Real Estate Inv Aspac 0805

Real Estate Investment in
Asia Pacific: Migrating capital
In Association with:
Contents
1
Introduction
Executive summary
The significance of real estate investment in Asia

A Global context
The Asian story
Capital flows in Asia
18
Outlook for real estate products in Asia

Real Estate Investment Trusts
Real Estate Funds
Real Estate Derivatives
32
About KPMG
33
About FTSE Group
34
About APREA
2008 KPMG, a Hong Kong partnership and a member rm of the KPMG network of independent member rms afliated with KPMG International, a Swiss cooperative.
All rights reserved.
Introduction
Property investment has emerged as an asset class, but it remains difficult to

access and is often beset by complex structures and regulation. The factors
governing investment decisions differ greatly from one market to another.
Developed jurisdictions such as Australia, Hong Kong, Japan and Singapore all
have well defined and strictly governed real estate markets, often competing to
attract investment from institutional investors with an Asian property mandate.
The other end of the spectrum sees frontier markets such as Vietnam, China and
India closely studying regulatory frameworks in the rest of the region as a guide
to establish their own viable marketplace for international real estate investors.
Regardless of the variation in market development there is an underlying
trend the proliferation of REITs and the increased number of property stock
listings. Both vehicles give investors the advantage of transparent reporting
and accounting required by the listing exchange. As a result, we are seeing
investors increasingly include listed property in their portfolio which compliments,
rather than competes, with their allocation to direct property investment. A
consequence of this new demand is the growing choice of Asian property funds.
KPMG China, FTSE Group and APREA are pleased to have teamed up to develop
this report, which explores the fast developing landscape of Asian real estate.
Andrew Weir
Partner in Charge
Property and Infrastructure
KPMG China
Fran Thompson
Director
Asia Pacific
FTSE Group
Peter Mitchell
CEO
APREA
Real Estate Investment in Asia Pacific: Migrating capital
Executive summary
The credit crisis in the United States and Europe brought to an end a decade of
sustained growth in global real estate. During this period, the debt-driven nature
of real estate was a key factor in its emergence as a core asset class. These
developments, which also had implications for equity markets, also started to
make their way to Asia.
Asian real estate has rebounded impressively since its own financial crisis a
decade ago. Questions continue to be asked as to just how severe an impact the
present credit crisis will have on the region. Arguably, many have been surprised
by how relatively little Asia has been affected.
Asia as a whole has continued to perform relatively well against the US and
European real estate markets and more importantly, continues to attract
investment. This is not to say that Asia has been immune, but it has been
impacted to a much lesser degree. This has led some US and European funds to
review their perspective on the region. Asian real estate may finally be getting
the respect that many say it deserves.
Capital flows in Asia have traditionally come from bank debt leveraging
developments while real estate funds awash with capital have been investing
throughout the region. With credit problems in the US and Europe, more focus is
being given to Asia, with investors viewing market fundamentals favourably and
increasing their allocations to the region.
The credit crisis has not slowed the inflow of capital to Asia quite the
opposite. While real estate investment was already growing steadily due to a
combination of opportunistic and increasingly longer-term investments, the credit
crisis appears to be accelerating this process.
More funds have been looking around the region than ever before, many with
capital waiting to be invested. In recent months, a number of European pension
funds have been looking to Asia in search of stable returns. There has been
continued interest from Australian funds and even opportunistic US funds in
search of distressed assets. Alongside huge Asian pension funds from markets
such as Singapore, interest hasnt been this high for a long time.
Though interest may be here, there is also caution. Traditional sources of debt
from US and European banks have all but dried up, and some Japanese and
Australian banks are delaying loans, so financing deals around the region has
become increasingly difficult.
Probably the most pronounced effect from the credit crisis is a tightening of
credit controls. In Asia, this is slowing the financing process rather than bringing
it to a halt, which suggests it has arisen from the temporary uncertainty of
lenders rather than more deep-seated problems in Asias real estate markets.
Eventually, this could have a positive impact for the region, improving bank
controls and in turn leading to stronger equity returns.
Meanwhile, the traditional debt leverage model in Asia is being challenged from a
number of directions. The recent and rapid emergence of real estate investment
trusts around the region is one immediate sign. Although many are trading below
net asset value, this generally does not reflect the quality of underlying assets
and the expected positive returns.
Likewise, the market capitalisation of listed real estate companies and real estate
funds in emerging markets have been increasing at an extraordinary rate. In India,
market caps are at an all time high far exceeding the expectations of mature
markets and leading some observers to question the sustainability of this growth.
To a lesser extent, increasing attention on Shariah-compliant financing (which
prohibits the earning of interest) and the fledgling real estate derivatives market
illustrate that debt-driven financing will not be the primary source of capital in
future.
Asian real estate may be experiencing some short-term pain, but the credit crisis
will eventually benefit the region. The perception that the region is only suitable
for opportunistic investors has been prevalent since the Asian financial crisis,
but is now being turned on its head. In time, the credit crisis will result in Asia
being regarded on a more equal and level playing field to the more mature but
struggling markets of the US and Europe.
The significance of real estate investment in Asia
A Global context
real estate equities are

gradually becoming a global
market, just like other listed
assets. There are dozens of
global funds, the vast majority of
which have appeared in the last
five years, and companies can
raise money on three continents.
The drivers include: abundant
liquidity, strong property markets,
REIT legislation in key markets,
more fund managers in the
sector, and more research and
information.2
End of a debt-driven era

Real estate is now emerging globally on the scale of other asset classes.
The underlying real estate market reached a value of over USD 17 trillion in
2007.1 The majority of investment still remains in North America and Europe
(75 percent), while Asia Pacific accounted for around 20 percent. Little of this
underlying market is listed, but Asia Pacific leads in this area with around 15
percent versus a global average of 9 percent.
The era of exceptional returns from global real estate came to a close in 2007.
Events in the sub-prime market in the US resulted in a credit-crunch in a number
of countries, and closed out a robust period of debt-driven investment.
Global real estate value, 2007 (USD billion)

8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
Europe
Underlying real estate
North America
Asia Pacific
Latin America
Listed real estate
Source: EPRA, 2008
1 EPRA, 2008.
2 Patrick Sumner, Head of property equities in the London office of Henderson Global Investors, Navigating real estate investment on a global
basis 2007.
Invested and investible real estate stock by region, 2007 (USD trillion)
12
10
8
6
4
2
0
Europe
North America
Investible stock
Asia Pacific
Invested stock
Source: RREEF Asia Pacific Real Estate Outlook 2008
Globally, there is room for further investment. Total invested stock only accounts
for 40 percent, and in regions like Asia Pacific, this is even lower. With the US
and Europe stalling from the credit crunch at the moment, eyes are turning to
Asia faster than before.
Global real estate transactions continued to grow in 2007 over the watershed
year of 2006, helped predominantly by high levels of investment in the first half
of the year. Strong investor interest and favourable credit conditions had driven
volume growth and increased pricing over the past few years.
The credit crunch in mid-2007 led many investors to hold back on investments as
pricing levels were revised and they reappraised their appetite for risk. However,
the slowdown in the second half did not dampen overall growth for the year,
which increased by a healthy 9 percent to reach around USD 760 billion.3 This
growth has been increasingly driven by cross-border activity, which accounted for
nearly half of transactions last year.
Global direct commercial real estate investment, 2003-2007 (USD billion)

800
700
600
500
400
300
200
100
0
2003
Domestic
2004
2005
2006
2007
Cross-border
Source: Jones Lang LaSalle Global Real Estate Capital Oct 2007 and press releases March 2008
Jones Lang LaSalle, March 2008.
Extraordinary performance
Returns from real estate securities were exceptional between 2003 and 2006,
averaging over 30 percent during the period. Last year saw an abrupt end to
these golden years with returns dropping dramatically to a tenth of this
average. Meanwhile, investment in direct real estate has experienced more
steady returns, comfortably averaging double-digits for the past decade.4
Real estate as an asset class has certainly outshone equities and long-term
government bonds over the past decade, providing average returns of between
7-8 percent. The success of real estate may have taken a few by surprise, but it
illustrates how important it has become to global capital markets.
FTSE EPRA/NAREIT Rental and Non-Rental Market Cap Index, 2001-Q1 2008
600
500
400
300
200
100
0
Jan 01
Jan 02
Jan 03
Jan 04
FTSE EPRA/NAREIT Global Index

