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Investing in ASEAN AEC- How Risky is it Really?
Investing in ASEAN AEC- how risky is it really?
As the impending launch of the ASEAN Economic Community (AEC) in 2015 draws closer, international investors are increasingly interested by the growth opportunity, which, at 600m people, will create the third largest population block on the planet. However, unlike their bigger neighbours, China and India, the more developed markets in ASEAN have already experienced decades of widespread FDI, extensive financial and market reform, and undergone a number of market correction cycles. This has produced more predictable, mature capital, property, banking and financial markets, and a significantly more robust investment risk environment than exists in China and India.
At the vanguard of the business migration across AEC are the banks, keen to capitalize on one of the fastest growing regions in the world. Asian institutions lead in exploiting ASEAN’s under-developed consumer banking markets and vibrant real estate markets ahead of their western counterparts, who have been wrapped up in their own domestic problems since 2008. The legal and financial infrastructure in ASEAN is long established and works well, whilst excellent demographics provide a real financial growth opportunity. Compared to other regions of the world, the investment case is persuasive, but for new investors seeking to buy into the banking and real estate markets, where can they find accurate knowledge-based third-party advice that underpins reliable conclusions and supports their investment decisions?
Real Estate Consultancies
The big brand name international real estate consultancies have been well established throughout ASEAN for more than a quarter of a century. Clearly they have amassed enormous amounts of data and possess a wealth of knowledge. However, their offices tend to be located in the capital and biggest cities and their experience may be confined to the international and prime commercial markets. Consequently, their coverage of the domestic markets and the less central parts of the country may be limited. Beyond the big international brands, the real estate industry tends to be highly localized and disjointed with few, if any property firms, able to provide widespread, effective nationwide coverage.
International appraisal standards have advanced enormously in ASEAN over the past two decades. In addition to initiatives from the international appraisal bodies, the valuation industry throughout most of ASEAN is strictly regulated by the authorities. As well as setting minimum standards and introducing best practice, educational infrastructures have been introduced in property appraisal. As a result, there is no shortage of well qualified home-grown real estate appraisers. The main issue with domestic appraisers may, in cases, be communication skills, as well as inexperience and misunderstanding of the specific needs of international investors.
Land Registry
The system of registering land and security interests is generally reliable and robust throughout ASEAN. Land registration offices should in theory carry a limitless supply of transactional data. However, sourcing information is mostly undertaken manually which is cumbersome and time consuming. Furthermore, where the transfer of land involves the payment of taxes, a portion of the purchase money is often paid outside the land office, which means there is always doubt as to whether the true market price of the transaction is accurately recorded and registered.
Domestic Banks
Probably the most comprehensive potential source of information is domestic banks. In addition to financing transactions, banks are one of the biggest users of appraisals and possess enormous amounts of property information. The quality may vary though. In cases, valuations undertaken by the banks may adopt the wrong technical approach and therefore not be accurate. There may be confusion as to what is actually meant by “value.” It is not uncommon for local banks to be uncertain about whether they actually mean “open market value,” “value in current use,” or “building cost/replacement value.” Cash flow and discount rates are frequently ignored in favour of an approach based on comparable land cost.
Capital Services Group
Since Capital Services Group established its ASEAN headquarters in Bangkok in 2001, we have undertaken over 30,000 property transactions and commissioned over 50,000 property valuations. This experience enables us to evaluate opportunity and draw accurate conclusions about different locations throughout Thailand and a range of property types. We can, for example, identify the specific or average length of time an individual property in a particular location takes to sell and the price at which this occurs. We can also accurately predict timing for the property foreclosure and legal execution process, and can even forecast the behavioral characteristics of different types of borrowers throughout the country. Accurate advice is essential to successful distressed investment. Comprehensive knowledge, based upon precise information, gives investors greater confidence in the reliability of transactional advice and significantly mitigates jurisdictional, sectoral and market risks when making investment decisions.
In conclusion, both transparency and visibility are frequently an issue in ASEAN. Securing accurate advice to underpin transactional decisions may not be as straightforward as in some more mature market jurisdictions. However, the region is still a decade ahead in terms of track record and historical data compared with China or India. The biggest difficulty in ASEAN may be in finding an accurate and reliable advisory source, particularly for newcomers with no prior investment experience in the region.
Governance & Risk Management in ASEAN
Throughout ASEAN, central banks and regulators have done their utmost to introduce high governance standards similar to those found in the west, particularly in the aftermath of the 1997 Asian Crisis. Regional standards have also benefitted from two decades of technology transfer from some of the world’s largest institutional investors. The issue within the region now is not governance itself, but inconsistent implementation, particularly amongst purely domestic players. For new investment entrants, governance standards should not therefore be considered a major regional risk. The issue is rather identifying the participants that practice and match western standard. Capital Services Group, for example, throughout their ASEAN operations has always adopted robust rules, systems, policies and procedures to include, amongst others:
  • Corporate Governance
  • Compliance & Regulations
  • Risk Management
  • Internal Auditing
  • Business Continuity & Disaster Recovery
Within each jurisdiction, a risk assessment plan is regularly updated to cover areas such as: performance & profitability analysis, client data integrity, strategic planning, HR & key persons, environmental issues, business development, management reporting, tax risks, fraud risk mitigation, insurance and public liability.