Foreign investors with a higher risk appetite can find a lot of high-yield real estate investments in Southeast Asia. This is especially true in Indonesia, Vietnam and Myanmar, according to David Faulkner, managing director of valuation and advisory services in Asia at Colliers International.
The three countries have received less attention over the years due to the risks associated with their economies. “Some of them had a difficult time economically, but things have changed. These are less-developed economies, so people are less familiar with them,” says Faulkner.
“Obviously, people are very excited about Indonesia because of the sheer scale [of its population] and opportunities there. But Vietnam and Myanmar hold many opportunities as well.”
The growth of cross-border investments and focus on intra-Asia investments are attracting foreign investors to the region. According to Colliers’ recent report on the Southeast Asian property scene, the six promising markets are Indonesia, Vietnam, Myanmar, the Philippines, Malaysia and Thailand.
Of the six markets, Indonesia, Vietnam and Myanmar offer the highest range of yields. Property investments in Indonesia typically offer yields of 6% to 10% while those in Myanmar and Vietnam have yields of 8.4% to 10.5% and 5.5% to 8.5% respectively. The yields represent the current average capitalisation rate.
“The most exciting thing in Asean is the agreement to bring the countries closer together and increase trade by removing some barriers. I think that could be quite positive for the growth of all the economies,” says Faulkner.
Another thing he is excited about is the opening up of new areas or cities. “Indonesia and the Philippines, for example, have very clear policies for investing across the country and not to have it concentrated in the capital city. If they build all the infrastructure that goes with this, such as high-speed rail and airports, it will open up new opportunities [for investors].”
Indonesia, Vietnam and Myanmar
In Indonesia, the property market is concentrated in two major cities — Jakarta and Surabaya. But there are also investment opportunities in second-tier cities on Java and Sumatra islands due to improvements in infrastructure. The building of toll roads and mass transport have created opportunities for transit-oriented and industrial estate developments
“Jakarta is by far the biggest market in Indonesia. Surabaya is your alternative investment for main commercial centres. There is money going into Bandung and Central Java as well. If you invest in areas such as Bali and the golden triangle in Jakarta, you probably will not get a return of 10%. But if you go to one of the second-tier cities or slightly newer resort areas, you could easily get that return,” says Faulkner.
According to the Colliers’ report, the yield for the hotel sector in Jakarta and Surabaya is 10% while that of industrial properties in the Jakarta-Bekasi area is between 8% and 10%. The retail sector in Jakarta and Surabaya has a yield of 7% to 8%.
Meanwhile, Myanmar’s government has been enacting new laws and regulations to attract foreign investors. This includes liberalising the banking and finance sector, relaxing the insurance sector and issuing new regulations for retail and wholesale investing.
The number of middle-income families is growing in Myanmar, driving consumption and spending. This translates into investment opportunities in Yangon, its economic centre, as well as in lifestyle destination malls.
The report highlights that the yield for the retail sector in Yangon is about 8.4% while the office sector has a yield of 10.5%, although the vacancy rate for the latter is high at 28%. The yields for serviced apartment and upscale hotel investments are 9.7% and 8.7% respectively while their vacancy rates are 21% and 57%.
“A lot of people live long term in serviced apartments. They did not really rent condominiums in the past because these were not available. But the developers are starting to build condominiums now,” says Faulkner, referring to the demand for serviced apartments by businessmen and expatriates.
He adds that tourism is also driving these trends. “I think people are now looking further than Yangon. We are seeing quite a lot of activity in Mandalay, which is the second biggest city in the north. Due to the tourism sector, we are seeing activity along the beaches as well as the north and south coast of Yangon.”
Vietnam is a key manufacturing hub for electronics and clothing, among other products. Its industrial sector is expected to see strong growth over the next few years. In major cities, the office and retail sectors have low vacancy levels and yields of 5.5% to 8.5%. The yield for Hanoi’s industrial sector is 10%.
“If you can find something in downtown Ho Chi Minh City or even in District 2 across the river in a prime location, you cannot really go wrong. Hanoi is a smaller market and probably not as secure as Ho Chi Minh City. You can go down another tier to places such as Da Nang. The risk there is oversupply if there are a lot of new developments. So, you have to keep an eye on what is happening,” says Faulkner.
Colliers expects more merger-and-acquisition deals by foreign investors and businesses, who are taking advantage of the sale and leaseback structure, in industrial zones across Vietnam. This as an asset class to look out for, says the report.
There are several investment themes in the six markets. One is infrastructure development in countries such as Indonesia, Malaysia and the Philippines. This translates into investing opportunities in secondary cities that will become more accessible. Another theme is tourism, which is booming across the region.
“I think one thing that everyone likes around Asean is the tourism sector because of the huge growth. We are not building for those from Europe and the US anymore. We are building for Asian tourists. There is also a lot going on in the industrial logistics sector,” says Faulkner.
On the other hand, the retail sector promises opportunities only in select places. “If you go to some of the underdeveloped places such as Myanmar and Vietnam, they are short of retail space. But if you look at Malaysia and the Philippines, retail is starting to be affected by e-commerce,” he says.
Thailand has been giving investors good returns due to its burgeoning hospitality sector, which benefits hotel investors. Its luxury and food and beverage sectors are also doing well.
There are also opportunities in office renovation projects in the Bangkok central business district (CBD), where the market is currently experiencing stock shortages. The yields for the hotel and office sectors in the CBD are 6% and 5.5% respectively.
A new area of focus in Thailand is the export-oriented Eastern Economic Corridor on the eastern seaboard, which could be a good location for property investment. “The east coast of Thailand has always been a location for industrial activities and ports. I think they are just trying to diversify the industrial base and build that up as a big centre for Thailand,” says Faulkner.
“That is obviously going to open up not just the office sector but also the industrial one. There will be accommodation, high-end manufacturing and logistics. It will also open up the residential market.”
How to invest
There are risks to investing in some of these markets, especially Vietnam and Myanmar, which are considered the least well-developed among the six markets. This is followed by Indonesia and the Philippines. Thailand and Malaysia present the least risk.
The report provides basic information on property investment laws and taxes imposed on foreign investors in the six markets. In each country, there are various limitations to the kind of properties that can be owned by foreign investors, the method of investment and length of time they can lease the land.
“In a number of these countries, foreigners cannot own freehold land. If you want to do so, you can only have a minority share in a company that owns the land. Some of them have slightly unique land title systems. For example, Indonesia’s is based on the old Dutch system. It is not the same as common law. These are the things people have to look at carefully and get themselves comfortable with such restrictions,” says Faulkner.
Investors who may not have large sums to invest or high risk appetites usually go through funds or real estate investment trusts (REIT) instead of investing directly in developments. “Some of the Singapore REITs have exposure to Indonesia and probably a little in Malaysia and Thailand. I do not think they have exposure to Vietnam and Myanmar. So, you probably have to go through private equity funds to get into those markets,” says Faulkner.
“Having said that, companies such as CapitaLand have investments in Vietnam. So, you could go through the listed route as well.”