FTSE EPRA/NAREIT North America Index
Jan 05
Jan 06
Jan 07
Mar 08
FTSE EPRA/NAREIT Asia Index*

FTSE EPRA/NAREIT Europe Index
* includes Australia and New Zealand

Source: FTSE Group 2008
FTSE EPRA/NAREIT Real Estate Index, 2001-Q1 2008

300
250
200
150
100
50
0
Jan 06
FTSE
FTSE
FTSE
FTSE
Jul 06
EPRA/NAREIT
EPRA/NAREIT
EPRA/NAREIT
EPRA/NAREIT
Jan 07
Global Rental Index

Asia Rental Index*
Europe Rental Index
North America Rental Index
Jul 07
FTSE
FTSE
FTSE
FTSE

RREEF Asia Pacific Real Estate Outlook 2008.
EPRA/NAREIT
EPRA/NAREIT
EPRA/NAREIT
EPRA/NAREIT
Jan 08
Mar 08
Global Non-Rental Index

Asia Non-Rental Index*
Europe Non-Rental Index
North America Non-Rental Index
Annual returns by global asset class, 1998-2007

50
40
30
20
10
0
-10
-20
-30
1998
1999
2000
2001
Direct real estate

Real estate securities
2002
2003
2004
2005
2006
2007
Equities
Long-term government bonds
2008: Time to slow down

Global economic growth slowing
The global economy continued to expand in 2007 and this trend is expected to
continue in 2008, albeit at a slower rate. Global gross domestic product growth
is forecast to slow to 3 percent in 2008 and this is expected to mildly weaken
demand for real estate.5
Despite the sub-prime crisis and the housing market slowdown in the US, it
is generally felt that the US could still avoid a deep recession and may even
maintain some mild growth over the course of the next two years.6 While most
European countries are expected to maintain growth in 2008, in particular in
Central and Eastern Europe, the UK is expected to feel the impacts from the
global credit crunch with economic growth slowing to less than 2 percent.
As Asia Pacific emerges as its own growth engine, a slowdown in US and
Europe is unlikely to have a significant impact on the region. Overall, economic
growth for the region is expected to remain strong, supported by growing intraregional trade.
Real estate returns declining
Strong real estate fundamentals bode well for most markets, with generally low
vacancy rates and healthy pipelines. Global transaction volumes are expected
to decrease. Total global volumes [are expected] to be below those achieved
in recent years due to lower pricing and fewer transactions, commented Tony
Horrell, CEO European Capital Markets at Jones Lang LaSalle,7 while adding that
even with the tightening of credit a number of equity investors are cash-rich and
prepared to wait for good buying opportunities to emerge.
5
6
7
ING Real Estate Global Vision 2008.
Economist Intelligence Unit, March 2008; ING Real Estate Global Vision 2008; KPMG and FTSE interviews with industry participants.
Jones Lang LaSalle press release, March 2008.
On the whole, returns on real estate investments are expected to decline in most
countries, but still remain positive for 2008. Returns from investments in Asia
Pacific are expected to generally remain higher than the global average for the
coming year.
Direct real estate returns, 2007 and 2008

35%
30%
25%
20%
15%
10%
5%
2007
Global
UK
Italy
Netherlands
Germany
US
Australia
Japan
South Korea
Hong Kong
-5%
China
0%
Singapore
2008F
The Asian story

Real estate growth has not slowed
Asian real estate has remained strong in the face of the credit crisis in US and
Europe. Backed by strong market fundamentals and even stronger economic
growth, real estate in Asia is expected to continue to weather any global
problems. Capital flows throughout the region are at an all-time high, and the
general sentiment in the market is still favourable. The credit crunch has not
significantly impacted market sentiment in Asia.
A number of interviewees did not expect Asia to be as badly hit as the US and
Europe, with one fund management executive commenting Asia is certainly not
immune, but it wont be impacted to the same degree as elsewhere.8
Total investment in the region has continued to increase, growing by over 27
percent in 2007 to reach USD121 billion. Unlike the US and Europe, where
real estate investment slowed in the second half of last year, over half of
investments in Asia Pacific were made during this period.
KPMG and FTSE interview with a fund manager at an investment bank.
Asia Pacific direct commercial real estate transactions, 2005-2007 (USD billion)
140
120
100
80
60
40
20
0
2005
2006
Domestic
2007
Cross-border
What you have is a balance of

both theories: globalisation in the
real estate sector will continue,
meaning that what hurts the US
will hurt Asia, but at the same
time Asia is continuing along its
own trajectory making it more
immune than it was two or three
years ago.
Source: Jones Lang LaSalle Global Real Estate Capital 2008 and press releases March 2008
Morgan Parker,
President,
Taubman Asia
Japan remains a dominant force in the region, not only accounting for half of last
years real estate transactions but also experiencing the strongest growth. China
also grabbed a number of headlines last year as it continued to produce attractive
returns for investors. Looking forward though, Japan continues to be viewed as
an attractive market to look into, particularly for the lower-risk investor, while
commentators still view China as a popular place to look as large volumes of
capital chase more limited investible stock.9
Asia Pacific direct commercial cross-border transactions, 2006-2007 (USD billion)

30
25
20
15
10
2006
Vietnam
Macau
Malaysia
Taiwan
Hong Kong
Australia
South Korea
Singapore
China
Japan
2007
Source: Jones Lang LaSalle Asia Pacific Property Digest Q4 2007
Urban Land Institute Emerging Trends in real Estate in Asia Pacific 2008.
10
Healthy performance continues

Investors in Asian real estate have been enjoying healthy returns for the past few
years. Returns from direct real estate investments last year were as high as 20
percent in some Asian markets, with almost all markets exceeding 10 percent.
Although 2008 is expected to slow, most Asian countries are forecast to beat the
global average. Investor confidence appears to remain high, with many expecting
the prospects for profitability in the coming year to be good and in some cases
exceed last year.10 Investment in Asia seems to be taking a cautious approach
at the moment, but it will continue and most markets [in Asia] will see growth
albeit slower than before, one director at a European investment bank
commented.11
FTSE EPRA/NAREIT Global and Asia REIT and Non-REIT Indexes,

Q2 2006-Q1 2008
200
150
100
50
Mar 06
Sep 06
Mar 07
FTSE EPRA/NAREIT Global REIT Index

FTSE EPRA/NAREIT Asia REIT Index*
Sep 07
Mar 08
FTSE EPRA/NAREIT Global Non-REIT Index

FTSE EPRA/NAREIT Asia Non-REIT Index*

Against global averages, Asia generally tracked global trends, illustrating that it
is unlikely to ever de-couple from the US or Europe; however Asia has largely
outperformed global averages in both the REIT and the non-REIT areas. In the
US, real estate securities have been more closely linked with underlying real
estate markets. This trend is also likely to emerge in Asia as the market matures.
Likewise average Asian yields from REITs have generally outperformed REITs in
Europe and North America and the global average. Non-REIT yields have been
slightly below global averages.
10 Urban Land Institute Emerging Trends in Real Estate in Asia Pacific 2008.
11 KPMG and FTSE interview with a director at a European investment bank.
Yields from rental properties by region, 2006-Q1 2008

7%
6%
5%
4%
3%
2%
1%
0%
Jan 06
Jul 06
Jan 07
Jul 07
FTSE EPRA/NAREIT Global Rental Index

FTSE EPRA/NAREIT Europe Rental Index
Jan 08
Mar 08
FTSE EPRA/NAREIT Asia Rental Index*

FTSE EPRA/NAREIT North America Rental Index

Yields from non-rental properties by region, 2006-Q1 2008

5%
4%
3%
2%
1%
0%
Jan 06
Jul 06
Jan 07
Jul 07
FTSE EPRA/NAREIT Global Non-Rental Index

