Nicholas Mak has 15 years experience working in the Singapore real estate market in the areas of research, consultancy and business development and is currently Executive Director, SLP International Property Consultants Pte Ltd.
Nicholas has provided real estate advisory services to the legislative and regulatory bodies in Singapore, financial institutions, real estate funds and developers. His opinion is often sought after and quoted by the media. Nicholas has also spoken extensively at many seminars on various aspects of the real estate market.
Nicholas recently addressed Johnson Controls GWS customers at an event in Singapore, where he spoke about the differences between how Western and Asian companies perceive real estate, globalization and the impact of real estate investment trusts.
What are main differences in how Asian companies perceive real estate compared to their Western counterparts?
The traditional Asian view, regardless of whether that’s Chinese, Japanese, Korean or Indian, is that a business should own the real estate it needs for its operations. Ideally they should own freehold land so that they can pass it on to the next generation. From an Asian perspective, it’s not just a business, but also a family legacy that can be passed down to the eldest son. Western companies don’t take the view that it’s necessary to own real estate, especially if they value the need for flexibility to move locations quickly. For them, leasing real estate makes more sense. Western companies also tend to regard real estate ownership as tying up capital that could be used to invest in the business.
What are the reasons behind this?
One explanation for the formation of this Asian perspective is that the business manager is also very often the owner, particularly so if they are a founding member of the company. Therefore, they hope to build something that will last, something that can be passed on to the next generation. There are some people who may have experience of being at the mercy of landlords, rising rentals etc., which is another reason for them wanting to own their business space, for the security it provides. Another reason is that Asian business owners view real estate as providing a solid asset backing for their company. From a Western perspective, particularly when you’re talking about larger companies, there is a separation of ownership and management. Companies are managed by professional managers, who view real estate as just another necessary business expenditure, rather than something that is part of a legacy to be handed down.
How is globalization changing how Asian companies view their real estate assets?
Globalization is an exchange of ideas. In the post-World War II years, many Asian countries looked at the Western model of development and in some cases, incorporated their methods and ideas for the development of their local financial markets. Many second-generation business owners may have been educated in the U.S or Europe, so inevitably bring back Western ideas of how to run a company. Globalization has created a melting pot of ideas with Eastern and Western ones coexisting side-by-side. Some businesses in Asia are now adopting the Western view that they should divest their real estate and become tenants, which has contributed to the growth of real estate investment trusts (REITs).
What has been the impact of these investment trusts?
The emergence of the REIT has become a real game changer, as it both expedites and provides a venue for companies in Asia to divest their real estate. It enables businesses to liquidate their real estate and free up capital for the businesses. But at the same time, the process also turns the real estate owners into tenants. In some cases, the REIT buys the real estate assets from the business owners and then enters into an agreement to lease it back to them for a long period of time. Some REITs are actually off-shoots of property developers who have large portfolios of investment properties from which they can collect rental. The parent companies, especially real estate developers, use REITs to divest part of their portfolio, particularly commercial or industrial properties. In addition, they could also acquire land, develop it, attract tenants and once occupancy levels have reached a stable level they may divest it to the investment trust at a profit. That allows them to free up capital and then acquire more land for development.
Are REITs new to the Asian market?
In the 1960s, REITs were found in only the Netherlands and U.S., followed by Australia in the 1970s. In the 1990s four other countries listed REITs on their stock exchanges – Belgium, Canada, New Zealand and Turkey. The explosion came in the decade from 2000, a further 16 countries had REITs and seven of these were in Asia – Hong Kong, Japan, Malaysia, South Korea, Singapore, Taiwan and Thailand. Today there are 26 REITs listed on the Singapore stock exchange following phenomenal growth, considering the relatively small geographical area of Singapore.
How will this growth of REITs affect the market?
The business models of REITs encourage the managers to expand the portfolio of the REITs and to increase the income from the assets that they manage. A growing number of REITs listed in Singapore also own real estate overseas. As a result, REITs are becoming bigger, more powerful and own more properties. Rentals of REIT-managed properties have increased, which has added to the operating costs for some businesses. For the REITs themselves it’s been positive, although it depends of the size of the assets they’re operating and whether they can hit their growth and acquire assets. Shareholders of REITs get a steady dividend payout as the REITs will distribute a high percentage of the net income as dividends to obtain tax benefits. However, from the tenants’ point of view, it’s not such a rosy picture. Complaints have grown from tenants that REITs are increasing rentals and are doing so because there’s a growing concentration of ownership.
What’s the outlook for the Asian property market?
The different economies in Asia are at different stages of development, but I think they are moving towards a similar economic development model. The growth of the middle class and businesses in these developing economies will lead to the demand for higher quality and investment-grade real estate. The financial markets in those countries will also develop further and with that economic maturity will be the development of REITs or the acquisition of the investment-grade real estate by foreign REITs.
Some of the large multi-national corporations which usually lease their corporate real estate could find themselves as tenants of the REITs. Unlike smaller tenants, these corporations could use their market size or ‘brand-name’ to obtain favorable terms from the landlords. But if all else fails, the multi-national company could consider buying and owning its business space, which brings it back to the ‘traditional Asian view’.
Nicholas Mak is a graduate from the University of Technology, Sydney with a degree majoring in Economics and Finance, and attained a Master of Science in Real Estate from the National University of Singapore.