the case for south east asia retail investment: structural

REF: PFIA – 8RPS2U

PREI ®

PRUDENTIAL REAL ESTATE INVESTORS

The Case for South East Asia Retail Investment: Structural Opportunity vs. Trading Strategy? FEBRUARY 2013

HENRY CHIN, PHD

HEAD OF RESEARCH AND STRATEGY, ASIA PACIFIC

[email protected]

ALAN CHOW

DIRECTOR OF RESEARCH

[email protected]


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1 REF: PFIA – 8RPS2U


Executive Summary

The Asia Pacific retail market is the world’s largest. The region’s retail sales rose from US$3.2 trillion in 2006

(31% of the worldwide total) to US$3.8 trillion in 2011 (41% of the total).1 The rate of growth during this period

was at least four times faster than in Europe or North America. When we think of the Asia Pacific region, the

big economies of Japan, China, India, and Australia often come to mind first. Within the Asia Pacific

landscape, South East Asia tends to be overshadowed by these bigger and more high profile players that

surround it. So is there a case to be made for retail investment in South East Asia? In this paper, we tackle

this question, and these are some of our findings:

Strong Demographics: The five core markets of South East Asia—Singapore, Malaysia, Thailand,

Indonesia, and Vietnam—had a combined population of 436 million in 2011, more people than either Europe

or the US. And the age structure in South East Asia is relatively young compared to these advanced

economies.

Economic Resilience: South East Asia generally weathered the recent Global Financial Crisis with less

collateral damage than might have been expected. The region’s economic contraction during this period was

short-lived and the subsequent rebound was impressive. Over the next five years the core South East Asian

economies are projected to grow by 4% to 7% per annum, a significantly faster pace of growth than is

expected in advanced economies.

Tourism Potential: South East Asia’s location boosts its prospects for luring tourists. First, China’s 1.3 billion

residents live immediately to the north. As China’s affluence grows, so too will outbound tourism, possibly on

a large scale. Second, Malaysia has already become a popular destination for affluent tourists from the Middle

East and this suggests a strategic direction that other countries in South East Asia could emulate.

Retail Market Maturity: The core markets of South East Asia offer a range of opportunities, depending on

investor appetite for risk and maturity. Global markets can be categorized along a sliding scale of maturity that

ranges from advanced (e.g., Australia, UK, US) to pre-institutional (e.g., Myanmar, Pakistan, Iraq). Within

South East Asia, Singapore is a mature retail market with attributes that are generally comparable to Hong

Kong, France, Japan, and Germany. Malaysia and Thailand are maturing, and they lag somewhat behind

Singapore. Vietnam and Indonesia are still emerging.

Investment Opportunities: South East Asia presents differing retail investment opportunities from country to

country. Opportunities can also vary significantly within countries. In emerging markets like Vietnam and

Indonesia, the focus should usually be limited to the major cities. In maturing markets like Malaysia and

Thailand, urbanization and improving infrastructure bode well for the retail scene in the central and fringe

areas of capital cities, and increasingly in second tier cities and resort areas outside the capitals. In mature

markets like Singapore, both central city and suburban retail are considered core investments which can

attract institutional investors.

1 Canadean and Market Research.com, The Future of Global Retailing to 2016, June 2012.

2 REF: PFIA – 8RPS2U


Table of Contents

Executive Summary .................................................................................................. 1

Part 1: Global Retail Trends and Structure .............................................................. 3

Market Maturity and Evolution ..................................................................................... 3

Global Retail Trends.................................................................................................... 5

Globalization and International Retailing .................................................................. 5

E-commerce ............................................................................................................ 8

Composition and Impact of Sales Growth Trends .................................................... 8

A Conceptual Framework of Factors Impacting Retail Property ................................. 10

Part 2: South East Asia Retail Market Analysis .................................................... 12

The Macro Environment ............................................................................................ 12

Macro Economy ..................................................................................................... 12

Demographics ....................................................................................................... 13

Labor Market ......................................................................................................... 14

Wealth Accumulation ............................................................................................. 15

Tourism ................................................................................................................. 16

Retail Competitiveness .............................................................................................. 17

Real Estate Fundamentals ........................................................................................ 18

Structure of the Regional Market ........................................................................... 18

Supply ................................................................................................................... 20

Demand ................................................................................................................. 20

Pricing ................................................................................................................... 22

Risk Considerations .................................................................................................. 24

Assessment of Retail Attractiveness ......................................................................... 26

Part 3: Opportunities and Conclusions ................................................................. 29

3


PREI ®


Part 1: Global Retail Trends and Structure

Market Maturity and Evolution

No assessment of a regional property market can begin without first understanding the market’s

context. All property markets fall along a continuum of structural progression. The least mature

markets are those with a limited stock of investment grade property. These markets consist largely of

small, owner-occupied shops, with few if any organized multi-store domestic retailers, let alone foreign

ones. Government policies in these markets can be both confusing and confounding, with potential

institutional investors deterred from even considering participation. Market information is scant, if it

exists at all. This is the beginning of the maturity spectrum, the starting point for progress. In South

East Asia, this is where Myanmar is today.

Far away, at the other end of the spectrum are a handful of markets—Australia, the UK, and the US

are among them—with high levels of liquidity, transparency, and organized participation by

institutional investors. Retailers are sophisticated and organized, and from their head offices, they

command multi-store formats that span national borders, languages, and local product preferences.

Policy frameworks in these markets offer multiple, clearly-defined modes of entry. Market information

providers are numerous and competitive. Modern, advanced retail centers form deep pools of

investible stock in these markets. The closest South East Asia gets to this level of retail market

maturity is Singapore.

Other markets in South East Asia fall midway along the spectrum. Emerging retail markets in

Vietnam, the Philippines, and Indonesia, for example, are ahead of Myanmar, but they lag behind the

maturing markets of Malaysia and Thailand. Exhibit 1 provides a framework for understanding how

South East Asian markets fit into the maturity spectrum in 2013.

4



1: MATURITY OF RETAIL MARKETS

Stage Definition / Features

Trans-parency

Major Formats

Main Entry Method

Retail Stock

Retailers Countries

PRE-INSTITUTIONAL

• Limited investment • Lack of organized shopping formats • Local owner- occupiers dominate

Opaque • Street shops • Domestic retailers dominate

• Difficult path to entry

Non-institutional

• Domestic retailers

Pakistan, Venezuela, Kazakhstan, Iraq, Laos, Myanmar

EMERGING • Middle class growing

• Consumers aware of retail formats

• Shopping districts emerge

Low Trans-parency

• Department stores

• Super-markets

• Modern retail in prime areas

• Local partner needed

Limited institutional grade stock

• Domestic retailers

• Foreign retailers (big cities)

Vietnam, Philippines, Indonesia, Mexico, Russia, India

MATURING • Surge of well-organized malls

• Domestic/foreign chains enter market

• Significant growth in retail sales

Semi-Transparent

• Shopping malls

• Hyper-markets

• Online sales

• Develop / acquire malls

• Local partner preferred

Development expands institutional stock

• Foreign retailers penetrate

• Strong retailer competition

• National brands emerge

Malaysia, Thailand, Poland, South Korea, China, Taiwan

MATURE • Retail property as institutional asset class

• Consumer affluence; liquidity still evolving

• Domestic/foreign retailer sophistication

Transparent • Mature retail formats

• Suburban shopping centers

• Acquire/re-position malls

• Develop without partner

• Indirect (debt, listed stocks)

Institutional grade stock

• Chain retailers expand into secondary locations and cities

Singapore, Hong Kong, France, Italy, Japan, Germany

ADVANCED INSTITUTIONAL

• High liquidity and transparency

• High discretionary spending

• High barriers to market entry (expensive)

Highly Transparent

• Big box / specialty shops

• Entertainment formats

• Competitive online sales

• Acquire malls • Multiple entry

options

Institutional grade stock

• High foreign retailer penetration (big cities)

US, Australia, UK

Source: Prudential Real Estate Investors Note: as of End 2012

The pre-institutional and emerging stages of maturity are less suitable for institutional real estate

investing. Even if an adequate retail opportunity can be identified, investments in these markets

generally involve various risks, including illiquidity, lack of transparency, identification and vetting of

local partners, unfriendly legal structures, and volatile fundamentals, especially on the supply side.