FTSE EPRA/NAREIT Europe Non-Rental Index
Jan 08
Mar 08
FTSE EPRA/NAREIT Asia Non-Rental Index*
FTSE EPRA/NAREIT Non-North America Rental Index

Direct real estate returns, 2006-2008F

60%
50%
40%
30%
20%
2006
2007
Global
Japan
Australia
South Korea
Hong Kong
China
0%
Singapore
10%
2008F
11
12
As with US and European markets, yield compression throughout Asia Pacific

region is expected to be nearing its end.12 This is due to demand for properties
continuing to increase, forcing prices to rise and cap rates to decline.
Asia has some of the fastest

growing economies in the world.
Real estate will continue to benefit
from this growth particularly
as Asia comes into its own and
becomes less reliant on trade with
the US and Europe.
There is potential for returns from the market this year, though most likely in
the form of rental returns rather than capital appreciation. The general view is
that rents will continue to rise in several Asia cities over the coming year, easing
the income pressure from compressed yields and benefiting project cash flow.
Well probably start seeing rental prices increase in some markets this year,
which will help stabilise returns for some of the less opportunistic investors,
said one US fund manager.13
The outlook is good
Dr Henry Chin,
Global Real Estate
Strategist,
RREEF
Continued economic growth

Asias increasing economic independence and inter-regional trade will help it
to overcome most negative impacts from any US and European slowdown this
year. As impacts from the credit crunch are being felt in the financial sectors
overseas, Asias growth is forecast to slow in 2008 but still remain at a healthy
level.
Capital spending is expected to remain high in the region, as one commentator
noted, this is due in part to a lack of investible options in home markets in US
and Europe.14 While the Australian REIT market is starting to show diminished
interest in offshore acquisitions, the countrys superannuation funds continue to
demonstrate growing interest in Asian real estate. Meanwhile, the outlooks for
other economic indicators remain healthy, with industrial production and retail
sales generally remaining level or increasing.
Key economic indicators

Gross domestic product
Prime lending rate
Retail sales growth
Industrial production
(% Growth)
(%)
(%)
(%)
2008F
2009F
2008F
2009F
2008F
2009F
2008F
2009F
3.2
2.8
10.3
9.6
1.4
3.8
3.4
2.6
10.1
9.6
8.1
7.8
13.2
12.8
15.7
13.0
Hong Kong
4.8
5.7
7.0
7.6
4.0
1.7
-0.5
-1.4
Indonesia
6.1
5.7
13.0
12.4
5.2
4.5
4.4
4.0
Japan
1.3
1.3
2.1
2.8
-0.1
0.5
1.2
1.4
Malaysia
5.7
5.8
6.5
6.5
4.8
4.0
3.8
5.2
New Zealand
8.3
8.2
12.7
12.2
1.8
3.2
2.0
1.9
Philippines
5.3
5.4
8.6
9.3
3.9
5.2
5.5
5.5
Singapore
4.9
4.7
5.5
5.4
1.5
1.8
5.9
5.6
South Korea
4.7
4.7
6.4
6.2
2.8
2.9
6.7
4.6
Taiwan
4.6
3.9
4.7
5.3
1.5
1.4
5.0
5.1
Thailand
4.8
4.1
6.5
6.2
1.1
2.9
6.0
5.2
Vietnam
8.3
8.2
11.6
11.3
6.0
6.0
16.5
16.5
World average
2.9
3.3
2.3
3.5
Australia
China
Source: Economist Intelligence Unit, 2008

12 Jones Lang LaSalle press release, March 2008; Urban Land Institute Emerging Trends in Real Estate in Asia Pacific 2008;
KPMG and FTSE interviewees with industry participants.
13 KPMG and FTSE interview with a US fund manager.
13
Asia not immune

Buoyed by healthy economic growth, Asias position in real estate markets looks
secure. Investment volumes throughout the region have declined recently but are
expected to pick back up towards the end of the year.
The slowdown in the US and Europe is expected to flow through to Asia, but it
is unlikely to be immediate. The most significant impact interviewees expected
was a tightening of credit from banks, in particular for financing large-scale
developments.
The impact is expected to result in a smoothening out of supply, as one real
estate fund manager described it, explaining that deals will continue to happen,
but will take longer, resulting in a slowing of the supply cycle.
Transfer pricing issues affecting real estate sector

The recent increase in transfer pricing enforcement in the Asia Pacific region
has led to severe tax scrutiny and transfer pricing audit cases for several
listed REITs. Since the burden of proof lies with the taxpayer, it has become
increasingly important for REITs to have an intricate and clear strategy in place
to handle potential transfer pricing issues. Some of the common issues for
REITs include the following:
l
Determination of related party transactions and ownership structures:

From a transfer pricing perspective, the related-party transactions must
not disadvantage the REIT in accordance with internal, statutory and other
transfer pricing regulations; furthermore, the REIT must document its
ownership structure to ensure that it complies with all of the regulatory
constraints.
Pricing for services provided by the REIT subsidiaries: Typically related

subsidiaries engage in a variety of real estate management and development
activities on behalf of the REIT, such as leasing, development of real property,
management services, acquisition services and tenant services. The service
fee paid to the subsidiaries of the REIT for these functions must be at arms
length.
Allocation and recharging of shared expenses: Various related group

entities may also perform support services that benefit the REIT or other
group recipients; these services need to be allocated and reimbursed
appropriately.
Consideration of thin capitalisation issues: A REIT is typically financially

leveraged and may have obtained funding from related entities. Consideration
needs to be paid to arms length interest rates and thin capitalisation issues,
so as to avoid transfer pricing adjustments and potential loss of interest
deductions.
Key factors driving real estate

investment in Asia Pacific
l
Unparalleled volumes of global

liquidity
Relatively cheap debt
Ongoing re-rating of real estate as

an asset class
Increased Asia Pacific allocation of

institutional funds
Low levels of institutional

ownership in Asia Pacific real
estate
Continuing yield compression in

global real estate markets.15
14
There is no question at all the

US slowdown is impacting Asia:
financing options are increasingly
limited. Its not that you cant
obtain financing, even for large
developments, its that banks are
being much more cautious and
its taking longer to secure and
close the deal on terms that are
different than before.
Morgan Parker,
President,
Taubman Asia
Capital flows in Asia

Asian real estate has seen a broadening of its capital base away from real estate
developers into other equity-based sources over the past decade. Although
financing in Asia remains privately driven, as the globalisation of real estate
continues, other types of public capital flows are beginning to emerge in the
market.
Between the varying types of public and private debt and equity (see table
below), private debt and equity funding continues to dominate as bank loans and
funds remain the key sources of capital in the region. Real Estate Investment
Trusts (REITs) have emerged in places with fanfare over the past couple of years,
while securitised financing remains some way off for many Asian markets.
Private
Public
Debt
Bank loans
l Debt leverage still popular
form of financing in Asia
l Prime rates in Asia not set to
change dramatically
Securitised financing
l Little traction in Asia for
CMBS
l CDOs have yet to become
active in Asia
Equity
Real estate funds

l Majority of real estate capital
in Asia
l Asian and overseas funds
remain very active
l Australian funds investing in
Asia
Real Estate Investment Trusts

l Market correction following
period of overvaluation and
excessive speculation
l Yield compression means
many are performing below
NAV
Private capital is king

