Cross-border Capital Research Report March 2015 Home Bias: Is the Phenomenon Still Relevant to the Asia Pacific Real Estate Capital Market? Investment Highlights Chinese investors completed an aggregate amount of US$3.3 billion Asia Pacific (APAC) cross-border deals in 2014, up 10.3% year-on-year (y-o-y) to 27.3%. Australia was the main beneficiary. APAC cross-border transaction volumes completed by Singapore investors reached US$10.6 billion in 2014, rising by 20.2% y-o-y to 67.1%. This was boosted by a mega GIC deal as well as more deals sealed by the sovereign wealth fund and Singapore REOCs and REITs. The Singapore office sector investment volume showed resilience despite a significant increase in cross-border transaction volumes by local investors. A recent trend study on the APAC real estate capital markets shows investors from countries such as Japan and Australia prefer to invest in their domestic market. Close to 100% of Japanese and Australian investors prefer local, rather than overseas markets. Conversely, investors from other major real estate investment markets such as Hong Kong and China have shown less of a home bias preference. In 2014, Hong Kong and China investors completed 35.1% and 27.3% of real estate transaction volumes outside of their domestic markets. While recent statistics show that Singapore investors have completed more overseas rather than domestic investment deals. In 2014, 67.1% of total APAC transaction volumes by Singapore investors were cross-border transactions. APAC cross-border transaction volumes in China and Singapore rose sharply y-o-y between 2013 and 2014 Last year, US$3.3 billion out of the US$11.9 billion invested into real estate in APAC by Chinese investors were crossborder transactions. This translates into 27.3% of the total transaction volumes, an increase of 10.3% or US$0.9 billion y- o-y from a year ago. From a country perspective, Australia attracted the bulk of the Chinese cross-border capital within the region - about 70.8% out of the US$3.3 billion. More than half, or about US$2.8 billion, of the total APAC Chinese cross-border transactions went into major cities such as Sydney, Hong Kong and Melbourne.
Chinese investors completed US$3.3b APAC cross-border deals in 2014 In China, local developers have begun to follow in the footsteps of other early Chinese investors such as the state-owned enterprises and high net worth individuals who are divesting overseas - in particular into Australia - where they have bought an array of assets across different real estate sectors, with offices being the preferred choice in recent years. Singapore has also been on the radar for these Chinese developers. In Q3 2013, Bright Ruby Resources, a Singaporeincorporated company by Chinese steel tycoon, Du Shuanghua, bought Grand Park Orchard hotel along with its Knightsbridge retail podium for US$912.3 million. Government-related entities and developers lead Chinese APAC cross-border deals, 2007 2014 Australia a hot destination in APAC for Chinese crossborder investors, 2007 2014 Sydney attracted the majority of Chinese cross-border capital in 2014 With more real estate capital outlay by Chinese investors heading or looking to invest overseas, the question is what impact has it caused on its domestic market and which sectors have been worst hit? Comparing 2013 and 2014, total domestic investment by Chinese investors was down 23.4% y-o-y, according to our research data. The office sector took the hardest beating, down 34.6%, and almost single-handedly caused the y-o-y fall in domestic transaction volume. The Chinese retail sector also fell 7.4% y-o-y on lower transaction volume as well as on number of deals transacted (2014: 27 deals versus 2013: 35 deals), but the average deal size increased marginally from US$51.6 million to US$61.9 million. 2 Cross-border Capital Research Report
Chinese office sector took the biggest hit from domestic investors in 2014 Sydney and Tokyo attracted the majority of Singapore cross-border capital in 2014 Last year, US$10.6 billion out of the US$15.7 billion invested by Singapore investors into real estate in APAC were crossborder transactions. This translates into 67.1% of the total transaction volume, which was an increase of US$4.5 billion or 20.2% y-o-y the biggest percentage gain in eight years. The majority of this, or US$6.9 billion, went into major cities in the region such as Sydney, Tokyo, Melbourne, Auckland and Hong Kong. Singapore investors completed US$10.6b APAC crossborder deals in 2014 In Singapore, the trend of investment by local investors remains unchanged as cross-border investment trumps domestic investment. This is due to the lack of property stock in the local market and the size of Singapore s sovereign wealth fund Government of Singapore Investment Corporation (GIC), which accounts for a large proportion of the total Singapore real estate investment capital within the APAC region. Furthermore, Singapore real estate operating companies (REOCs) and real estate investment trusts (REITs) have also started to look overseas due to limited opportunities locally. In 2014, Singapore REOCs and REITs APAC cross-border transaction volumes rose 21.1% and 175.3% to US$4 billion and US$1.2 billion respectively, from a year ago. Singapore REOCs and REITs strong cross-border investors in the APAC region Tokyo was the biggest standout as it was heavily scaled by GIC s mega deal purchase of Pacific Century Place Marunouchi office building in Q4 2014 for US$1.7 billion from real estate investment management firm, Secured Capital Investment Management. Sydney also attracted a large bulk of Singapore cross-border capital with more small deals being completed in 2014. 3 Cross-border Capital Research Report
What did this mean for the Singapore market? Our research data shows that total domestic investment in 2014 by Singapore investors was down 24.7% y-o-y. Hotel and industrial sectors fell by the most, 61.6% and 41.6% to US$0.6 billion and US$0.8 billion respectively, mainly attributed to lower stock in the local market. The office sector proved most resilient, down by only 6.3% as local buyers continue to show purchasing power. Singapore hotel and industrial sectors took the biggest hit from domestic investors in 2014 In the early part of 2015, several deals have closed that support this prediction: China Investment Corporation s joint venture with LaSalle Investment Management for the US$1.2 billion purchase of Meguro Gajoen office building in Tokyo from Mori Trust; Shanghai Shenglong Investment Group s purchase of an office building - 168 Walker in Sydney from Anton Capital for US$128.6 million; and Dalian Wanda Group s US$59.6 million purchase of Fairfax House office building in Sydney from Everbright Group and AXF. Likewise, Singapore cross-border investors (mainly REOCs and REITs) have also maintained the buying momentum in the region in 2015. Most recently, Fortune REIT s purchase of Laguna Plaza for US$247 million in Hong Kong and CapitaMall Trust s portfolio purchase of Tropicana City Office Tower and Mall for an aggregate of US$154.4 million from Tropicana Building Corporation. Did you know? Looking ahead, JLL anticipates the trend towards geographical diversification of real estate investment to continue in the near term as China and Singapore have a few factors such as high saving rates working for them and slower economic growth against them which would make investing overseas more attractive. China and Singapore overseas investment trend likely to continue in 2015 Investors sometimes are made to feel guilty when they have a portfolio skewed towards local assets which contradicts the proponents of modern portfolio theory. The contention here is that diversification benefits are improved by adopting a global portfolio, and the most efficient portfolio is one which contains all risky assets at market capitalisation weights. Nonetheless, home bias persists and clearly the modern portfolio theory, which in recent years has been widely challenged by fields such as behavioural finance, is to a certain degree lacking description of how the real world works. Home bias refers to the notion that most investors hold portfolios with an asset mix that is skewed towards their local market. Arguments that local assets hedge certain risks making it more aligned with local investors, information asymmetries as well as insufficient evidence of benefits to international diversification are just some of the reasons which could lead to this behavioural phenomenon. While the notion that modern portfolio theory may not be perfect, the benefits of diversification have been studied in numerous academic literatures and cannot be easily casted away. Here, we take a look at the change in home bias effect to some real estate investment markets within Asia Pacific (APAC) and the implications it would cause in the near term on real estate investment within the region. 4 Cross-border Capital Research Report
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