The establishment of the Association of South East Nations (ASEAN) as a single economic market by the end of 2015 will immediately benefit the industrial sectors of member countries, with some positive spill over for local office and retail property markets.
According to CBRE's new report – ASEAN Economic Community – A Boost to South East Asia's Real Estate Market – expects a ramp-up in the demand and supply of industrial and office space in most ASEAN markets in the short to medium term as more Small and Medium Enterprises (SMEs) and MNCs establish themselves in the region. In particular, the logistics market is expected to grow and develop in ASEAN given the strong emphasis under the AEC blueprint for infrastructure development and the gradual elimination of Non-Tariff Barriers across member countries.
The lift in the industrial market will in turn bolster the growth in office demand too as more MNCs enter the market and more regional SMEs expand. In particular, the financial and legal services sectors in emerging markets could grow on the back of rising infrastructure development and the proposed liberalization of the region's capital markets. More foreign retailers are also projected to venture into ASEAN, building on the momentum they have charted in the last few years. Tourism is a bright spot for ASEAN member countries as the AEC blueprint focuses on enhancing air and land transport infrastructure and regional cooperation to attract more visitors to the region.
ASEAN member countries include Singapore, Thailand, Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines and Vietnam
Desmond Sim, Head of CBRE Research, Singapore and South East Asia says, “while there exist hurdles and limitations that ASEAN needs to overcome, the region is still anticipated to remain an attractive proposition for businesses and commercial real estate with the implementation of the AEC serving to strengthen ASEAN's development”.
The impediments to growth are varied. The report cites the possibility of an ill-managed institutional supply pipeline, which may result in volatility in retail rents. This could delay or even deter retailers from expanding. The undersupply of skilled labor also poses a challenge for the office and industrial sectors in the short to medium term, which might in turn hamper the expansion of high-value industrial manufacturers. The disparity in the skill sets between countries also limits the positive effects of the proposed free flow of skilled labour within ASEAN.
Another limiting factor would be the lack of complementary real estate investment policies to promote the liberalization of investment policies and free flow of capital. Often, real estate investors are deterred by restrictions on foreign land ownership and the short duration of leases. A pro-investment environment will be required to encourage further inflow of Foreign Direct Investments and improve the overall development process in ASEAN. Thus, a review of the individual country's land ownership policy for acquisition purposes may be necessary to allow more foreigners to participate in real estate development.
Still, market observers remain optimistic about the real estate capital inflows, going by the strong track record the ASEAN community has charted in the last decade. Real estate investments in the ASEAN region recorded a total of $28.190 billion in capital inflow between 2005 and 2014. For the last five years from 2010 to 2014, China reigned as the top investor in the ASEAN market at 29% of total investment volume, which amounted to $4.423 billion of Chinese capital. This was followed closely by Singapore in second position, with a value of $4.268 billion, which made up 28% of total investment in that period. In tandem with the increase in cross-border investments into the ASEAN market, there is a prominent shift in global capital distribution across all ASEAN countries in recent years.
“The ASEAN Economic Community has played a key role to liberalize the investment markets in ASEAN to pave the way for foreign investments within individual member states. The diversity in the development of the real estate markets in ASEAN provides investors a broader investible universe for their investment strategies. More developed markets such as Singapore and Malaysia could offer investors a 'core' or 'value-added' investment profile while 'opportunistic' investments could be sourced from emerging markets such as Vietnam and Philippines. Investments into ASEAN real estate market is thus expected to grow as investors seek alternative markets for their real estate portfolios,” Mr. Sim added.