The sub prime crisis in the US had a significant impact on US and European
lending attitudes. As banks become more selective over loans in the real estate
sector, the debt-driven growth in real estate of the past few years has come
to an end. In response, the Federal Reserve decreased interest rates towards
the end of last year and recently again to around 2 percent, while the Bank of
England is expected to decrease rates to an average 5 percent over the coming
two years.16
The response in Asia has been mixed, affected to a large extent by domestic
market conditions. However, the majority of countries are forecast to maintain
relatively high rates in the face of robust economic activity, with average prime
lending rates for the region forecast at around 8 percent and most countries
expected to remain above 6 percent.17
With private equity and bank loans remaining the major forms of real estate
capital in the region, debt funding is expected to continue to support much of
the real estate investment immediate future. As one real estate executive put
it, Some of the major real estate funds have significant balance sheets and can
afford not to rely on loans, however, most real estate investment in Asia requires
debt, and this will remain the norm for some time to come.18
Real estate funds are a dominant source of real estate financing in Asia. With
many banks sitting on large amounts of fund capital awaiting allocation, the
region has become a key target. The opportunistic funds of the past that had
viewed Asia as high risk are starting to dwindle, and longer-term perspectives on
the sustainability of the regions real estate market are now prevailing.
The regions generally low interest rates are expected to continue to support the
activity of private equity in the region, as alternative sources of finance, remaining
the key source of finance over Asias emerging REIT and collateralised mortgagebacked securities (CMBS) markets.
Cross-border investments around the region are expected to continue to grow.
Much of this will be driven by diversification of global funds as managers view
Asia as a less opportunistic destination and local markets remain less attractive.
Debt may be less available globally this year, but equity is expected to remain in
healthy supply.
16 Economist Intelligence Unit, Nov 2007.
17 Economist Intelligence Unit, March 2008.
18 KPMG and FTSE interview with the regional director of a professional real estate services firm.
15
16
Public financing developing

Debt leverage in Asia remains the predominant form of real estate financing
however, this has primarily been supplied by banks. Although the securitisation
of real estate assets has brought additional liquidity and transparency to markets
and is often seen as an innovative financial product, it has not been without
problems. Under normal market conditions it spreads risk, however, what has
emerged in the US and Europe is often a lack of knowledge of where this risk
lies.
Asia on the other hand, has largely been sheltered from this recent problem, as
securitised financing has not yet properly taken off around the region. Where
it has, in the form of commercial mortgage-backed securities (CMBS), this has
mainly been in Japan, Australia and Singapore, which together account for over
90 percent of transactions in a relatively small market.19 Meanwhile Hong Kong,
Taiwan, Malaysia and China have begun to introduce CMBS albeit, tentatively
and even more risky products, such as collateralised debt obligations (CDOs),
are yet to even emerge in this part of the world.
One reason CMBS have not appeared in most parts of Asia rapidly, is the easier
availability of finance from private equity and REITs sources of finance that at
present meet most real estate financing needs. Although in time, it is expected
that CMBS will gain better traction around Asia as capital flows continue to
broaden. One investment banker commented thatSecuritised finance will
eventually become more prominent in Asia. Regulators will be careful given what
has happened in the US, but it will continue to emerge.
More and more countries have begun adopting REITs or REIT-like legislation in
recent years, and although REITs have been around for more than 30 years in the
US and Australia, it has been in the past five years that their growth has really
boomed around the world. Tax transparency plus mandatory high distributions
offered by REITs make them an attractive proxy for holding real estate.
Moreover, these factors underpin their liquidity as an asset class. ING Real
Estate explains the rationale for investing in REITs as being liquidity, competitive
total returns, diversification via low correlation to broad equities and bonds and
diversification by geography.20
Asian REITs have had an impressive start and have grown by a compound annual
growth rate between 2004 and 2007 of over 35 percent to reach a combined
value of over USD80 billion around 12 percent of the global value. Meanwhile,
a number of REITs around the world have been trading at above average
discounts to Net Asset Value, as they reflect the correction in real estate values
in certain markets.
Around Asia this trend has also emerged and with REITs being impacted by
continued yield compression, interest in them has declined recently. This has
led some market commentators to reappraise the prospects for REITs, while in
some cases triggering opportunities for merger and acquisitions.21
20 ING Real Estate Global Vision 2008.
21 KPMG and FTSE interviews with industry participants.
17
18
Outlook for real estate products in Asia
As US and European banks tighten lending to the real estate sector in response
to sub-prime lending problems, eyes have turned to Asia for new and continuing
opportunities. It is unlikely that Asia will be immune to these issues, but the
region will not be as severely impacted as the US and Europe.
Meanwhile, Asian real estate is emerging as its own growth engine. With
established markets such as Japan, Hong Kong and Singapore demonstrating
robust real estate fundamentals, many of the emerging markets such as China,
India and Vietnam, are also providing some, albeit more limited opportunities for
investors.
In this section, we take a look at three areas of real estate investment in Asia:
REITs, real estate funds and real estate derivatives. We discuss how global
trends are expected to impact these three areas over the remainder of the year
and how they will continue to contribute to Asias growing real estate sector.
Real Estate Investment Trusts22

Rapid growth has suddenly slowed
REITs in Asia have had a tough ride in recent months. With the tightening of
credit, yield compressions and differing views on the price of underlying assets,
many REITs have been trading at a price below their net asset value. This is a far
cry from their rapid growth over the past few years.
The first Asian REIT arrived in Japan in 2001, and the market grew at an
incredible rate from around USD 2 billion in 2001 to USD 82 billion six years later
and this is only the beginning of Asias REIT journey.
Growth, however, has been uneven around the region. Japan dominates, with
an estimated 54 percent of market cap at March this year, followed by Singapore
with around 28 percent. In terms of the number of REITs, Japan dominates again
with 42 of the markets 113 REITs, with Singapore and Thailand following behind.
22 The term REIT refers to both REITs and REIT-like structures.
Why has Asias REIT story been so successful? In essence, REITs appeal to
direct real estate investors by offering a range of benefits:
l
Diversification: REITs allow investors to invest in different properties in

various geographical locations, with a variety of lease terms and tenant profiles,
without the associated risks of owning the real estate.
Liquidity: REITs are a more cost-effective method of gaining exposure to real

estate due to their higher liquidity than investing directly in the underlying
asset, coupled with low transaction or holding costs. The liquidity benefit is
underpinned by tax transparency and the mandatory high distributions required
of REITs, which make them a proxy for holding real estate.
Efficiency: REITs in Asia are generally required to pay annual dividends of up

to 90 percent of earnings, limiting the impact of management discretion on
dividend returns to investors and encouraging a constant return to investors.
Asian REITs have typically started with single-geography and single-market

strategies. However, as they have gained success, many have started
diversifying into multiple geographies and markets. For example, approximately
one quarter of all REITs in Singapore and Hong Kong have assets outside in more
than one country.
Asset diversification can benefit the value and income of a REIT, providing assets
are valued expertly and properly managed with the aim of ensuring a stable cash
flow, not only growth. On the other hand, geographic diversification can bring the
risk of managing exchange controls when transferring cash, and valuations dont
always reflect this.2
Number of REITs by country, 2001-Q1 2008
120
100
80
60
40
20
2000
2001
2002
Japan
Singapore
Hong Kong
South Korea
2003
Thailand
2004
2005
Malaysia
2006
2007
Q1 2008
Taiwan
Source: Bloomberg, APREA

23 Fitch REITS: Singapore and Hong Kong June 2007.
19
20
Market cap by country, 2001-Q1 2008 (USD billion)

90
80
70
60
50
40
30
20
10
2000
2001
2002
Japan
Singapore
Thailand
South Korea
2003
2004
Hong Kong
2005
2006
Taiwan
2007
Q1 2008
Malaysia
Source: Bloomberg, APREA
Top 10 REITs in Asia by market cap, 31 March 2008