But maturity is a constantly evolving concept. Of course, markets themselves move through the

continuum of maturity, but even our definition of advanced maturity is a moving target. Downtown

department stores once sat at the top of the retail spectrum. Then came suburban malls. Today our

notion of advanced retail markets has moved toward specialty shops, retail warehouses, and

entertainment-themed centers.

South East Asia currently lacks markets that are recognized as advanced institutional, but fast-paced

economic development is definitely pushing the region up the maturity spectrum (Exhibit 2). South

East Asian markets are quickly becoming more urbanized and consumers have more disposable

income to spend. Organized retailers, both domestic and international, are watching South East

Asia’s progress closely, as are institutional investors. Incremental institutionalization is creating new

opportunities. In the maturing markets, for example, where institutionalization is nascent, a convenient

5



point of entry is development of modern retail stock. In those markets that are already considered

mature, optimal strategies might also include acquisition of existing malls.

Advanced maturity may eventually become widespread in South East Asia, but for now the

opportunities in this segment of the market—things such as the development of retail ―big box‖

stores—remain limited. South East Asia’s retail properties, both prime and suburban, are often tightly

held by their owners. This translates to fewer market transactions, and thus constraints on liquidity.

2: EVOLUTION OF RETAILING

Source: Prudential Real Estate Investors

Global Retail Trends

Globalization and International Retailing

More than half of the world’s 250 largest retailers sell fast-moving consumer goods (FMCG). Deloitte

defines these as consumer staples such as food, beverages, drugs, and general mass merchandise.2

The low-margin, high-turnover product mix of these retailers pulls in about two-thirds of revenues

produced by the top 250 global chains (Exhibit 3). FMCG retailers are surprisingly insular, especially

North American ones, and have so far been the least likely of major retailers to enter markets abroad.

Those FMCGs that have stepped across borders, especially European hypermarkets, have

significantly broadened their revenue streams.3 These types of price competitive retailers dealing in

basic necessities tend to do best during sluggish economic times. Other types of retailers, especially

those dealing in luxury-type goods, tend to perform better when discretionary incomes are expanding.

2 Deloitte, Switching Channels: Global Powers of Retailing 2012, January 2012, p. G25.

3 Deloitte, Switching Channels: Global Powers of Retailing 2012, January 2012, p. G26.

domestic

Economic development & foreign

Urbanization domestic

Consumer spending capacity & foreign

Retail market

domestic

& foreign

domestic

domestic

ADVANCED

Retailers

LIFESTYLE← →INDEPENDENT ← → CHAIN

↓

↑

NECESSITIES Consumers

Shopping malls

High street shops

LOW / IMMATURE

HIGH / MATURE

PRE-INSTITUTIONAL EMERGING MATURING

← potential for institutionalization →

Grocery stores

Street shops

High street shops

Department stores

Shopping malls

(prime & suburban)

Specialty shops

Retail warehouses

Themed centers

MATURE

6



3: DISTRIBUTION OF TOP 250 GLOBAL RETAILERS BY PRODUCT SECTOR, 2010

by number of companies by sales volume

Source: Deliotte (2012) Note: as of Jan 2012

Globalization among the world’s top 250 retailers can be measured by the level of foreign market

penetration. According to Deloitte4, these top retailers brought in nearly a quarter (23%) of their

revenues from outside their domestic markets, and on average, their store operations spanned at

least eight markets (Exhibit 4). European retailers were among the most active in this group. They

have reduced dependence on domestic markets. Given the recent economic situation in Europe,

diversification across global markets is probably not a bad thing. Take Spain’s apparel retailer Zara,

for example. Even though Spain has recently been mired in recession, Zara operates more than

1,700 stores in 87 different countries.5 Zara’s Spanish parent company, Inditex, S.A., ranked 49

th on

Deloitte’s list of the top 250 retailers, with compound annual global sales growth of 13.2% over the

2005-2010 period.6

Zara’s strategy is typical but not universal among the top 250 global retailers. At least two in five of

these companies (40%) generate no revenues outside their own domestic markets. Many of Japan’s

largest retailers have chosen this path. On average, the leading Japanese retailers operate in only 2

or 3 countries and bring in just 6.7% of retail sales from their overseas operations. Compared to

European retailers, both Japanese and US retailers have shown more reluctance to expand their

footprints abroad.

4 Deloitte, Switching Channels: Global Powers of Retailing 2012, January 2012.

5 http://inditex.com/en/who_we_are/concepts/zara accessed 20 December 2012.

6 Deloitte, Switching Channels: Global Powers of Retailing 2012, January 2012, G31.

Fast-Moving

Consumer Goods53.2%

Fashion15.2%

Hardlines & Leisure

21.6%

Diversified10.0%

Fast-Moving

Consumer Goods66.6%

Fashion8.0%

Hardlines & Leisure

15.6%

Diversified9.8%

http://inditex.com/en/who_we_are/concepts/zara

7



4: FOREIGN PENETRATION OF TOP 250 GLOBAL RETAILERS

Source: Deliotte (2012) Note: as of Jan 2012

CBRE surveyed 326 major international retailers in 73 countries in 2012.7 Exhibit 5 shows 18 of the

retail markets where penetration rates among international retailers were highest. Four Asian markets,

including one South East Asian market, were among this group. Advanced economies like the UK and

the US have among the highest shares of international retailers present. In the Asia Pacific region,

China ranks highest, followed by Hong Kong, Singapore, and Japan. Relatively strong retail sales

growth (and an increasing level of personal income) will continue to attract international retailers to

China. Russia, Hong Kong, Turkey, Saudi Arabia, Singapore, and Poland are among the other

markets with retail sales growth of at least 3% per annum during 2000 to 2012.

5: LEADING MARKETS FOR GLOBAL RETAILER PENETRATION

Note: Size of bubble represents disposable income per head. Asian markets are shown in blue. Source: CBRE; EIU. Note: as of 4Q 2012

7 CBRE, How Global is the Business of Retail?, April 2012.

Region/Country Number Foreign Sales (%) Mkts./Retailer (avg.) Domestic Only (%)

Global 250 23.4% 8.2 40.4%

North America 91 ██████████████████ 14.3% ███ 7.0 ███ 53.8% █████████████

USA 81 ████████████████ 14.3% ███ 7.6 ███ 49.4% ████████████

Europe 88 █████████████████ 38.9% █████████ 14.9 ███████ 18.2% ████

Germany 19 ███ 42.6% ██████████ 13.6 ██████ 10.5% ██

UK 15 ███ 24.1% ██████ 16.6 ████████ 20.0% █████

France 13 ██ 44.6% ███████████ 30.3 ███████████████ 0.0%

Asia Pacif ic 53 ██████████ 10.4% ██ 3.3 █ 58.5% ██████████████

Japan 38 ███████ 6.7% █ 2.6 █ 68.4% █████████████████

Latin America 10 ██ 19.3% ████ 2.1 █ 50.0% ████████████

Africa / Middle East 8 █ 15.0% ███ 9.8 ████ 40.4% ██████████

CAN

ESP

AUT

BEL

CHN

CZEFRA

DEU

HKG

POL

RUS

SAUSGP

CHE

TUR

USA

ITA

GBR

JPN

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8

9

10

11

12

13

30% 35% 40% 45% 50% 55% 60%

Share of Global Retailers Present (%)

Retail Sales Growth, % p.a.

