With the ambitious target of implementing the Association of Southeast Asian Nations (ASEAN) Economic Community (AEC) by 2015, the opportunities for corporate occupiers and real estate investors across an enlarged single market of some 600 million people look promising.
In his latest publication, Knight Frank’s Research Director for Asia Pacific Nicholas Holt (pictured left) looks into the background, the challenges and the possible impacts.
Nearly five years on from the signing of the AEC blueprint in November 2007, the region is now only three years away from the target of fully implementing measures to create a single market with free movement of goods, services, foreign direct investment and skilled labour.
The possible impacts of actually reaching all of the AEC milestones by 2015 are significant for member states, Asia Pacific and the world economy. The increasing cooperation of 10 countries that are so divided by language, political, religious, and economic philosophy is impressive. The acceleration of integration which includes the AEC as its focal point will enhance the ASEAN region’s emergence as a serious world economic region.
For corporates, the reduced cost of doing business, potential for economies of scale, improved transport infrastructure and a wider labour pool are tangible benefits, whether looking at the region as a manufacturing or service base. For real estate investors, the boost to economic growth, increased transparency and capital markets integration, add to sound underlying fundamentals to provide a compelling story for the region.
In reality, integration as set out in the AEC blueprint is likely to take longer than planned. Protectionism, especially in the form of non-tariff barriers, is an obstacle that will be extremely difficult to eliminate. The lack of central institutions and a reliance on consensus politics are also likely to ensure that the integration exercise will be a more prolonged process. Despite these challenges however, the fast growing, diverse economic landscape of the region will provide a huge range of opportunities over the coming years.
What is the possible impact of the AEC?
The most obvious impact will be an increase in trade between member countries. In terms of existing trade patterns, intra-regional trade is already significant, making up around a quarter of the region’s total trade, but this number only increased slightly between 2000 and 2011 (from 23 percent to 25 percent). Policy makers hope that as trade barriers come down, trade will increase significantly between member states. It should be noted that intra-regional trade in the European Union (EU) accounts for over 60% of total trade. The room to grow is therefore significant.
An increase in intra-regional trade is likely to bring about a number of effects. For firms, it will lower costs as inputs can be imported more cheaply and transportation costs drop as infrastructure is improved. Economies of scale will also be reaped by businesses that can consolidate regional offices and production sites, with easier mobility across markets enabling occupiers to choose the most cost-effective locations. The increase in competition in each market will drive productivity, which will again drive down costs and should be passed on to consumers. The purchasing power of households will increase as they benefit from increased competition, higher incomes and more imported goods and services. The overall effect will be to boost economic growth, by some estimates as much as 5 percent across the region (Petri, Plummer and Zhai 2010).
The increase in trade will however accelerate some regional disparities, as goods and services previously produced at high costs within a country, will be replaced by cheaper imports from more competitive markets. The free movement of skilled labour will mean that the countries that have a comparative advantage in goods or services could attract the best talent from around the region.
How will this affect commercial real estate markets?
These changes will influence commercial real estate markets, whose demand is derived from growth and changes in the economy. With a boost in GDP, there will be a general increase in demand for commercial real estate, as employment growth will be accelerated as production of goods and services increases. The movement of capital and labour towards the strongest markets for each good and service is likely as barriers come down. This could have certain repercussions on the member states and respective real estate markets across ASEAN, notably:
- Singapore to remain and increase its importance as the key financial and high end service centre for the ASEAN region. As a truly global city with an important stock market, Singapore will act as the key business hub of the region. This will ensure demand for prime office accommodation in the city state remains high.
- Cost driven manufacturing is likely to move towards markets such as Cambodia, Laos, Myanmar and Vietnam as their physical infrastructure improves. Thailand and Malaysia will have to compete higher up the value chain.
- With the continuing increase in incomes and emerging middle classes, retail expenditure will grow significantly, and foreign retailers will be increasingly attracted to an enlarged urbanising single market. Significant urban centres will develop more important retail offerings with foreign goods more prevalent.
Intra-ASEAN Real Estate Investment already significant and likely to grow.
Cross-border real estate investment within the ASEAN region has been concentrated around Singapore, both as the largest recipient of cross-border investment flows in the region, but also as the main investor itself within the ASEAN region. These numbers reflect Singapore’s importance as a financial centre of the region and the number of institutional investors based out of Singapore (deploying capital raised from throughout the world). As a destination for cross border investment, the transparent and liquid Singaporean market has certainly been seen as a relative “safe haven” when compared to some of the additional risks elsewhere.
As the AEC targets are met, the aim of strengthening capital market integration across the region will boost real estate investment, while bilateral tax agreements between all the member states will improve transparency and reduce exit risk.
As capital is more efficiently allocated across the ASEAN countries, and capital raising across borders becomes easier, we expect investment volumes to increase and pricing become more straightforward.
Marcus Burtenshaw, Director of Commercial Agency, Knight Frank Thailand (pictured right), said: “Last year Thailand’s biggest export destination (24 percent) and its second biggest supplier (after Japan) was ASEAN itself, and as the ASEAN economies continue to mature, and the inter-industry linkages deepen, the opportunities should grow too. Planned investment and improvements in logistical linkages with the member states of the AEC should reduce the transportation costs of goods and raw materials, boosting Thai competitiveness. But this will take time, and while minimising cost is important, from a manufacturer’s perspective, the depth of capability and market access when taken together are given just as much weight, in a firm’s decision making analysis. It is here that Thailand competes today, and not just with its ASEAN neighbours but on the world stage against such countries as China.
“To attract more manufacturing FDI after 2015, the challenge for Thailand will be the same as it faces today: to compete higher up the value chain by implementing well thought out policies designed to upgrade the industrial infrastructure and human capital. Further liberalization of Thailand’s service sector should present many opportunities for service providers with a regional presence to open a base here to not only take advantage of the opportunities present in ASEAN’s second largest economy (Thailand) but also of the geographic advantages that the country offers through its borders to Cambodia, Laos, Myanmar and Vietnam.”
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