S/N Name
Ticker
Nippon Building Fund Inc
8951 JP Equity
Japan Real Estate Investment Corporation
Market Cap
(USD billion)
Country
Date of
establishment
6.85
Japan
9/10/2001
8952 JP Equity
5.15
Japan
9/10/2001
Link Reit
823 HK Equity
4.79
Hong Kong
11/25/2005
Capitamall Trust
CT SP Equity
4.17
Singapore
7/17/2002
Fortune Reit
FRT SP Equity
3.02
Singapore
8/12/2003
Japan Retail Fund Investment Corporation
8953 JP Equity
2.44
Japan
3/12/2002
Ascendas Real Estate Investment Trust
AREIT SP Equity
2.29
Singapore
11/19/2002
Capitacommercial Trust
CCT SP Equity
2.24
Singapore
11/5/2004
Nomura Real Estate Office Fund
8959 JP Equity
2.16
Japan
12/4/2003
10
Japan Prime Realty Investment Corporation
8955 JP Equity
2.06
Japan
6/14/2002
Source: Bloomberg
Stable performance
On the whole, Asian REITs have performed well over the last few years, making
recent declines all the more noticeable. Average REIT yields since the second
quarter of 2006 have been around 4.3 percent in Singapore, 3.3 percent in Hong
Kong and 3.1 percent in Japan. This compares favourably against average nonREIT real estate yields of 1.2 percent in Singapore, 2 percent in Hong Kong and
0.5 percent in Japan for the same period.24
In the past nine months, REITs have been significantly impacted by changing
market conditions, with many selling at prices considerably below their net asset
values. As liquid investments, REITs are hit more immediately when market
sentiment changes.
21
REITs have been sold off quite

severely it appears to be
an overreaction given in Asia
they derive 100 percent of their
earnings from relatively low risk
contracted rentals.
Many real estate fund managers interviewed for this report held the view that
their inability to retain earnings has made them vulnerable, but as Asian REITs
require income from rental (unlike some other REITs globally), having good
underlying assets is of benefit. If [the REIT] has good underlying investments,
they should be able to maintain earnings, commented one REIT manager in
Singapore.25
Matt Nacard,
Executive Director,
Macquarie Capital
Securities
However, despite the general view of interviewees that real estate fundamentals
are solid in most markets in Asia and that many REITs have good underlying
assets, current performance is bringing into question the sustainability of some
of the smaller REITs, which may lead to consolidation in some markets.
Market sector focus
Geographic focus
Residential
Office
Industrial
Top shareholder
Retail
Japan
Japan Trustee Services Bank
Japan
Hong Kong
The Childrens Investment Fund Management
Singapore
Capitaland Ltd
Hong Kong
Cheung Kong (Holdings) Limited
Japan
Singapore
Ascendas Land Singapore
Singapore & Malaysia
SBR Pte. Ltd
Japan
Japan
24 FTSE EPRA/NAREIT Japan, Hong Kong and Singapore REIT and Non-REIT Indexes.
25 KPMG and FTSE interview with a Singapore REIT manager.
22
Average quarterly REIT yields by country, Q1 2006-Q1 2008

8%
7%
6%
5%
4%
3%
2%
1%
0%
Q2 2006
Q3 2006
Q4 2006
Australia
Hong Kong
Q1 2007
Q2 2007
New Zealand
Japan
Q3 2007
Q4 2007
Q1 2008
Singapore
Source: FTSE EPRA/NAREIT REIT Index
Total REIT Index Returns by country, 2006-Q1 2008

2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
Mar 06
Sep 06
Mar 07
FTSE EPRA/NAREIT Hong Kong REIT Index

FTSE EPRA/NAREIT Singapore REIT Index
FTSE EPRA/NAREIT New Zealand REIT Index
Sep 07
Mar 08
FTSE EPRA/NAREIT Japan REIT Index

FTSE EPRA/NAREIT Australia REIT Index
Total Non-REIT Index Returns by country, 2006-Q1 2008

3,000
2,500
2,000
1,500
1,000
500
0
Mar 06
Sep 06
Mar 07
FTSE EPRA/NAREIT Hong Kong Non-REIT Index

FTSE EPRA/NAREIT Singapore Non-REIT Index
Sep 07
Mar 08
FTSE EPRA/NAREIT Japan Non-REIT Index

FTSE EPRA/NAREIT Australia Non-REIT Index
23
A temporary speed bump

REITs may have been the most immediately impacted by changing market
sentiment in Asia, but the general view of interviewees is that returns should
continue to be good over the remainder of the year.
Many REITs have taken a long-term perspective on their investments, and as
a result often have good underlying assets that provide a constant dividend to
investors. The recent exiting from many REITs does not necessarily reflect their
value and the REIT sector has an opportunity to outperform other classes of
securities over the remainder of 2008.
Long-term performance will ultimately depend on two factors: the quality of the
asset and the quality of the REIT manager.
However, negative market sentiment is expected to impact some REITs that may
be looking to list, as one Asian REIT manager commented: The timing may not
be right to list at the moment. Its not that they wouldnt provide returns, but the
markets a little shaky at the moment.
This has been seen recently as a number of REITs have delayed their listing
plans. For example, Singapores MacarthurCook REIT in January this year
announced a delay to its fund raising,26 while David Tan, chief executive of APL
Japan Trust Management, the manager of APL Japan Trust REIT, explained that
uncertainty was also causing them to delay. Even though the fundamentals of
our transaction are sound, there is a risk of post-listing price weakness as a result
of negative market sentiment, he remarked.27
Interviewees generally held the view that the full impact from the US credit crisis
should have worked its way through the system by the third quarter of this year,
with expectations that market sentiment in Asia will improve by end of the fourth
quarter or early 2009.28
Net Asset Value premium/discount by region, Nov 2007

20%
10%
0%
-10%
-20%
Japan REOCs
US
Coninental Europe
US
World
Singapore
Australia
Hong Kong
-40%
JREIT
-30%
Source: ING Real Estate Global Vision 2008
26 AFX Asia Singapores MacarthurCook REIT delays equity fund raising Jan 2008.
27 Financial Times Reit woes Nov 2007.
28 KPMG and FTSE interviews with industry participants.
REITs and private equity funds

require a good pipeline of
quality assets. If there is sound
management expertise in fund
managers to source, develop and
incubate assets to bring them to
their full performance potential,
they should be able to weather
the uncertainties this year.
Ng Hsueh Ling,
CEO,
Korea and Japan,
Ascendas
24
Consolidation a natural progression

Meanwhile, there has been some degree of expectation that consolidation
in some of the REIT markets will occur, in particular Japan and Singapore.
A director at an Asian real estate fund commented: Theres definitely an
opportunity for consolidation in the market, especially in more developed markets
like Singapore and Japan. Consolidation has started, with Jones Lang LaSalle
Inc gaining control of eAsset the first takeover in Japans REIT market.29
Other interviewees asked on the subject, generally agreed with this sentiment,
and added that Singapore may follow. One commented that, itll be later than
Japan, and to a smaller degree. Its a natural progression for any market.30
Consolidation will begin in
Japan. It wont necessarily be the
better performers taking over the
poorer performers. Well see a
combination of both the smaller
REITs going private as well as
the larger, more established
REITs taking over the newer less
established.
David Lewis,
Partner,
Real Estate,
KPMG in Japan
REITs will remain important going forward

Despite Asian REITs hitting a speed bump at the moment, their longer-term
outlook remains positive. One forecast sees Asias REIT market exceeding a
market capitalisation of USD 100 billion by 2010, with the following seen as key
reasons for this outlook:
l
The bulk of real estate in Asia is held in corporate hands, weighing heavily on
company balance sheets and calling into question its long-term sustainability.
India and Chinas growth will have cascading effects on regional economies,
irrespective of when they introduce their own REIT markets.
Asia has the lowest level of securitised real estate in the world with potential
to increase the level of securitisation of investment-grade real estate by four
times.31
There still remain a number of markets in Asia in the early stages of development
and others without REIT-like legislation in place.
With regards Asias two fastest growing economies, China and India, the view of
several interviewees was that India is likely to have REIT-like legislation in place
within two years, while China is likely to follow in the next three to four years.
This will help solidify Asias position in the global REIT market.
In addition, there has been increasing interest in Shariah-compliant financing
(see box) around Asia. The first Islamic REIT was listed in Malaysia in 2006, the
Al-Aqar KPJ REIT, launched by KPJ Healthcare Bhd with more than USD 130
million focused on investing in hospitals. Where Shariah-complaint investing
has at times been restrictive by typical investment bank approaches, REIT and
Shariah requirements are actually fairly compatible, making them an attractive
proposition.
29 Shanghai Daily Japan REIT market sees 1st takeover Nov 2007.
30 KPMG and FTSE interview with a director of a Singapore-based REIT.
31 APREA The Growth of REITs in Asia 2007.
Eventually, Asian REITs will be looking to gain experience from the Australian
market, where A-REITs (formally known as LPTs) have been in operation for
several decades. Australia is now one of the most mature REIT markets in
the world and its growth has been assisted by substantial investment from
Australias superannuation fund. Nearly 10 percent has been allocated to real
estate investments, with the result that A-REITs are worth more than USD110
billion today.32 More significantly, A-REITs experienced rapid growth followed by
a period of consolidation, a pattern that many other Asian REIT markets are now
following.
Shariah-compliant REITs
Shariah law governs all aspects of Muslim life, providing guiding principles for
moral and economic decisions. Of particular relevance to the financial world is
the prohibition against interest, known as riba, which is considered unearned
income and therefore unjust. In addition, the law prohibits areas for investment,
such as casinos or bars.
The requirements of Sharia law and REITs are fairly compatible. The only
difference in a Shariah-compliant REIT is the use of the ijara (lease financing).
With an ijara, the REIT would lease property from the title holder and pay
money upfront for the purchase price. Economically, the REIT is the same
as the owner, and for tax purposes the REIT owns the property. However,
because this is styled as a lease and treated as a lease for Islamic purposes,
the REIT can be Shariah compliant.
This compatibility has opened up a number of opportunities for investors. With
around 45 percent of the worlds Muslims living in Asia, the development of
Shariah-compliant REITs provides viable alternative opportunities for Islamic
investment.
Source: Michele Lerner Shariah Compliance Opens Doors for Islamic REITs March 2006
Real Estate Funds