8



E-commerce

Another force transforming the retailing sector is e-commerce. As internet access and usage has

surged around the world, there has been a corresponding rise in online retail sales (Exhibit 6). This

does not necessarily mean that retail space along the world’s high streets is shrinking, but e-

commerce is forcing retailers to rethink the way they manage their traditional retail space in this new

environment of cross-channel sales. Asset managers have become more aware of ―show rooming‖ as

a key feature of high street retail spaces. Meanwhile, structural change in retail supply-chain

management has contributed to a rise in logistics demand for large, built-to-suit properties. In South

East Asia, the limited capacity and quality of local logistics service in the near term has become an

emerging opportunity for property investors.

6: ONLINE SALES IN SELECTED MARKETS

USA Europe China

Source: U.S. Department of Commerce Note: as of End 2011

Source: www.marketed.com Note: as of End 2011

e= estimate Source: Knight Frank, CEIC Note: as of Nov 2012

Composition and Impact of Sales Growth Trends

In the US, non-store retail sales—this includes both online sales as well as catalog sales—have

outpaced the growth of traditional retail sales for many years. These non-store sales, however, tend

to be more volatile than traditional sales, most likely reflecting a heavier reliance on discretionary

consumer products. By comparison, US retail sales growth of foods and beverages over the same

period showed greater inelasticity, with year-over-year changes rarely moving outside the narrow

band of 0-5%, regardless of economic conditions (Exhibit 7).

Over the past 20 years, a similar pattern has emerged in Japan’s post-bubble environment. Sales

growth for foods and beverages has held up better than more discretionary choices such as

restaurants. This trend in the US and Japan is harder to discern in Singapore, where retail sales

across categories have tended to move with the changing economy. In the near term, Singapore’s

softening economy will likely limit overall retail sales growth, as consumers temporarily become more

selective. As Singapore’s retail market matures, it is likely to see its structural sales patterns converge

more distinctly with advanced markets like the US and Japan. In other words, necessity-driven sales

0

50

100

150

200

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

USD (billions)

0

50

100

150

200

250

300

350

400

450

2006

2007

2008

2009

2010

2011

EUR (billions)

0

200

400

600

800

1000

1200

2007

2008

2009

2010

2011

2012e

RMB (billions)

9



growth is likely to become more stable in the future than discretionary-driven sales growth. These

trends should, in turn, be reflected in the retail property market. (In fact, there is some evidence that

this is already happening in Singapore. This is discussed more in Exhibit 8.)

7: RETAIL SALES GROWTH BY FORMAT IN SELECTED MARKETS, % p.a.

USA Japan Singapore

Source: U.S. Census Bureau; Moody’s Analytics Note: as of Sep 2012

Source: Japanese Ministry of Economy; Japan Council of Shopping Centers Note: as of End 2010

Source: CEIC Note: as of Sep 2012

Retailers (and the specific products they sell) impact the success of retail properties. For owners and

managers, the tenant mix is a fundamental consideration. High-margin, low-volume fashion retailers,

for example, pay higher rents than low-margin, high-volume retailers like supermarkets. Property

owners and managers play a delicate game of finding the right tenant mix of discretionary and non-

discretionary retailers. To stabilize incomes in sluggish economic conditions, property managers have

an incentive to minimize volatility and lease up with retailers selling consumer staples. During

economic booms, it may be more tempting to attract retailers of apparel or luxury goods since they

can pay higher rents.

These trends play out in an example from Singapore’s Hougang Mall. There was a clear shift in the

tenant mix between 2004 and 2012 that reflected changing economic conditions. Favorable economic

conditions between 2004 and 2007 cleared the way for ample discretionary spending. As a result,

Hougang Mall attracted more fashion stores. But after the global financial crisis in 2008, consumer

spending shifted to more necessity driven products, so leasing at Hougang Mall began tilting toward

food and beverage retailers as the economy shifted. In a direct comparison of the tenant mix between

2004 and 2012, both of these patterns can be observed. Food and beverage retailers held just 14% of

the net leasable floor area at Hougang Mall in 2004, but this had climbed to 24% by 2012.

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Non-store retail (online/mail order)

Clothing & accessories

Food & beverages

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Restaurants & cafés

Clothes

Food & beverages

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

2005

2006

2007

2008

2009

2010

2011

2012

Department stores

Supermarkets

Food & beverages

10



Similarly, fashion retailers held just 10% of the mall’s space in 2004, but a surge of new leasing in

2004-2007 still left these tenants with more space (14%) in 2012 than they had before the full property

cycle began in 2004. As of 2012, food and beverage retailers were the most common type of tenant at

Hougang Mall. A quick comparison to CapitaMall Trust’s retail portfolio in Singapore shows a similar

pattern with food and beverages being the leading tenant type. In CMT’s case, the tenant mix is

calculated on gross rents rather than net leasable area, but the same basic pattern still prevails

(Exhibit 8).

8: EXAMPLES OF TENANT MIX IN SINGAPORE

Hougang Mall (retail asset example)

Distribution by net leasable area, 2004 vs. 2012

CapitaMall Trust (retail portfolio example)

Distribution by gross rent, 2011

Source: Prudential Real Estate Investors, CMT Note: as of 2Q 2012

A Conceptual Framework of Factors Impacting Retail Property

This paper has so far focused on the structural context of global retailing. Before analyzing and

assessing the potential of the South East Asian retail markets, a conceptual framework is necessary

to explain the process for evaluating retail real estate attractiveness. The drivers of performance fall

into three distinct dimensions (Exhibit 9):

The structural drivers are normally associated with the long-term changes. This includes the

macro environment as well as some retail-specific drivers of market competitiveness.

Cyclical factors—real estate fundamentals and performance—also impact the attractiveness of

retail property markets. Like other property sectors, retail real estate markets follow cyclical

patterns, with periods of constrained supply tending to be followed by bursts of new construction.

Before engaging in any transaction, the cautious and pragmatic investor must first understand a

market’s position in the current cycle, both in terms of market fundamentals (demand, supply,

vacancies, and rents) as well as market performance (pricing and returns).

14%

29%

10%

20%

8%

19%

Food & beverages

24%

Lifestyle & entertain-

ment20%

Fashion & related

14%

Depart-ment

stores & super-

markets13%

Beauty & health-

care12%

Other18% 2012

2004

Food & beverages

27%

Lifestyle & entertain-

ment12%

Fashion & related

20%

Depart-ment

stores & super-

markets11%

Beauty & health-

care9%

Other22%

2011

11



Beyond the structural and cyclical drivers of performance, investors must understand the risks

associated with investing in different retail markets. These risks include the volatility and pricing

of market performance. Institutional risks involve the economic and political maturity of sovereign

markets, as well as property-specific considerations such as transparency, liquidity, income

security, asset management, tenant relationships, and property positioning issues.

9: FRAMEWORK OF FACTORS THAT IMPACT RETAIL REAL ESTATE


The remainder of this paper includes an analysis of the South East Asian retail property market

following the framework outlined above in Exhibit 9.

Short-term cyclical driversLong-term structural drivers

Real estate cycles

Infrastructure Access/convenience

Affordability Retail space per capita

The macro environment Retail competitiveness

Supply New construction

Demand Take up Retail sales Retailer strategies

Market pricing Yields Spreads

Macroeconomy GDP

Demographic factors Working population Urbanization rates

Labour factors

Unemployment Job growth

Wealth indicators Disposable Income

Tourism indicators Country risk

Risk considerations

Volatility Pricing

Institutional risks Country risk Political / legal risk Transparency

Liquidity Retail real estate risks

Asset management Positioning

Retailer relationship Catchment area Trade mix

FRAMEWORK OF VARIABLES TO EVALUATE REAL ESTATE ATTRACTIVENESS

12



Part 2: South East Asia Retail Market Analysis

The Macro Environment

Macro Economy

The South East Asian economies are projected to grow by 4% to 7% per annum over the 2012-2016

period. This is a significantly faster pace of growth than is expected in advanced economies.

