What the robot wars mean for Asian property

As leader of one of the world’s largest conglomerates making everything from aircraft engines to cyber security software, General Electric CEO Jeffrey Immelt knows a thing or two about robots. In fact, he believes they’ll bring an end to the days of “wage arbitrage”, where high cost jobs are exported to lower cost countries.

The reason is that robots cost the same wherever they’re used, so if robots are making things rather than people, why not reduce transportation time and logistics costs by locating production close to the customer? This insight was one of many unveiled at the Asia Pacific Real Estate Association (APREA) Property Leaders Summit in Hong Kong recently. For property investors, this has big implications.

APREA has done a tremendous job encouraging best practices in corporate governance and transparency among REITs in Asia, working closely with governments to open up and expand their respective real estate markets. The chart below shows how well this message has been received. In the last 15 years the market capitalisation of the Asian REIT market has grown at 35% per annum and stood at A$220bn at the end of 2015. In comparison, over the same period the Australian AREIT sector has grown at 7.6% a year with a total market capitalisation of A$117 bn (at end 2015).

asia-growth-chart_oct16

Source: Bloomberg

One of APREA’s current priorities is to develop ‘state of the art’ REITs in China and India, Asia’s largest real estate markets. When these markets do take off, as they have in developed Asia over the past decade or so, they will be among the world’s biggest, raising the profile of the REIT market across the region. That should be good for current investors in APN’s Asian REIT Fund.

The Indian growth story was one of the major themes in the Summit sessions, hardly a surprise given it is the world’s fastest growing large economy. The World Bank estimates that GDP growth this year will be 7.6% and 7.7% next year, more than double the pace of growth in other large economies.

Prime Minister Modi’s promise to modernise India by boosting manufacturing and infrastructure, and thus raising employment, has lately been attracting global institutional capital to Indian real estate investments. As part of this evolution, we expect to see the inaugural Indian REIT listing in the next 12 months. As APN’s Asian Fund focuses primarily on the developed Asian markets of Singapore, Hong Kong and Tokyo, we won’t be investing in it in the immediate future, although we are watching the growth of this market with interest.

The other major theme concerned the concept of the “fourth industrial revolution” and the rise of cognitive processes and artificial intelligence. The idea is that new (and existing) technologies will be transformative, drastically improving the efficiency of businesses and organisations. Yes, we’re back to the robots (if this feels like a digression from real estate, a connection will be made I promise).

The cost of robotic technology, as with all technology, tends to fall over the long term. That’s not the case with labour, where costs tend to rise. With each fall in the cost of new technology, new avenues to replace expensive labour open up, which is why automated technology is already replacing workers in many industries. So, how does this tie back to Asian real estate?

Accounting for 60% of the world’s population, Asia is home to some of the fastest growing countries (ASEAN bloc, India) and largest consumer markets (China and India) across the globe. It also possesses the largest and fastest growing retail e-commerce market in the world, estimated to be growing at an annualised rate of over 30%1. Asia is where much of the world’s future demand growth will come from.

Meeting that demand will require real estate development and infrastructure, plus a whole lot more. The process is already underway. China is building a new Silk road, termed the “One Belt, One Road” strategy that extends all the way to Spain by rail and Africa, India and Europe by sea. Singapore is currently building a “next generation” mega port, Malaysia is working with China to develop the largest port in the region under the Malacca Gateway project and is forming a ‘port alliance’ to fast track trade between the two countries.

Intra-regional trade is likely to soar, prompting demand for high quality logistics facilities and educated staff to ensure the new machines, networks and logistics run smoothly.

Steeped in the mechanics of global trade, Singapore and Hong Kong in particular are likely to strengthen their roles as the London and New York of the Asian region.

In the past, these cities have benefitted from their geographical location. Now their infrastructural advantages in a digital world take on a deeper hue. With fast, reliable digital infrastructure, highly educated populations and stable political environments, to say nothing of attractive tax rates, these cities already facilitate the huge and growing flows of cross border data, trade and finance.

As the fourth industrial revolution gets underway, this trend is likely to gather pace. With limited land supply in both cities, and stronger GDP growth prospects, commercial real estate looks like a good place to be which is why APN’s Asian Fund is happy to have a significant exposure to both cities.

 

This article has been prepared by APN Funds Management Limited (ACN 080 674 479, AFSL No. 237500) for general information purposes only and without taking your objectives, financial situation or needs into account. You should consider these matters and read the product disclosure statement (PDS) for each of the funds described in this article in its entirety before you make an investment decision. The PDS contains important information about risks, costs and fees associated with an investment in the relevant fund. For a copy of the PDS and more details about a fund and its performance click here. To receive further updates and insights from the APN team, sign up for Review, our monthly email newsletter.

  1. Emarketer estimated figures for 2016, annualised.