The dominant investors
Real estate funds remain the dominant source of capital for real estate
investments in Asia, and this look set to continue. An increasing number of
real estate funds have been active in Asia, with the majority of Watson Wyatts
Top 30 real estate funds list being present in the region. As the director of
one professional real estate services firm commented, Weve seen a growing
number of US and European funds take an interest in real estate in Asia over the
past five years many of which have been very successful.
25
The opportunity for REITs in

Asia is huge, as shown by the
success of the Singapore REIT
market in recent years. Korea and
Thailand now have nascent REIT
markets while the Philippines and
India have REIT legislation under
discussion. And this is before
taking into account the massive
potential of China-based REITs.
Andrew Weir,
Partner in Charge,
Property and
Infrastructure,
KPMG China
26
A considerable amount of
private equity real estate
opportunity fund capital has been
raised by major investment banks
and others over the past couple
of years. Much of this remains to
be invested and much is targeted
on Asia. Little has changed in the
outlook for Asia.38
Real estate funds have generally approached investing around the region in two
ways. The first is opportunistic funds, which are typically looking for high capital
growth, often focusing on such markets as India, China and Vietnam. The second
is long-term funds, which are typically seeking assets with the potential to
provide steady longer-term returns from rents.
Asias ability to provide a platform for different types of investors is testament to
its growing maturity. Opportunistic investors have been making returns alongside
funds looking for steadier returns.
Top 30 real estate funds
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
Name
Main country of domicile
RREEF
AEW Capital Management
ING Real Estate
JPMorgan Asset Management
LaSalle Investment Management
UBS AG/UBS Global Asset Management Real Estate
AMVESCAP
Hermes Pensions Management
Hetiman
Oppenheim Immobilien-Kapitalanlagesellschaft
Standard Life
Arlington Securities
Morley Fund Management
Rockspring Property Investment Managers
Schroders
BlackRock
Russell Investment Group
Cushman & Wakefield Investors
Credit Suisse
Morgan Stanley
Lend Lease
DTZ Investment Management
Henderson Global Investors
GE Asset Management
Scottish Widows Investment Partnership
Cohen & Steers Capital Management
Kempen Capital Management
Perennial Investment Partners
The Bank of New York Company
Prudential M&G
United States
United States
Netherlands
United States
UK/US
United States
United States
United Kingdom
United States
Germany
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United States
United States
United Kingdom
Switzerland
United States
Australia
United Kingdom
United Kingdom
United States
United Kingdom
United States
Netherlands
Australia
United States
United Kingdom
Source: Watson Wyatt Global Alternatives Survey 2007
33 ING Real Estate Global Vision 2008.
AUM (USD billion)

38.9
38.5
37.4
36.3
29.5
20.9
18.6
16.2
14.6
12.7
11.0
9.7
8.2
8.1
8.1
7.7
7.6
6.4
6.0
5.2
4.6
4.3
4.0
3.5
3.4
3.4
3.4
2.6
2.6
2.5
Investment in Asia by real estate funds is expected to continue to grow,

maintaining its position as the key source of capital for the region. A director in a
US real estate fund remarked: With the tightening of credit around the region,
real estate funds will remain one of the key sources of capital flow for many
investments. Respondents to a survey conducted by the Urban Land Institute34
were of the view that Private Equity/Opportunity/Hedge Funds and Institutional
Investors/Pension Funds are to remain the two main sources of equity capital for
the region, anticipating a large increase this year.
Recent market downturns do not appear to have dampened interest in Asian real
estate with new funds being invested into, for example MGP Asia III Fund35 and
CalPERS.36 The US and European funds are not the only ones bringing capital
into Asia, as Australian funds are also investing heavily in the region. With its
compulsory superannuation pension scheme mandating an allocation of 8 percent
in real estate, Australia is becoming a significant investor beyond its own shores.
It is estimated that Australian real estate funds acquired around USD 12 billion in
overseas assets in 2006.37
Meanwhile, private equity funds continue along their opportunistic path in Asia.
Most have focused on investing in the underlying assets and exiting through a
trade sale as opposed to listing, which has generally been easier for residential
assets versus commercial. However, many private equity funds have been
turning their attention real estate companies, which in some markets have been
looking for more immediate capital with banks tightening credit.
Asian funds have fared better
The average global performance of real estate funds dropped significantly from
over 33 percent gain in 2006 to a 14 percent loss in 2007. Research by AME
Capital also showed that real estate funds with an Asian mandate did not fare
much better, with 2007 returns of only 0.25 percent.38
The AME Capital analysis was based on the performance of 685 real estate funds
of varying geographic mandates with a combined value of around USD 170 billion
and a median fund value of USD 79 billion.
Asian mandates had managed to withstand much of the sub-prime crisis in 2007,
however, eventually market sentiment caught up and its fourth quarter results
significantly impacted the overall performance for the year. Despite the 2007
performance of Asian funds being nothing like their 25 percent returns in 2006,
other regions performed even more poorly, with European and US mandated
funds posting losses of 25 and 20 percent, respectively.
34
35
36
37
38
Urban Land Institute Emerging Trends in Real Estate in Asia Pacific 2008.
Australian Financial Review MGPA raring to go with new fund Nov 2007.
Australian Financial Review CaIPERS invests in Asia Nov 2007.
Urban Land Institute Emerging Trends in Real Estate in Asia Pacific 2008.
AME Capital Real Estate Securities Funds Jan 2008.
27
28
2007 returns, by mandate

Real estate securities funds, Dec 2007
Mandate
Dec 07 return
Q4 07 return
2007 12-mth return
European
-3.42%
-12.32%
-24.59%
Global
-4.21%
-11.14%
-14.38%
Global REIT
-2.12%
-12.25%
-14.82%
US
-4.35%
-13.28%
-20.06%
Australian
-7.14%
-13.06%
-9.31%
Asian
-1.64%
-6.97%
0.25%
Source: AME Capital Real Estate Securities Funds Jan 2008
Total returns by mandate, 2006-2007

50%
40%
30%
20%
10%
0%
-10%
2006 return
Asian
Australia
US
Global REIT
Global
-30%
Europe
-20%
2007 return
Source: AME Capital Real Estate Securities Funds Jan 2008
Some of the larger deals may be

impacted by reduced availability
of debt. But there are still plenty
of deals in the market it just
depends on whether you have the
right value-proposition. I dont see
it drying up landlords are still
selling off portfolio.40
A wait and see approach

The general view of interviewees is that most real estate funds are adopting a
wait and see attitude towards new investments in the market, at least for the
next couple of quarters. On the whole, availability of deals is considered to be
good, but issues lie with the high pricing of some of the deals and difficulty in
securing financing.39
On the whole, the approach of real estate funds in Asia depends on their attitude
to investing:
l
For opportunistic funds, a number of new distressed asset funds have

emerged, in particular from US real estate fund managers
While long-term funds are generally taking a wait and see approach
39 KPMG and FTSE interviews with real estate fund managers.