Singapore’s productive capacity—in essence, its wealth—has already pulled in line with the US,

Japan, and Western Europe as measured by GDP per capita. And Malaysia's GDP per capita

exceeds China and India by a relatively wide margin. Given these trends where are international

retailers likely to be seeking growth opportunities in the years ahead? Clearly, a fertile environment

exists for prime retail demand to grow in South East Asia in the years ahead. Add to this a surprisingly

massive population base. South East Asia’s 436 million residents in 2011 exceeded both the US and

Western Europe in size. Moreover, the region’s large population base tends to be younger than either

the US or Western Europe, where age cohorts are skewed in the other direction (Exhibit 10).

10: SOUTH EAST ASIA COMPARED TO THE REST OF THE WORLD

GDP 2011 (US$bn)

GDP per capita 2011 (US$)

GDP growth 2012-2016 (% p.a.)

Population 2011 (millions)

Population growth 2012-2016 (% p.a.)

Urban share 2011 (%)

South East Asia

Indonesia 847 3,448 6.3% 245.6 1.00% 54.9%

Malaysia 279 9,737 5.2% 28.6 1.30% 73.2%

Singapore 260 49,963 4.6% 5.2 2.64% 100.0%

Thailand 346 5,067 5.0% 68.2 0.64% 34.4%

Vietnam 124 1,400 6.9% 88.7 0.98% 29.3%

Rest of Asia Pacific

China 7,053 5,343 8.1% 1,320 0.44% 45.9%

Japan 5,871 46,409 1.3% 126.5 -0.36% 67.0%

India 1,897 1,578 7.9% 1,202 1.46% 30.4%

Australia 1,487 66,010 3.0% 22.5 1.42% 89.3%

Korea 1,092 21,998 3.8% 49.6 0.14% 82.1%

Taiwan 467 20,235 3.9% 23.1 0.14% 80.0%

Hong Kong 243 34,107 4.1% 7.1 0.38% 100.0%

Other regions

Western Europe 17,288 42,186 0.9% 409.8 0.38% 77.1%

USA 15,094 48,208 2.2% 313.1 0.96% 82.6%

Source: EIU Note: as of 3Q 2012

Indonesia and Vietnam, only marginally integrated with the rest of the world economy, have easily

weathered recent external disruptions, including the global financial crisis and Europe’s sovereign

debt crisis. These same events had a different impact on South East Asia’s more mature economies.

External shocks, for example, contributed to sharp, but relatively short, corrections in Singapore and

Thailand. Looking forward, recent forecasts for medium-term economic growth in South East Asia

appear favorable. (Exhibit 11).

13



11: GDP GROWTH

Source: EIU Note: as of Nov 2012

Demographics

Increasing rates of urbanization bring profound structural changes across a number of fronts:

Economic. Urban labor pools are larger, denser, and more diverse, something that works to the

advantage of employers as well as those seeking jobs. In this environment, productivity and

incomes rise and so does spending.

Social. Urban areas integrate diverse groups of residents and visitors, creating a social and

cultural environment that can influence fashions, entertainment, and ultimately spending

patterns.

Political. Urban areas also wield political power, providing a voice for concentrated public

investments in infrastructure such as airports, transit systems, hospitals, and universities.

All of these structural impacts stem from urbanization, and all of them—economic, social, and

political—shape the retail property markets in one way or another. If higher urbanization, for example,

translates into more retail spending, then there is likely to be an increase in demand for retail space.

The urbanized share of South East Asia’s population jumped from 25% in 1980 to 50% today. If

current population trends continue, the urbanization rate will reach 75% by 2050 (by comparison, the

urbanization rate in the US is currently 83%). At this rate, the size of the urbanized population in

South East Asia would grow by a net 300 million over the next four decades. The city-state of

Singapore is already fully urbanized, but other countries within the region hold a great deal of

potential for urban expansion (Exhibit 12).

0

2

4

6

8

10

12

14

16

2010

2011

2012e

2013f

2014f

2015f

2016f

%

Indonesia

History

Forecast

0

2

4

6

8

10

12

14

16

2010

2011

2012e

2013f

2014f

2015f

2016f

%

Malaysia

History

Forecast

0

2

4

6

8

10

12

14

16

2010

2011

2012e

2013f

2014f

2015f

2016f

%

Singapore

History

Forecast

0

2

4

6

8

10

12

14

16

2010

2011

2012e

2013f

2014f

2015f

2016f

%

Thailand

History

Forecast

0

2

4

6

8

10

12

14

16

2010

2011

2012e

2013f

2014f

2015f

2016f

%

Vietnam

History

Forecast

0

2

4

6

8

10

12

14

16

2010

2011

2012e

2013f

2014f

2015f

2016f

%

Asia Pacific

History

Forecast

0

2

4

6

8

10

12

14

16

2010

2011

2012e

2013f

2014f

2015f

2016f

%

China

History

Forecast

0

2

4

6

8

10

12

14

16

2010

2011

2012e

2013f

2014f

2015f

2016f

%

US

History

Forecast

14



12: KEY DEMOGRAPHIC INDICATORS

Urbanization rates Working age population (% of total)


Labor Market

With solid rates of job growth projected for South East Asia in the coming years (all of the markets in

the region except Thailand are expected to add jobs at a faster pace than the US), retailers have

reason to be considering expansion. Singapore and Malaysia are expected to lead the region’s job

growth over the 2012-2016 period. Corresponding unemployment rates are expected to be below the

historical averages experienced since the mid-1990s. Emerging markets like Indonesia, and to a

lesser extent Vietnam, are expected to experience significant improvements in their respective

unemployment rates (Exhibit 13).

60

62

64

66

68

70

72

74

76

78

80

2007

2008

2009

2010

2011

2012e

2013f

2014f

2015f

2016f

%forecast

20

30

40

50

60

70

80

90

100

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012e

2013f

2014f

2015f

2016f

%

Indonesia

Malaysia

Singapore

Thailand

Vietnam

China

US

forecast

15



13: KEY LABOR INDICATORS

Employment growth (% per annum ) Unemployment rate (% per annum )


Wealth Accumulation

Disposable incomes provide a reasonable basis for measuring and comparing consumer spending

power. Singapore’s disposable income per capita (estimated by the Economist Intelligence Unit at

around US$23,700 in 2012) is on a scale that is out of line with the rest of South East Asia. Compare,

for example, Singapore’s disposable income level to Vietnam’s US$600 in 2012. Nevertheless, the

vector is the same across the entire region. Disposable incomes are projected to grow in all five major

markets in South East Asia over the 2012-2016 period. Some markets are expected to see significant

improvements in disposable income growth rates (Indonesia, Malaysia). Others will maintain steady

growth (Singapore, Thailand). Only Vietnam is expected to see gradual deceleration of in the pace of

annual growth (Exhibit 14).

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2011

2012e

2013f

2014f

2015f

2016f

%

IndonesiaMalaysiaSingaporeThailandVietnam

Asia PacificChinaUS

forecast

0

1

2

3

4

5

6

7

8

2012e

2013f

2014f

2015f

2016f

2012e

2013f

2014f

2015f

2016f

2012e

2013f

2014f

2015f

2016f

2012e

2013f

2014f

2015f

2016f

2012e

2013f

2014f

2015f

2016f

Indonesia Malaysia Singapore Thailand Vietnam

%

ForecastHistorical average (1995-2011)

16



14: DISPOSABLE INCOME PER HEAD (US$)


Tourism

Markets that generate increases in disposable incomes and domestic consumer spending can expect

to see their retail markets grow. Adding in the extra spending from cross-border tourists is an added

bonus for the tourism sector. Singapore, constrained by its size and lack of natural features, has

opted for a Las Vegas-style tourism strategy that centers on casinos and the luxury resort experience.

