Southeast Asia: new frontier for development.

Southeast Asia is emerging as an economic powerhouse region, with many opportunities for real estate investment and development. However, American investor and developers need to do an extensive amount of homework before venturing into these lands of potential opportunity. They need to understand where they fit in an environment of sophisticated and well-capitalized developers and investors who are already established there, and to assess what unique strengths and niche products and services they can bring to the region. This article reviews activity at the regional level, describes some sample projects now underway, and concludes with some suggestions for American developers and investors interested in participating in the region's growth.

Regional Basics

Let's begin with some basics. The nations of the region are Singapore, Malaysia, Thailand, Indonesia and the Philippines. They have in common that they are part of a rapidly growing region, which is attracting investment not only from internal sources, but also from all around the world - Japan, Europe, Hong Kong, Taiwan, Overseas Chinese, Australia, and North America, to name just the most prominent investment sources. While Japanese investment surged into the region in the 1980s, Japanese investment is now one part, albeit is a strong part, of a broader multinational inflow. Regional GDP annual growth averages 7 percent or greater (vs. 2-3 percent in the west). The region is developing a middle class, a consumer class with money to spend on something more than the basics of food and shelter.

One universal maxim of real estate investment holds true here also: many good deals are snapped up before they get too far from the neighborhood. Each nation has a core group of local development and investment companies, may of them publicly traded. Investors and developers from the region (as well as Hong Kong and Taiwanese property companies) are intensely networked into the region, and alert to opportunities as they appear.

Throughout the region, rapid infrastructure improvement, much of it financed by private sector techniques such as "BOT" (build-operate-transfer), is changing the face of cities and countryside, and lending a certain instability to real estate market analysis and development. Major metropolitan transit, highway, water and sewer upgrade programs are underway, at varying stages of completion, in Kuala Lumpur (Malaysia), Bangkok, Manila and Jakarta. However, automobile ownership is also increasing, providing an ongoing challenge to the transportation infrastructure developers. Power plant construction is everywhere evident, as the power suppliers try to reduce the incidence of "blackouts" and "brownouts." Upgrading of telephone infrastructure is taking place throughout the region. Major land reclamation projects are changing the face of cities large and small.

Nation by Nation:

Profiles in Diversity

Only a few generalizations, like those above, can safely be made about the region. Beyond lies a realm of diversity and complexity. On every other variable, there is a wide range of variance.

For example: Singapore is one island, a city state of 2.7 million people, approximately 230 square miles in area (picture metropolitan Atlanta); growing in area as reclamation projects slowly add new waterfront. National per capita income is higher than Britain's; skills are high; infrastructure of every kind, including telecommunications, is first class; planning and regulation are sophisticated and honest. The city/state, the so-called "intelligent island," offers blue chip, rather than speculative, real estate opportunities.

Indonesia, by contrast, has a population of nearly 190 million, and stretches over 13,577 islands. The dominant city, Jakarta, has a population of over 8 million, and is a mix of developing and developed nation characteristics. Market conditions will differ from city to city, island to island, and region to region. Opportunities in such cities as Medan, Jogjakarta, Bandung, and the resort communities of Bali and Lombok, all require unique and product-specific analysis. The island areas closest to Singapore, Batam (industrial and distributive) and Bintan (resort) benefit from multi-national growth triangle strategies with their sister nation.

In Malaysia, description of five (of the many) unique submarkets illustrates the range and diversity of activity. The capital and dominant city, Kuala Lumpur, offers a broad-based and rapidly growing economy. Malacca, initially settled by Portuguese and Dutch traders in the 1400s, offers nationally-supported historic preservation opportunities. Johor, the southern province of peninsular Malaysia (as distinguished from east Malaysia, the states of Sabah and Sarawak, that are located on the island of Borneo) functions in many respects as an extension of Singapore, just across the bridge. Penang is a Chinese-dominated Silicon Valley environment. The island of Labuan is a budding offshore financial center.

Some Sample Projects

Here is a summary of selected project activity in the region, to illustrate the range and scale of real estate projects and market conditions.

Kuala Lumpur. A major multi-use center city project, the so-called "Golden Triangle," is underway on the site of the former race track. It will include, among other developments, one of the world's tallest office complexes, the two-building Petronas Tower, 466 meters high, roughly the same height as Chicago's Sears Tower. This building, targeted for completion by mid-1996, was designed by US architect Cesar Pelli, and is colloquially known as "Asia's World Trade Center." Analysts report that major suburban development projects are also underway, providing additional office and retail space in at least five suburban districts.

Jakarta: Rapid development in all sectors has led many markets to the verge of oversupply. However, developers and government are now exploring the feasibility of a joint program to upgrade and rebuild the city's 20 mile long waterfront, with office, residential and related uses. Moderate income housing is seen to offer some growth and profit opportunity. The government is considering relaxing regulations that would permit foreigners to buy, rather than merely rent residential property. A number of Jakarta property companies are considering "going public," listing their shares on the Jakarta Stock Exchange.