40 KPMG and FTSE interview with a European real estate fund manager.
However, despite many real estate funds holding back in terms of making
investments, many are still looking at deals: Were still looking, were just not
in a hurry. In particular, were waiting for some assets to be re-priced before we
make a move.41
Fund managers are expected to eventually start investing again, most likely in the
third and fourth quarters. Funds have money to spend. They can afford to wait
out the first two quarters, but will be looking to spend towards the end of the
year, said one US fund manager.42
Whether spending is triggered by decreases in sellers prices remains to be
seen, as many executives do not expect prices to decline until early 2009.
Despite many real estate funds taking a more cautious approach for the time
being, Asia holds a lot of potential for investment. The credit crunch will force
many banks to revisit their lending policies resulting in higher quality loan
portfolios and improved returns.
Real Estate Derivatives

The new big thing
Real estate derivatives are emerging in Asia, albeit on a small level. Allowing
investors to take instant positions on the real estate sector, real estate
derivatives do not require the investor to trade in the physical assets. This is
immediately attractive to investors as it allows them to increase or decrease
exposure instantly while not having the time lag of buying the underlying asset
and without the additional costs associated with such a transaction.
While other asset classes have developed derivatives markets, real estate has
lagged behind. The key reason is due to problems with developing an iron clad
measure for a markets performance. Reliable and universally-agreed data is
essential to the development of an index that can be used for derivatives trading,
followed by an infrastructure to support the trades.
Real estate derivatives were first introduced in the UK with a landmark threeyear all-real estate total return swap completed in late 2004. The UK market
has since grown six-fold from USD 620 million in 2005 to an estimated USD 3.6
billion in 2007, as demand has rapidly increased and products have become more
complex. From its first over-the-counter trade, the UK real estate derivatives
market now handles such products as inter-sector swaps, 1-2 year and 5-10 year
swaps, sub-sector swaps, options, as well as overseas swaps and spreads.
41 KPMG and FTSE interview with a European real estate fund manager.
42 KPMG and FTSE interview with a US fund manager.
29
30
This rapid development would not have been possible without the following core
fundamentals:
l
A reliable and accepted index
Standardised documentation, accounting and taxation treatments
An established administrative framework.
Continental Europe followed soon after, with the first total return swap
completed in France at the end of 2006, based on IPDs French Index, and a
total return swap in Germany based on IPDs DIX German Property Index in early
2007. Australia completed its first trade, a commercial real estate swap between
Grovsenor and ABN Amro in May 2007.
These trades demonstrate how other countries have benefited from the UKs
development. For example, Frances first swap was regionally-traded, as opposed
to the UKs all-real estate trade.
Testing the waters
Asia has not been too far behind. Hong Kong was home to Asias first real
estate derivatives trade, a one-year price return swap of less than USD 13
million conducted between ABN Amro bank and Sun Hung Kai Financial in
February 2007. It was small by global standards, but a move in the right direction.
Subsequent trades have followed, but have remained short one-year swaps due
to the high volatility of Hong Kongs residential real estate market.
These trades have been based on The Hong Kong University Real Estate Index
Series (HKU-REIS), developed between GFI-Colliers and Hong Kong University,
and comprises four residential indices: one covering the whole region and three
other regional sub-indices.
Meanwhile, a trade between Royal Bank of Scotland and Grosvenor took place in
Japan in July 2007, based on IPDs J-REIT monthly indicator, marking it the first
commercial real estate derivatives trade in Asia.
Challenges for new markets
A number of benefits can be gained from a successful real estate derivatives
market, in particular
l
Replicating real estate exposures without having to trade the physical asset,
thus saving on transaction costs, stamp duty, and time
Gaining sub-sector and region-specific exposures without needing to establish

portfolios of physical properties which may be tightly held
Speed and flexibility in selecting the size of real estate exposures
31
The ability to short real estate as an outright position or as part of an asset

allocation adjustment to a real estate portfolio.43
However, these benefits can only be realised when a number of challenges are
successfully overcome, from the buyer and seller sides, as well as the underlying
market.
l
Buy-side challenges: Buyers need the confidence that products will be fairly
priced on entry and exit, which underpins the necessity for an independent and
robust index to be in place as well as market makers (typically licensed banks)
to be active.
Sell-side challenges: Sellers are typically used to taking long exposure on

positions and will also need the confidence to take short or hedged exposures.
Market conditions: Real estate markets need to be sufficiently volatile for

investors to trade off one another frequently and generate liquidity. A relative
price-stable market is not necessarily attractive to traders.
Asia well positioned

Derivatives markets flourish when investors have differing views on the
market and trade against one another. As a result, Asia offers fertile ground for
derivatives traders since, as one senior vice-president of an investment bank
commented, Investors trade quickly in and out of real estate here (in Asia), and
opinions can range widely on markets even on specific cities.
Hong Kong is considered by some as one of the best markets in Asia for real
estate derivatives trading. With around 15,000 residential transactions per month,
it offers accurate index data and rapid swings in residential real estate prices
making a volatile market attractive.
Japan is also considered attractive due to divergent views on the future of the
market. One director of a professional real estate firm commented that You
have a difference of opinion about where Japans real estate market will go.
These are ideal conditions for traders.
It will still take time for Asia to fully develop real estate derivatives, and countries
such as China and India will remain some way off without reliable real estate
data.
For example, the FTSE EPRA/NAREIT Global Emerging Market Index is due for
release on 14 July 2008. With detailed coverage of the Asia Pacific Region, the
index will provide investors with more reliable data for their investments.
Still at an early stage in its development, real estate derivatives will eventually
emerge into a core financial product for the region.
43 AFMA Property Derivatives 2008.
The data and information

in markets around Asia is
improving. As a result, quality
indices are being developed for
the region which will support
the development of a property
derivatives market.
Fran Thompson,
Director,
Asia Pacific,
FTSE Group
32
About KPMG
KPMG is a global network of professional firms providing audit, tax, and advisory
services, with an industry focus. With more than 123,000 people worldwide, the aim
of KPMG member firms is to turn knowledge into value for the benefit of clients,
people, and the capital markets.
China
8th Floor, Tower E2
Oriental Plaza
1 East Chang An Avenue
Beijing 100738
China
Tel: +86 (10) 8508 5000
Hong Kong SAR
8th Floor, Princes Building
10 Chater Road
Central
Hong Kong
Tel: +852 2522 6022
Australia
10 Shelley Street
Sydney NSW 2000
Australia
Tel: +61 (2) 9335 7000
Japan
Marunouchi Trust Tower North
8-1 Marunouchi 1-chome
Chiyoda-ku
Tokyo 100-0005
Japan
Tel: +81 (3) 3266 7233
Singapore
16 Raffles Quay #22-00
Hong Leong Building
Singapore 048581
Tel: +65 6213 3388
At KPMG, we are committed to providing quality service to our clients. KPMGs