For the rest of the region, the prospects for tourism are quite solid as well. South East Asia’s location

boosts its prospects for luring tourists for at least two reasons.

First, proximity to China will become a bigger factor in the competition for tourists in the years ahead.

A growing level of affluence among China’s 1.3 billion residents is already impacting tourism across

the Asia Pacific region, most notably in Hong Kong. By proximity alone, South East Asia is likely to

capture some of this growing market in the years to come.

Second, only the Indian subcontinent separates South East Asia from the Middle East. Malaysia has

already become a popular destination for affluent tourists from this region. With more than 25 million

visitors annually, Malaysia is the region’s top tourist destination. By capitalizing on its Islamic heritage,

perhaps Indonesia is suited to capture some of this growing market in the future. (Exhibit 15).

0%

3%

6%

9%

12%

15%

18%

21%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2011

2012e

2013f

2014f

2015f

2016f

%US$

SingaporeDisposable Income(US$ per head, LHS)

Disposable Income Growth

(%, RHS)

-8%

-4%

0%

4%

8%

12%

16%

0

1,000

2,000

3,000

4,000

5,000

6,000

2011

2012e

2013f

2014f

2015f

2016f

%US$

IndonesiaDisposable Income(US$ per head, LHS)


(%, RHS)

-8%

-4%

0%

4%

8%

12%

16%

0

1,000

2,000

3,000

4,000

5,000

6,000

2011

2012e

2013f

2014f

2015f

2016f

%US$

MalaysiaDisposable Income(US$ per head, LHS)


(%, RHS)

-8%

-4%

0%

4%

8%

12%

16%

0

1,000

2,000

3,000

4,000

5,000

6,000

2011

2012e

2013f

2014f

2015f

2016f

%US$

ThailandDisposable Income(US$ per head, LHS)


(%, RHS)

-8%

-4%

0%

4%

8%

12%

16%

0

1,000

2,000

3,000

4,000

5,000

6,000

2011

2012e

2013f

2014f

2015f

2016f

%US$

VietnamDisposable Income(US$ per head, LHS)


(%, RHS)

17



15: TOURIST ARRIVALS & GROWTH

Source: EIU Note 1: as of Nov 2012 Note 2: It should be noted that for the consistency across various countries, we are using EIU’s estimates. EIU's data source is the World Tourism section of the World Development Indicators, and international sources tend to bring in the latest data with a lag, compared to national releases.

Retail Competitiveness

The macro environment described in the previous section—a mix of demographic, economic, labor,

income, and visitor dynamics—provides context for South East Asia’s retail demand. All of these

factors are long-term and structural. Yet there are other long-term, structural factors that can stimulate

retail property growth. These are loosely connected to the macro environment, yet they do not fit

neatly into that framework. For lack of a better term, we call them ―retail competitiveness factors‖ in

this paper. Singapore provides a good illustration of retail competitiveness. It lures tourists to its two

integrated resorts, Sentosa and Marina Bay. Tourists spend their retail dollars within these resorts, but

the on-site retailers have external competition. Retailers in prime high street districts like Orchard

Road recognize the potential of this tourist market and move further upscale to attract a share of non-

resident spending. This drives up demand for prime retail space, and over a longer period of time, it

pushes rents up more than they would have increased otherwise. In this sense, a number of

competitiveness factors, including infrastructure, accessibility, affordability, and retail capacity impact

the structure of the retail market over the long term. Both Malaysia and Thailand are keen to emulate

this entertainment-led model of retail competitiveness.

A recent study of cross-border shopping patterns in the Asia Pacific region attempted to measure the

competitiveness of 25 major cities across the region, including cities in South East Asia, for attracting

tourists.8 Though the study was a comprehensive look at tourism spending, it included various retail-

specific variables. Singapore, for example, ranked high in the Asia Pacific region on factors such as

transport infrastructure, accessibility, and the diversity of the shopping experience but it fell short on

affordability. Other cities in the region like Jakarta and Ho Chi Minh City were deemed affordable, but

fell short in the areas where Singapore ranked high. Kuala Lumpur tended to rank relatively high

across all categories. The cities with the highest overall scores in South East Asia (Kuala Lumpur,

8 Economist Intelligence Unit and Global Blue, The Globe Shopper Index Asia-Pacific, April 2012.

0%

1%

2%

3%

4%

5%

6%

7%

8%

0

5

10

15

20

25

30

35

40

2011

2012e

2013f

2014f

2015f

2016f

%mils

Indonesia

Arrivals(millions, LHS)

Growth(%, RHS)

0%

1%

2%

3%

4%

5%

6%

7%

8%

0

5

10

15

20

25

30

35

40

2011

2012e

2013f

2014f

2015f

2016f

%mils

Malaysia


Growth(%, RHS)

0%

1%

2%

3%

4%

5%

6%

7%

8%

0

5

10

15

20

25

30

35

40

2011

2012e

2013f

2014f

2015f

2016f

%mils

Singapore


Growth(%, RHS)

0%

1%

2%

3%

4%

5%

6%

7%

8%

0

5

10

15

20

25

30

35

40

2011

2012e

2013f

2014f

2015f

2016f

%mils

Thailand


Growth(%, RHS)

0%

1%

2%

3%

4%

5%

6%

7%

8%

0

5

10

15

20

25

30

35

40

2011

2012e

2013f

2014f

2015f

2016f

%mils

Vietnam


Growth(%, RHS)

18



Singapore, and Bangkok) are the ones considered best prepared to compete for external tourism

spending. The implication for the other cities is that broad improvements in overall amenities—things

like airports, transit systems, public spaces—could enhance the value of local retail markets (Exhibit

16).

16: THE GLOBE SHOPPER INDEX (ASIA PACIFIC)

Overall Ranking Infrastructure (Transport & accommodation)

Access (Convenience)

Diversity (Shopping & product mix)

Affordability

1 Ho Chi Minh City

2 Kuala Lumpur

Kuala Lumpur

3 Singapore Kuala Lumpur

4 Kuala Lumpur

Jakarta

5 Singapore

6 Singapore

Bangkok

7 Bangkok

Singapore Bangkok

8 Kuala Lumpur

Manila

9 Bangkok

10

Manila

11 Manila

12 13 14 15 16

Manila Bangkok Jakarta

17 Jakarta

18 Jakarta

Manila

19 Ho Chi Minh City

Singapore

20 Ho Chi Minh City

21

Ho Chi Minh City

Ho Chi Minh City

22 Jakarta

23 24 25

Source: Globe Shopper Index Asia Pacific (2012); Prudential Real Estate Investors

Real Estate Fundamentals

Structure of the Regional Market

The structure of a local real estate market establishes a foundation for fundamentals and

performance. Emerging markets like Vietnam and Indonesia, for example, offer only marginal diversity

across retail formats. There are other important clues to a retail real estate market’s structure, such as

property ownership (is property held by institutions or by the occupiers?) and land supply (is it tightly

controlled by the government or freely traded?) and lease structures. Retail leases in South East Asia

are typically shorter than in Western countries. This has an upside in that it enables property owners

to exert more active management control, but it also carries the risk of quickly losing lease renewals if

economic conditions deteriorate or if the property does not perform well. Another important issue is

the level of foreign participation permitted in property ownership. Emerging markets tend to impose

various restrictions on foreign investments. All of these issues feed into the overall maturity and

structure of the market (Exhibit 17).

19



17: STRUCTURE OF SOUTH EAST ASIAN RETAIL MARKETS

Dominant Retail Format

Ownership Supply Risk (2013/14)

Typical Lease Length

Maturity Stage

Foreign Investments

SINGAPORE Shopping malls; department stores.