Singapore: Development is guided by the 1991 Concept Plan. With most basic needs met, the plan concentrates on upgrading quality of development consistent with the city's "clean, green" image, and on decentralizing development to take advantage of the island's rapid transit network and advanced telecommunications infrastructure. The plan proposes to decentralize city center activities into four regional subcenters, each serving a population of roughly 800,000 persons, and further subdivided into commercial, subregional and fringe centers. High quality research, technology and office parks will be developed to major international and local tenants. A "new downtown" is being created in the "Marina South" area, accommodating expansion out of the existing central district, and building on the hotel/convention center investments made in recent years. In the residential ares, greater diversity of housing styles and types is being encouraged, as well as more medium and low density living space.

Bangkok: Many product markets are at or verging on oversupply. Infrastructure projects are underway to try to reduce the city's serious traffic congestion. The government has shifted its hotel incentives away from development of new, toward improvement of existing, properties. The "third wave" of Japanese investment is being experienced, with major Japanese companies in joint venture with Thai firms. Medium-priced housing is one of the product types current in favor. Wal-Mart is posed to develop discount stores in Bangkok and elsewhere in Thailand, in association with Thailand's GP Group, which operates throughout Asia.

Philippines: Military Facility Reuse

Among the numerous large projects transforming the Philippines are the reuse programs for the former US naval base at Subic Bay, and Clark Field, the former U.S. air base. Both facilities offer inplace infrastructure - and some usable structures - making them ready for almost immediate, use by industrial, warehousing, residential and office tenants. The Subic zone, approximately 2400 acres in size, had (according to the Financial Times), signed up 73 companies by fall 1994, with 44 of them having started operations. The Clark Field site contains a core area of 1800 acres, part of which will be used as an international airport, and a peripheral area covering another 10,000 acres. US companies such as Federal Express and Cypress Semiconductors are considering locations there. In addition, Fort Bonifacio, a 160 acre former Philippine military base, is being auctioned off in phases by the government. It will join the Makati and Ortigas districts to comprise Manila's "Golden Triangle" of major office and multi-use developments.

Opportunities for the

American Developer and Investor

So where do the American developer and investor fit in this picture? For the company venturing individually, (rather than through a pooled investment fund), two basic concepts should guide involvement; unique niche products or services which have proven track records in North America; and joint venture with local or regional players.

American-style retailing is becoming popular, initially in the dominant cities of the region. The old Asian "shop house" style of retailing is slowly but steadily giving way to more modern offerings. Therefore, American retail and food service chains are finding ready opportunities. The concept of themed activity and recreation, whether in theme parks, multi-plex entertainment centers, arcades, or associated with restaurants or traditional shopping centers, provides opportunities for Americans, notably in the construction, architecture and design fields. In the hotel and resort field, the need is for skilled management, operation and restructuring of existing properties, more than for development of new. The region underwent a boom for these types of facilities in recent years. Now shakeouts of varying degrees are taking place.

Build-to-suit opportunities exist for facilities of American manufacturing companies expanding in the region. These opportunities are often associated with provision of housing for western expatriates-another area in which knowledge of U.S. demand requirement ran provide an edge to American companies. American subdivision design techniques are popular with foreign and local purchasers throughout the region. Senior citizen housing and life care facilities, and private hospitals are becoming increasingly popular, as improved health care increases life spans, and higher incomes create a better ability to pay for health care.

It's a good general rule in real estate, or anywhere else for that matter, not to wander into a strange culture with your mouth wide open. Thus the advisability of entering into intelligently researched joint ventures with locals in each nation on each project; people who know the local polities, land use regulations and other subtleties associated with project approval and success. (Some nations, like Malaysia may even require this in certain instances.) The region's economies are rapidly growing and changing, hence there is an advantage to having a reliable partner on the ground, in country, who can anticipate and quickly react to changes that affect the success or viability of your project. This may make more sense than transferring large numbers of expatriate personnel into the country. The qualifications and selection of such a partner is a time-consuming but necessary part of the process.

As the above illustrates, while there is opportunity in Southeast Asia, it is opportunity that is neither easily nor quickly grasped. However, for those Americans who are prepared to invest for the long term, with qualified local partners, and to provide a product or service different or better than can be provided by the "home-boys" of the Asian real estate industry, South Asia should be a candidate for serious consideration.

David L. Peterson is a New York-based business advisor. He is currently in southeast Asia, presenting real estate-related seminars on behalf of Business Focus/Singapore. Peterson previously served as a director in the real estate industry services group of Price Waterhouse/New york, and with Honvath Asia Pacific. He is a member of the Pacific Rim Council on Urban Development (PRCUD).