Global Real Estate and Construction group is represented in all major international
markets, with industry knowledge and training shared among member firms, thus
enabling them to assist clients in recognising opportunities and implementing
changes necessitated by industry developments.
Audit
Clients look to KPMG member firms to provide independent and objective
assurance on the reliability of financial information for statutory, management,
and external capital raising purposes. We have extensive experience and
knowledge in initial public offerings and capital raising exercises in the Property
sector in local and international markets including REITs, listed and unlisted
funds. Our US Capital Markets Group, located in China, helps facilitate SEC filing
reviews in the US Capital markets.
Tax
KPMGs tax professionals analyse organisations and proactively identify taxrelated opportunities and challenges. Services included tax restructuring, tax
compliance and planning, tax due diligence, indirect taxes, transfer pricing,
international executive services, regulatory, and foreign exchange.
Advisory
Risk Advisory Services
Our Risk Advisory Services focus on key risk areas accounting and reporting,
information, operations, finance and treasury, regulatory compliance and controls
to consistently help organisations manage those risks and improve on
business effectiveness.
Our Internal Audit Services (IAS) focus on the areas of internal audit, corporate
governance reviews, business risk management, process reviews, management
reporting, procedures and controls. Our IAS professionals can help organisations
to maintain effective and efficient controls, which are designed and functioning to
manage organisational and strategic risk.
Financial Advisory Services
Our Financial Advisory Services focuses on four core service areas Transaction
Services, Corporate Finance, Restructuring Services, and Forensic. Our services
includes deal origination, transaction evaluation, deal structuring, financing
options, modelling support, negotiation and completion, post-deal integration, and
IPO/trade sale exit.
About FTSE Group
FTSE Group is a world-leader in the creation and management of indexes. With

offices in Beijing, London, Frankfurt, Hong Kong, Madrid, Paris, New York,
San Francisco, Boston, Shanghai and Tokyo, FTSE Group services clients in 77
countries worldwide. It calculates and manages the FTSE Global Equity Index
Series, which includes world-recognised indexes ranging from the FTSE AllWorld Index and the FTSE4Good series, as well as domestic indexes such as
the prestigious FTSE 100. The company has collaborative arrangements with
the Athens, AMEX, Cyprus, Euronext, Johannesburg London, Madrid, NASDAQ,
Singapore and Taiwan exchanges, as well as Nomura Securities and Xinhua
Finance of China. FTSE also has a collaborative agreement with Dow Jones
Indexes to develop a single sector classification system for global investors.
Hong Kong
59th Floor
The Center
99 Queens Road Central
Hong Kong
Tel: +852 2230 5800
Fax: +852 2230 5804
FTSE indexes are used extensively by investors world-wide for investment

analysis, performance measurement, asset allocation, portfolio hedging and for
creating a wide range of index tracking funds. Independent committees of senior
fund managers, derivatives experts, actuaries and other experienced practitioners
review all changes to the indexes to ensure that they are made objectively and
without bias. Real-time FTSE indexes are calculated on systems managed by
Reuters. Prices and FX rates used are supplied by Reuters.
Sydney
Level 29, Chifley Tower
2 Chifley Square
Sydney NSW 2000
Australia
Tel: +61 9293 2866
Fax: +61 2 9293 2828
Tokyo
Yamato Seimei Building 10F
1-1-7 Uchisaiwaicho
Chiyoda-Ku
Tokyo 100-0011
Japan
Tel: +81 (3) 3581 2764
Fax: +81 (3) 3592 8590
33
34
About APREA
The Asian Public Real Estate Association (APREA) is the leading professional body
representative of the publicly traded real estate sector in Asia.
APREA is a non-profit industry association that works to encourage greater

investment in the listed real estate sector in Asia Pacific through the provision
of better information to investors, improving the general operating environment,
encouraging best practices and unifying and strengthening the industry.
13 Amoy Street #02-01
Far East Square
Singapore 049955
Tel: +65 6438 1110
Fax: +65 6438 5550
e-Mail: info@aprea.asia
www.aprea.asia
APREAs mission is to:

l
Promote the listed real estate sector in the Asia Pacific region to domestic and
foreign investors
Develop a unified and powerful professional industry body
Represent the sector to governments and regulators to improve the

commercial operating environment for members.
Based in Singapore, its membership comprises listed real estate companies,

listed real estate trusts, unlisted property funds, investment managers,
investment banks, property securities fund managers, institutional investors, real
estate consultants, corporate advisors, stockbrokers, investment advisors and
universities.
The APREA Institute, APREAs education and training arm, provides the
foundation for raising standards in the industry through the provision of practical
and applied training programs. Its Certificate of Real Estate Investment Finance
program is the only course of its kind in the region to be both developed and
delivered by industry practitioners.
APREAs achievements in education and information dissemination, and focus on
improving the general real estate operating environment, have firmly entrenched
it as the leading representative body for the industry in the region. In particular,
its achievements in driving regulatory improvements within the listed real
estate trust sector extend beyond existing markets and pave the way for the
emergence of new markets in other Asian countries.
APREA membership is the gateway to a network of the industrys most
influential decision makers and provides the opportunity to influence and
participate in the development of the real estate markets in Asia.
Notes
35
36
Notes
The information contained herein is of a general nature and is not intended to address the
circumstances of any particular individual or entity. Although we endeavour to provide accurate
and timely information, there can be no guarantee that such information is accurate as of the date
it is received or that it will continue to be accurate in the future. No one should act upon such
information without appropriate professional advice after a thorough examination of the particular
situation.
2008 KPMG, a Hong Kong partnership

and a member firm of the KPMG network
of independent member firms affiliated with
KPMG International, a Swiss cooperative.
All rights reserved. Printed in Hong Kong.
KPMG and the KPMG logo are registered
trademarks of KPMG International, a Swiss
cooperative.
Publication date: May 2008
www.kpmg.com.cn
www.kpmg.com.hk

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Real Estate Investment in

Asia Pacific: Migrating capital

The significance of real estate investment in Asia

Outlook for real estate products in Asia

About FTSE Group

Property investment has emerged as an asset class, but it remains difficult to

Real Estate Investment in Asia Pacific: Migrating capital

Real Estate Investment in Asia Pacific: Migrating capital

Real Estate Investment in Asia Pacific: Migrating capital

The significance of real estate investment in Asia

real estate equities are

End of a debt-driven era

Global real estate value, 2007 (USD billion)

Listed real estate

Source: EPRA, 2008

Real Estate Investment in Asia Pacific: Migrating capital

Source: RREEF Asia Pacific Real Estate Outlook 2008

Global direct commercial real estate investment, 2003-2007 (USD billion)

Jones Lang LaSalle, March 2008.

Real Estate Investment in Asia Pacific: Migrating capital

FTSE EPRA/NAREIT Global Index

FTSE EPRA/NAREIT Asia Index*

* includes Australia and New Zealand

FTSE EPRA/NAREIT Real Estate Index, 2001-Q1 2008

Global Rental Index

* includes Australia and New Zealand

RREEF Asia Pacific Real Estate Outlook 2008.

Real Estate Investment in Asia Pacific: Migrating capital

Global Non-Rental Index

Annual returns by global asset class, 1998-2007

Direct real estate

Source: RREEF Asia Pacific Real Estate Outlook 2008

2008: Time to slow down

ING Real Estate Global Vision 2008.

Jones Lang LaSalle press release, March 2008.

Real Estate Investment in Asia Pacific: Migrating capital

Direct real estate returns, 2007 and 2008

Source: RREEF Asia Pacific Real Estate Outlook 2008

The Asian story

KPMG and FTSE interview with a fund manager at an investment bank.

Real Estate Investment in Asia Pacific: Migrating capital

What you have is a balance of

Asia Pacific direct commercial cross-border transactions, 2006-2007 (USD billion)

Source: Jones Lang LaSalle Asia Pacific Property Digest Q4 2007

Real Estate Investment in Asia Pacific: Migrating capital

Healthy performance continues

FTSE EPRA/NAREIT Global and Asia REIT and Non-REIT Indexes,

FTSE EPRA/NAREIT Global REIT Index

FTSE EPRA/NAREIT Global Non-REIT Index

* includes Australia and New Zealand

Real Estate Investment in Asia Pacific: Migrating capital

Yields from rental properties by region, 2006-Q1 2008

FTSE EPRA/NAREIT Global Rental Index

FTSE EPRA/NAREIT Asia Rental Index*

* includes Australia and New Zealand

Yields from non-rental properties by region, 2006-Q1 2008

FTSE EPRA/NAREIT Global Non-Rental Index

FTSE EPRA/NAREIT Asia Non-Rental Index*

FTSE EPRA/NAREIT Non-North America Rental Index

* includes Australia and New Zealand

Direct real estate returns, 2006-2008F

Source: RREEF Asia Pacific Real Estate Outlook 2008

Real Estate Investment in Asia Pacific: Migrating capital

As with US and European markets, yield compression throughout Asia Pacific