Local developers; S-REITs.

Moderate. Centrally planned by the government.

Typically 2 to 3 years.

Mature. Yes.

MALAYSIA Shopping malls; department stores; suburban malls.

Developer-owned; increasingly institutional (M-REITs).

Moderate to Considerable. Increasing level of supply for suburban malls in major cities.

Typically 2 to 3 years on fixed rent; longer leases must be registered with the relevant local land office.

Maturing.

Yes, but conditional; foreign investors would need to obtain state government approval.

THAILAND Department stores; shopping malls; street shops.

Predominantly retailer-owned; local developers.

Moderate. Less institutional grade stock outside Bangkok.

Typically 3 years on fixed rent.

Maturing. Yes.

VIETNAM Department stores; street shops; shopping malls.

Local developers; retailer-developed and owned.

Considerable. Concentrated in HCM City; significant level of new supply (double the existing stock) will enter the market over the next 3 years.

Typically 3 years on fixed rent; longer term lease also available with flexible terms and market rental cap.

Emerging.

Yes. but conditional; the most common route is through joint ventures.

INDONESIA Department stores; street shops.

Local property companies; retailer-developed and owned.

Minimal. Strong pre-leasing commitment for new malls in Jakarta. Developers are focusing on office and residential sectors.

Typically 5 years on fixed rent; longer leases are available for negotiation.

Emerging.

Yes, but conditional.

Source: DTZ, Prudential Real Estate Investors Note: as of End 2012

20



Supply

With the exception of prime retail space in Singapore, the pipeline throughout the rest of South East

Asia ranges from adequate to abundant, depending on the market. Despite the large new supply

expected in Singapore’s suburban areas, demand is expected to be robust, and vacancy rates

already reflect full occupancy. The retail market in suburban Kuala Lumpur faces a similar situation,

i.e., ample supply but with relatively low vacancy. Pre-commitment ratios are above 70% for planned

retail construction in the suburbs of both cities.9

In the major cities of Vietnam significant supply risks loom ahead. Both Ho Chi Minh City and Hanoi

are expecting to add more than one million square feet of supply in the coming four years.10

The

addition of this much modern shopping stock—in cities where such space hardly exists—will be a

challenge for retailers to absorb, particularly in Hanoi which has been less responsive to market

conditions than Ho Chi Minh City. Still, it is difficult to tell if or how much pent-up demand may exist in

these markets. Vietnamese cities are different from the rest of the region because they are at such an

early stage of retail investment. A surge of new supply is not uncommon when retail markets are

moving up the maturity continuum. For now, Vietnamese retail vacancy rates remain far above the

rest of the region (Exhibit 18).

18: RETAIL SUPPLY OVERVIEW

Source: CBRE, JLL; Prudential Real Estate Investors Note: as of 4Q 2012

Demand

As outlined in the macro environment section of this paper, increasing levels of domestic income and

inbound tourism boost the potential for retail demand. Steady growth in disposable income translates

into greater volumes of retail sales over time, but in the short term, retail sales growth can be quite

volatile, depending on economic issues such as job growth, inflation, and consumer confidence. Major

new tourist destinations in Singapore—Marina Bay Sands, Universal Studios, and Resorts World

Sentosa—helped to re-establish the market’s retail sales growth in the wake of the global financial

crisis. Despite Singapore’s weaker economic outlook, its retail sales growth is expected to keep pace

with past trends.

9 Jones Lang LaSalle, as of Q3 2012.

10 CBRE Research, as of Q2 2012.

Supply Risk

Outlook

Singapore Prime 5.5% ██ 2.2% █ Low

Suburban 34.2% █████████████████ 0.6% Low

Kuala Lumpur Prime 29.9% ██████████████ 8.3% ████ Medium

Suburban 22.5% ███████████ 5.4% ██ Medium

Other Malaysian Cities — — — Medium / High

Bangkok Prime 13.4% ██████ 9.5% ████ Medium

Suburban — — Low / Medium

Jakarta Prime 18.9% █████████ 3.9% █ Low

HCM City Prime 538.6% █████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████► 39.8% ███████████████████ Medium / High

Hanoi Prime 427.6% █████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████████► 30.0% ███████████████ High

Total New Supply 2013-

2016 / Current Stock 2012 4Q Vacancy Rate

21



Malaysia was perhaps influenced by Singapore’s recent success in attracting big-spending visitors.

Already a major destination for Middle Eastern tourists, Malaysia has launched a new initiative to

attract both investors and visitors. Dubbed Iskandar Malaysia, the mixed-use initiative is located in the

southern region of the country across the border from Singapore.

Liberalization of the retail sector in Vietnam and Indonesia will push retail sales growth up over the

next five years. Indonesia is expected to sustain the upward momentum in sales growth over the five-

year forecast window. Although Vietnam may lose some of its retail sales momentum in the latter

years of the forecast window, it will still see some of the fastest growth in the region (Exhibit 19).

19: RETAIL SALES GROWTH (%)


Retail rents in Malaysia, Bangkok, and Jakarta share solid prospects for growth in the near term, Over

the past few years rental performance in these markets has remained relatively sheltered from

external disturbances in the Eurozone or elsewhere.

Recent new deliveries of retail space boosted Singapore’s retail stock and provided retailers with a

new array of options. In the process, the new supply also muted the market’s recent rental growth.

With economic conditions in Singapore looking cloudy in the near term, retailers are likely to sit on

their expansion plans until prospects improve, thus delaying the retail rental recovery.

A massive excess of modern supply will overwhelm Vietnamese cities in the near term. Despite an

upbeat outlook on the demand side, the supply pipeline will disrupt retail fundamentals in Vietnam and

send rents down in the near term. From a longer term perspective, however, this pattern is hardly

unusual. When incomes and retail sales are increasing rapidly, as they are in Vietnam, large new

stocks of modern space are needed for the market to transition into greater maturity. It is inevitable

that some short-term imbalances in supply and demand will occur as this transition plays out. (Exhibit

20).

-2

0

2

4

6

8

10

12

14

2002

2004

2006

2008

2010

2012e

2014f

2016f

%

IndonesiaHistoryForecast

-2

0

2

4

6

8

10

12

14

2002

2004

2006

2008

2010

2012e

2014f

2016f

%

MalaysiaHistoryForecast

-2

0

2

4

6

8

10

12

14

2002

2004

2006

2008

2010

2012e

2014f

2016f

%

SingaporeHistoryForecast

-2

0

2

4

6

8

10

12

14

2002

2004

2006

2008

2010

2012e

2014f

2016f

%

ThailandHistoryForecast

-2

0

2

4

6

8

10

12

14

2002

2004

2006

2008

2010

2012e

2014f

2016f

%

VietnamHistoryForecast

22



20: RETAIL RENTAL OVERVIEW

Source: JLL; CBRE; Prudential Real Estate Investors Note: as of 4Q 2012

Pricing

Retail assets in Singapore and Kuala Lumpur are currently trading at the lower end of their respective

historical yield bands. The historical yield bands for these markets are rather narrow, reflecting their

relative maturity and stability.

Contrast this with Bangkok and Jakarta, where yields have ranged much wider over time. These retail

markets are still evolving and maturing. As a result, investors in Bangkok and Jakarta demand higher

risk-adjusted returns. (Exhibit 21).

