Hutchison Whampoa. Other successful capital raisings targeted on the Asia Pacific region included Secured Capital, Alpha Investment Partners, Mapletree and The Carlyle Group. These groups will be looking to invest throughout 2014 and will be a major influence on the retail, and in particular the shopping centre investment market during the year. Source: JLL 18 Asia Pacific Retail Investment Outlook and Review

19 2013 Highlighted Transactions Summarised below are a number of headline or relevant retail asset transactions throughout Asia Pacific in CHINA Blackstone acquired a 40% stake in Chinese shopping mall developer SCP US$340 million Q3, 2013 CHINA Tesco sold its Lifespace shopping centre in Qingdao to Macquarie US$68 million Q2, 2013 PLATFORM SHOPPING CENTRE JAPAN Barclays sold its Gates shopping centre in Fukuoka to Fukuoka Standard Oil US$101 million Q4, 2013 JAPAN Department Store Group Takashimaya acquired the Takashimaya Times Square from Tokyu Land US$1 billion Q4, 2013 SHOPPING CENTRE SHOPPING CENTRE KOREA Korean retailer, Lotte acquired the Incheon Express Bus Terminal from Incheon city government US$807 million Q2, 2013 CHINA Gaw Capital together with Morgan Stanley acquired themetropolitan Plaza, Guangzhou from Hutchison Whampoa US$420 million Q3, 2013 SHOPPING CENTRE SHOPPING CENTRE MALAYSIA Malaysian Pension Fund EPF acquired Quill Retail Mall from Quill Capital US$379 million Q3, 2013 SHOPPING CENTRE CHINA MSREF sold an 80% interest in Jinqiao, Shanghai to Alpha Inv Partners & Keppel Land US$424 million (80%) SHOPPING Q2, 2013 CENTRE JAPAN Retailer Parco acquired the store they occupy in Fukuoka from Tsuzuki Gakuen US$204 million Q1, 2013 SHOPPING CENTRE SOUTH KOREA Samsung Asset Management acquired a portfolio of foodstores from Tesco US$581 million Q4, 2013 FOODSTORE PORTFOLIO JAPAN Asia Pacific Land sold the Tiffany&Co. flagship store in Ginza to private investor Masayoshi Son US$325 million (2.6%) FLAGSHIP Q3, 2013 STORE SINGAPORE Park Hotel Group sold the Knightsbridge retail podium to Chinese investor Bright Ruby Resources US$595 million Q3, 2013 HIGH STREET Note: All transactions quoted in US$ Asia Pacific Retail Investment Outlook and Review 19

20 AUTHORS David Raven Lead Director, Retail Investment Asia Pacific Capital Markets David, based in Hong Kong provides clients with specialist retail investment and brokerage advice throughout Asia Pacific. He sits within the regional Asia Capital Markets team working alongside local country based colleagues on client assignments. Prior to moving to Asia in 2012, David led JLL s UK Shopping Centre Investment team where he advised clients on some of the largest and high profile transactions in Europe. He has more than 14 years experience in advising developers, investors and land owners on the acquisition, sale and joint venture of retail real estate. Nicholas Wilson Research Manager Asia Pacific Capital Markets nicholas.wilson@ap.jll.com Nick joined JLL in 2010 and is a Research Manager within the Asia Pacific Capital Markets team. He is responsible for managing the provision of research advice throughout the Asia Pacific region, coving asset classes from office, retail, logistics and residential. He provides top-down insights on regional trends and investment activity, from macro-level and financial market developments through to the impact and consequences of these on real estate markets via both internal and external publications and delivery of market presentations. JLL advised on the largest volume of retail investment transactions in Asia Pacific in 2013 Real Capital Analytics, Februrary 2014 Whether clients are considering the sale, acquisition or strategic joint venture of a single retail asset or a large portfolio incorporating retail assets, JLL s dedicated retail investment professionals use their specialist sector skill set and experience to advise clients on the optimum strategy and its implementation so as to achieve and fully maximise client s objectives. In addition to brokerage skills, JLL s Asia Pacific Retail Investment team is highly experienced in strategically advising clients on the planning and formation of joint ventures for mixed use and retail assets. The team s relationships and experience in dealing with global capital partners and leading operational groups provide JLL with an unparalleled competitive advantage in providing comprehensive and confidential advice. In 2013, JLL advised clients on retail investment transactions totaling US$5.2 bn in Asia Pacific. JLL s specialist retail investment team is looking forward to working with all clients during the year on the strategic inception of ideas through to implementation and completion of chosen strategies. CONTRIBUTORS Stuart Crow Head of Asia Pacific Capital Markets stuart.crow@ap.jll.com Dr. Jane Murray Head, Asia Pacific Research jane.murray@ap.jll.com Ali Bryant, Beijing Director, Retail Investment, China alexandra.bryant@ap.jll.com Tom Gaffney Director, Retail, Asia Pacific tom.gaffney@ap.jll.com 20 Asia Pacific Retail Investment Outlook and Review

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