By David Drake
(Note: This article is the third in a series on Global Trends in Family Offices Investments.)
Asia has shown more robust economic growth than anywhere else in the world. According to IMF WEO Data, GDP grew to 6.3% in 2013 and is expected to grow to 6.5% in 2014, compared to 2.7% and 3.1% for Latin America/Caribbean, 1.6% and 2.6% for the United States, and 0% and 1.3% for the European Union.
Government debt is also an important indication of how well an economy is doing. Sovereign debt in Asia is much lower (and declining) than in other regions. Debt as a percentage of GDP for countries in Asia was 31.7% in 2013 and forecast at 29.9% in 2014 compared to 50.5% and 50.7% for Latin America/Caribbean, 85.5% and 90% for the Eurozone and 106.3% and 107% for the United States. Current-account balances as a percentage of GDP also favor Asia.
Investing in Asian equities
Not all countries in Asia are equal, nor are their markets. Despite being the third-largest economy in the world, Japan’s economy is shrinking. On the other hand, the Chinese economy has performed well over the last few years, but its equity markets have been among the worst. India fascinates many investors because it has a decent growth story and a massive workforce, with around 500 million people below the age of 25. The Indian political system has handicapped growth, but with a new business-friendly government, it should prove to be less of an impediment in the future.
Prospects for the ASEAN countries are bright. Spearheaded by Indonesia, southeast Asian countries are aiming to establish a common market by 2015. They boast a young working class as well as the favourable cost structure. The 10 countries in the bloc, if taken as a whole, would rank as the eighth-largest economy in the world while accounting for 8.8% of the global population. The six major countries – Indonesia, Thailand, Malaysia, Singapore, Philippines, and Vietnam – account for the lion’s share of the economies in the region.
Trends in Real Estate
Despite uncertainties in the economic environment, real estate markets stayed surprisingly strong in 2013 with increases in transaction volumes towards the end of the year. In 2014, there will be intense competition for traditional real estate assets. Already low yields are likely to decline further if interest rates begin to move up. As a result, investors looking for higher yields will be forced to take higher risks, such as buying smaller sized or B-grade buildings.
A survey of 250 respondents by the Urban Land Institute and PricewaterhouseCoopers reported Tokyo as the top destination for real estate investment in 2014. Shanghai remains the second favourite despite stagnant rentals, because it is regarded as a relatively low-risk market for investors willing to venture into less well-known cities in China. There is also continuing interest in Jakarta and Manila. Jakarta ranks first in terms of the prospects for development.
Private equity outlook 2014
According to a report by Ernst and Young, General Partners will continue to exit the thinning IPO market by selling to sales to corporate buyers in Asian markets. Even in China, where the temporary pause in IPO listing has ended, the backlog of deals will mean considerable waiting periods for private equity companies launching an IPO. Those surveyed in the Ernst and Young report said they expect an increase in buyout deals, which have largely been confined to mature markets such as Japan and Singapore, but acquisitions for control appear to be gaining momentum. Emerging markets such as China and India will continue to dominate even though there is increasing interest in the frontier markets of Southeast Asia. Overall, private equity activity is expected to increase in 2014.
Family offices based in the Asia-Pacific are expected to be an increasingly important source of investment in private equity deals, according to a report from Preqin. The largest proportion of family offices interested in private equity funds comes from Singapore and India, at 28% each, followed by Hong Kong at 19% and Australia at 9%. Family offices strongly prefer venture capital funds, with 83% of family offices opting for this strategy, followed by 58% for buyouts and 20% for growth funds. 21% of the family offices surveyed prefer distressed asset funds and 13% opt for mezzanine funds. In terms of geography, 24% are seeking opportunities in South Asia, 7% in ASEAN and 28% of family offices have a mandate which is restricted to the Asia-Pacific region. The remaining 72% are open to global investment opportunities not restricted to the Asia-Pacific region.
Note: This article originally appeared in the first issue of Family Offices Today.
Image: Singapore skyline
David Drake is the Chairman of LDJ Capital, a multi-family office; Victoria Partners, a 300 family office network; LDJ Real Estate Group and Drake Hospitality Group; and The Soho Loft Media Group with divisions Victoria Global Communications,Times Impact Publications, and The Soho Loft Conferences. Reach him directly at David@LDJCapital.com.