21: RETAIL PRICING OVERVIEW

Source: JLL, Prudential Real Estate Investors. Note: as of 4Q 2012

Cumulative Retail Rental Growth, 2008-2012 10-Year Historical

Average Retail Rental Rental

Growth Rate, 2003-2012 Outlook

Singapore Prime 0.0% ◄►

Suburban 1.0% ||||||||| ◄►

Kuala Lumpur Prime 4.2% |||||||||||||||||||||||||||||||||||||||||| ◄►

Suburban 5.5% |||||||||||||||||||||||||||||||||||||||||||||||||||||| ▲

Other Malaysian Cities — — ▲

Bangkok Prime 1.6% ||||||||||||||| ▲

Suburban — ▲

Jakarta Prime 2.6% |||||||||||||||||||||||||| ▲

HCM City Prime 4.4% ||||||||||||||||||||||||||||||||||||||||||| ▼

Hanoi Prime 3.9% |||||||||||||||||||||||||||||||||||||| ▼

-100 -80 -60 -40 -20 0 20 40

Cumulative Percent (%) Change

2008 2009 2010 2011 2012

Other

Malaysia Jakarta HCM City Hanoi

Prime Suburban Prime Suburban — Prime Suburban Prime Prime Prime

Yield Trend ▼ ▼ ▼ ▼ ◄► ◄► ◄► ▼ ▲ ▲

BangkokSingapore Kuala Lumpur

0

2

4

6

8

10

12

14

16

% Historical yield range, 2001-2012 (as available) Current yield at 4Q 2012

23



The previous chart (Exhibit 21) showed yield movements over time. The following chart shows yield

spreads, past and present (Exhibit 22). The patterns are essentially the same: only marginal historical

changes to spreads in Singapore and Kuala Lumpur, but wide variations in Jakarta and Bangkok.

Look closely at Exhibit 22 and it shows that Singapore’s yield spread is slightly higher than its long-

term average. Low government bond yields in Singapore have more than offset the market’s

historically low cap rate. Ownership of Singapore’s retail property is closely protected, with few

transactions occurring. If and when a retail property does become available in Singapore, local

institutions and S-REITs often acquire the assets with aggressive underwriting assumptions. (See

again Exhibit 1, which shows Singapore as a mature market rather than an advanced institutional

market. One of the features separating these two types of maturity is liquidity. In mature markets like

Singapore, liquidity is still evolving. Advanced institutional markets tend to be highly liquid.) This may

help to explain why, despite Singapore’s modest outlook for rental growth, yields are unlikely to move

out, and are instead expected to remain fairly stable. In Malaysia, the retail markets are maturing

quickly. The country’s M-REITs have become a major force driving cap rate stabilization.

Meanwhile, yields for maturing markets like Jakarta and Bangkok are relatively healthy and the

spreads are attractive. Cap rates could compress further in these markets, but the drivers will be

different from Singapore and Malaysia. The Jakarta retail market is experiencing structural change in

its fundamentals. Strong demand from domestic and international retailers has been met with a dearth

of new modern supply. This is likely to drive cap rate compression until Jakarta’s retail fundamentals

can rebalance. In Bangkok, demand for retail assets is increasing, and the Thai market recently

welcomed the successful launch of Tesco Lotus REIT. As the Bangkok market matures, yields are

likely to compress further.

22: YIELD SPREADS

Source: JLL, CBRE, Prudential Real Estate Investors. Note: as of 4Q 2012

0

1

2

3

4

5

6

7

8

9

10

Singapore Prime

Singapore Suburban

Kuala Lumpur

Prime

Kuala Lumpur

Suburban

Jakarta Prime

Bangkok Prime

%

Long-term average spread, 2001-2012

Most recent 5-year spread

Current spread at 4Q 2012

24



The outlook for unadjusted total returns on retail assets over the next three to four years varies market

by market based largely on the progression of maturity in each country. In the more mature markets of

South East Asia, income will be the primary driver of total returns in the near term, as cap rates in

these markets—currently at historically low levels—are unlikely to compress significantly in the major

cities of Singapore and Kuala Lumpur. The outlook for capital appreciation in Bangkok is a bit better.

Solid economic growth and tourism expansion are encouraging greater institutionalization of the

market, and this is likely to stimulate new tenant demand from retailers. Retail yields in Bangkok are

relatively high, so the current dynamics of the market leave room for further compression. But liquidity

issues complicate retail returns in the emerging markets. The lack of investment grade assets and

transactions tends to amplify capital appreciation. When a transaction occurs, the yield is typically low,

making it difficult for foreign investors to justify the acquisition on a risk-adjusted basis. In markets like

Hanoi and Ho Chi Minh City, the infrequency of transactions and the limited stock of modern retail

assets make it impractical to forecast capital appreciation in any meaningful way (Exhibit 23).

23: TOTAL RETURN OUTLOOK

Income Return

Capital Appreciation

Annualized 2013-2016

Annualized 2013-2016

Min Max

Min Max

Singapore Prime 4% 5% 3% 4%

Suburban 5% 6% 1% 2%

Kuala Lumpur Prime 6% 7% 2% 3%

Suburban 7% 8% 3% 4%

Bangkok Prime 7% 8% 5% 7%

Jakarta Prime 8% 10% 3% 5%

Ho Chi Minh City Prime 10% 12% Outlook Uncertain

Hanoi Prime 11% 13% Outlook Uncertain

Source: Prudential Real Estate Investors, JLL, CBRE Note: as of 4Q 2012

Risk Considerations

Investors face a wide range of country and political risks across South East Asia. Singapore presents

a low risk environment but in countries like Vietnam the risks are much more daunting. Stable

governments and sound financial and credit markets have ushered in noticeable improvements in

country risks across the region, especially in Indonesia, Singapore, and Malaysia. Meanwhile, country

risks in Vietnam have actually worsened over the past decade due to weaker credit markets and

rampant corruption (Exhibit 24).

25



24: VOLATILITY AND COUNTRY RISK

10-year rental volatility Country risk / Corruption index (0=lowest, 100=highest)

Note: Corruption scores on a 100 percentile scale have been inverted to be comparable with risk scores Source: CBRE, JLL REIS, EIU; Prudential Real Estate Investors. Note: as of 4Q 2012

The following are among the other specific risks retail property investors face:

Liquidity risk. Liquidity varies across the South East Asian markets with Singapore and

Malaysia posing fewer challenges. Liquidity risks are higher in markets like Vietnam and

Indonesia.

Development / counterparty risk. Again, there is a higher level of risk in markets like Indonesia

and Vietnam.

Asset management risk. This type of risk is often a function of maturity. Less mature markets

lack a deep pool of talent, local knowledge, and market information.

Property positioning / tenant mix. Many South East Asian markets are in the throes of

structural change. This has brought a surge of new modern retail construction projects in various

locations. As the modern retail stock increases, asset competition will be heightened. As a result,

owners and managers will spend more time considering how to position assets and optimize the

mix of retail anchors and tenants.

Site selection. As urbanization increases, cities extend mass transport services further into the

outlying markets. Retail catchment areas outside of prime districts are subject to rapid change as

0 10 20 30 40

Singapore Prime

Singapore Suburban

KL Prime

KL Suburban

BKK Prime

Jakarta Prime

Ho Chi Minh City Prime

Hanoi Prime

Standard deviation (in percentage points) of annual

historical rental growth

0

10

20

30

40

50

60

70

80

90

100

Sin

gap

ore

Mala

ysia

Ind

on

esia

Th

ailan

d

Vie

tnam

Ch

ina

US

2001 country risk

2011 country risk

2012 corruption

2001 country risk average for Asia Pacific

2011 country risk average for Asia Pacific

Higher

scores =more risk /

more

corruption

Lower scores =

less risk / less

corruption

1

26



infrastructure is extended. As a result, catchment areas in secondary or suburban locations must

be chosen with caution.

Retailer relationships. Domestic retailers dominate the tenant mix in many South East Asian

cities. Even though international retailers continue to expand their footprints into these markets,

business relationships with domestic retailers are crucial for success. Without local knowledge or

local networks, the risks will be greater.

