India, China hot destinations for real estate investment

India and China are growing target destinations for investment and have the potential to be major destinations for global capital in the future. However, Japan continues to dominate commercial real estate in both total and cross-border transaction volumes.

According to a Jones Lang LaSalle report titled 'Global Real Estate Capital - The Search For Opportunity Intensifies', "While Japan dominates today, India and China are both growing target destinations for investment and have the potential to be major destinations for global capital in the future. We believe that as property transfers between institutional players continue to build, capital inflow and outflow from these two investment hot spots will expand rapidly, creating further cross-border investment opportunities."

Global direct real estate investment of $237 billion was recorded in the first half of 2005, 18 per cent up on the first half (H1) of 2004; and is estimated to jump to an all time record of approximately $550 billion (20 per cent increase on 2004) by the year end, the report said.

Asia Pacific is undoubtedly experiencing the strongest growth as it catches up on the other larger, more developed regions, with the value of Asia Pacific transactions in H1 2005 being 45 per cent higher than H1 2004.

Europe remained the key destination for cross-border activity, being dominated by intra-regional purchase activity in H1 2005. Notably, cross-border investment reached $52 billion (a 21 per cent increase on H1 2004) as all regions saw higher transaction volumes.

Guy Hollis, International Director in Jones Lang LaSalle's International Capital Group explains, "Direct real estate investment continues to undergo rapid globalisation. The prolonged low interest rate environment, improving property fundamentals, ageing populations and increasing pension savings are driving an unprecedented weight of capital, which in turn is compressing yields in many international property markets."

"Pressure continues to mount to find higher returns wherever they become available. In Asia Pacific, the search for higher returns is likely to accelerate growing volumes in emerging Asian nations, driving improvements in market transparency and liquidity. Global investors are also increasingly exerting significant influence on local investment markets through competition with domestic and regional players. For this reason, investors cannot afford to disregard international investment opportunities which are increasingly providing relatively significant returns and strong diversification characteristics for property portfolios," Hollis added.

Despite its low transparency, the value of Chinese transactions recorded in H1 2005 is over two and a half times higher than the full-year 2004 total and based on current negotiations by foreign groups, total inter-regional transactions in 2005 could be as much as six or seven times the total deal flow in 2004.

Most notable is the far wider geographic scope of Chinese transactions, with several joint ventures between foreign and local investors acquiring shopping malls across the country. Investing in new-found locations presents transparency challenges but allows investors to achieve significant scale quickly and to tap into the projected rapid growth in Chinese consumer spending.

Similar transaction volumes are expected to continue, increasing market penetrations and access in 2006 and beyond.

With the emerging Real Estate Investment Trusts (REITs) sector in Asia, a number of countries are restructuring local property and tax regulations to accommodate increased cross-border flows, encouraging investments into and out of the region and driving liquidity and market transparency.

Singapore to date has been the most aggressive country in encouraging REIT development, allowing wider geographic coverage than available to other Asian REITs, in addition to a zero tax rate on REIT dividends.

The first Hong Kong REIT will be listed shortly while other Asia countries have either relaxed or are considering REIT structures. The highly developed domestic Japanese REIT market continues to grow rapidly and expand its coverage beyond the Tokyo office sector.