Assessment of Retail Attractiveness

All of the variables described thus far in this paper as contributing to retail attractiveness were scored

and assigned a value of Attractive, Fair, or Unattractive based on that score. The results are shown

in Exhibit 25. Ho Chi Minh City and Hanoi scored poorly across many of the variables. The only other

cities that received Unattractive scores in any variable were Singapore (for affordability) and Kuala

Lumpur (for retail capacity, a measure of stock per capita). Ironically, the Unattractive scores for both

Singapore and Kuala Lumpur reflect to some degree their own success. Like most high-amenity

developed markets, Singapore’s overhead costs are high, and this makes it appear unaffordable

relative to other cities in the region. Malaysia is the biggest tourist draw in South East Asia (and by a

wide margin). Malaysian retailers cater to a larger market than just domestic consumers. This drives

up retail space per capita, despite relatively healthy retail vacancy rates in Kuala Lumpur. (Exhibit 25).

25: RETAIL ATTRACTIVENESS MATRIX

A Attractive

F Fair

U Unattractive

Macro Environment Competitiveness Real Estate Risks

City Sectors Ma

cro

eco

no

my

Dem

og

rap

hic

s

La

bo

r

Wealt

h

To

uri

sm

Tra

ns

po

rtati

on

Access

Aff

ord

ab

ilit

y

Infr

astr

uctu

re

Reta

il c

ap

acit

y *

Su

pp

ly

Dem

an

d

Ren

ts

Pri

cin

g

Co

un

try r

isk

Mark

et

matu

rity

Pro

pe

rty s

up

po

rt

Singapore Prime F A A A F A A U A A A F F F A A A

Suburban F A A A F A A U A A A F A F A A A

Kuala Lumpur Prime F A A A A A A F A U F F F F A F A

Suburban F A A A A A A F A U F F A A A F A

Other Malaysian cities F A A A A F F F F F F F A A A F F

Bangkok Prime F F F A A A F F F F F F A A F F A

Suburban F F F A A F F F F F A F F A F F F

Jakarta Prime A A F A A F F F F A A A A A F F F

Ho Chi Minh City Prime A F U F F U F A U A U A U A F U U

Hanoi Prime A F U F F U F A U A U A U F F U U

* Note: Retail floor space per capita is used to assess the capacity of the market. Relatively underserved markets (i.e., low per capita retail floor space) appear more attractive than those with an above-average retail capacity. Source: Prudential Real Estate Investors Note: as of End 2012

27



Next, the scores in Exhibit 25 were weighted. Long-term structural factors received preference, with a

weighting of 60%. Of this, 35% was attributed to the macro environment and the other 25% for the

contributions to retail market competiveness. Short-term cyclical factors (i.e., real estate fundamentals

and performance) were weighted at 30%. Risks were assigned a weighting of 10%. (Individual

investors might choose to vary these weights, depending on their respective circumstances and

objectives.)

The results are shown in Exhibit 26. Despite sluggish demand-side fundamentals and performance in

the near-term, Singapore came out on top of the rankings because it scored so well in most other

categories. Jakarta scored well for the opposite reason. Near-term fundamentals of constrained

supply and ample demand offset Jakarta’s moderate risks and limited competitive amenities like

infrastructure and accessibility.

Ho Chi Minh City and Hanoi in Vietnam ranked last in the region due to high risks oversupplied stock,

and limited amenities for retail competition.

26: RETAIL ATTRACTIVENESS RANKINGS

Rank Retail Market Submarket

1 Singapore Suburban

2 Singapore Prime

3 Kuala Lumpur Suburban

4 Jakarta Prime

5 Malaysian cities (other than KL) Prime

6 Kuala Lumpur Prime

7 Bangkok Prime

8 Bangkok Suburban

9 Ho Chi Minh City Prime

10 Hanoi Prime


Very soon after Prudential completed its analysis of retail markets in South East Asia, the Urban Land

Institute and PricewaterhouseCoopers released their annual outlook for the Asia Pacific real estate

markets.11

In their 2013 survey of investors, four South East Asian markets were deemed to be

among the 10 best investment prospects in the Asia Pacific region for 2013. Most notable in the 2013

survey is the shift in preference from 2012. Most South East Asian cities climbed significantly in the

annual ULI rankings, boosted by solid economic growth and relatively healthy fundamentals. The

exception was Ho Chi Minh City, which was pulled down in ULI’s list by supply issues, transparency

problems, and legal risks (Exhibit 27).

11

PricewaterhouseCoopers and Urban Land Institute, Emerging Trends in Real Estate, Asia Pacific 2013, 29 November 2012.

28



27: ULI 2013 SURVEY RESULTS

Source: Urban Land Institute (2012) Note: as of Dec 2012

2013 Retail Trading Preferences

Retail Market 2013 Rank 2012 Rank

Jakarta 1 11

Singapore 3 1

Kuala Lumpur 5 17

Bangkok 6 14

Manila 12 18

Ho Chi Minh City 18 10

Retail Investment Prospects

54%

37%

38%

35%

40%

41%

39%

53%

58%

55%

51%

47%

7%

10%

4%

10%

9%

13%

Buy Hold Sell

29



Part 3: Opportunities and Conclusions

This paper opened by asking a simple question. Is there a case to be made for South East Asian

retail investment? Macro factors such as strong demographics and economic resilience leave little

doubt that the broad answer is yes. But these trends alone do little to inform the execution of an

investment strategy. In this paper, we take a step beyond the macro factors to weigh other issues

both structural (long-term retail competitiveness) and cyclical (real estate fundamentals and

performance). A wide range of risk factors was also considered. Our conclusion is that the

opportunities vary, depending on the individual strategies of investors and their appetite for risk.

Several options are described below.

Structural Opportunities: The focus should be on the capital cities of emerging markets or

secondary locations in maturing markets.

Development of retail malls in emerging markets: Retail assets in Singapore and Kuala

Lumpur are trading at the lower end of their historical yield bands, thus reflecting the region’s

highest levels of market maturity and stability. Retail markets in Indonesia and Vietnam, in

contrast, show greater volatility and have less transparency and liquidity. Development strategies

within these emerging national markets should be limited to prime locations in the major cities of

Jakarta, Ho Chi Minh City, and Hanoi. Local partner relations, rampant supply, and regulatory

burdens are among the many significant risks offsetting potentially high returns.

Suburban retail malls in secondary locations in Thailand: Urbanization, improving

infrastructure, and rising wealth levels are among Thailand’s attractive attributes. Affluent

residential suburbs of Bangkok as well as second tier Thai cities and resort locations offer

potentially attractive retail investment opportunities. An encouraging milestone is Thailand’s

successful launch of Tesco Lotus REIT in 2012, which perhaps paves the way for wider

introduction of suburban retail malls outside central Bangkok. Although transparency and local

market knowledge are improving in Bangkok, they continue to be significant risks outside core

areas.

Cyclical Opportunities: The focus should be on prime locations in mature economies. The high

streets of mature markets offer the greatest potential for reliable cyclical rebound. In South East Asia,

Singapore’s Orchard Road is a potential match for this strategy. Downturns in economic cycles pose

challenges that impact rental performance, making well-timed cyclical investment opportunities

attractive. Of course, the major risks to such a strategy involve the timing and price point of market

entry.

Core/Defensive Strategies: The focus should be on suburban malls in mature or maturing

markets. Suburban malls offer a balance of consumer staples and discretionary items, and the

shorter retail lease cycles in South East Asia can offer a degree of management flexibility in shifting

the tenant mix as economic cycles turn. Investors should focus on those cities where governments

are committed to the maintenance and expansion of public transport networks. Suburban malls in

Singapore fit neatly with this strategy. Second tier urban areas in Malaysia such as Penang and Ipoh

might also prove attractive considerations. Major risks are related to retail-specific factors, such as

property positioning, location and catchment, tenant mix, and present and future transport

connections within the urban area.

30



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the case for south east asia retail investment: structural

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