China's ambitious Belt and Road Initiative (BRI) embarked on a new phase with the unrolling of BRI 2.0 by Chinese president Xi Jinping during 2nd BRI Forum in April. As China promises to address transparency concerns and open BRI to wider participation, one of the regions that can immensely benefit from this revamped programme is Southeast Asia.

BRI investments in new ports, railroads and highways in the region are expected to drive construction and real estate (CRE) developments in logistics, manufacturing and industrial sectors along those routes.

The biggest beneficiaries in BRI-related investments over recent years have been Thailand, Malaysia, the Philippines and Cambodia, said real estate consultancy Knight Frank in its report 'New Frontiers 2019.'

"For these markets and China, a capital injection brings mutual benefit: with infrastructure funding, the host country speeds up its economic expansion, while China gains new trading partners," said Justin Eng, Associate Director at Knight Frank Asia Pacific.

The report noted, over the past five years since the BRI's launch, $59.25 billion in Chinese-linked capital has been invested across the Southeast Asian transportation, real estate and logistics sectors; almost 3.5 times the $17.1 billion invested in the five years prior to BRI.

Accounting firm KPMG agrees that countries across Southeast Asia are experiencing rapid economic growth and high levels of public infrastructure expenditure.

"These dynamics are leading to an attractive and diverse range of opportunities in the construction and real estate sectors," said Andrew Weir, Regional Senior Partner, KPMG Hong Kong and Vice Chairman, KPMG China.

He said specific countries which are expected to see strong volumes of real estate development and construction activity in coming years include Vietnam, Thailand, the Philippines and Indonesia.

Within the real estate sectors, the logistics and industrial sectors will be the biggest initial beneficiaries, according to Knight Frank.

When a new port is built, Eng explained, there is a corresponding rise in demand for warehouses to store incoming goods prior to being transported inland.

"We are witnessing an uptick in client interest - especially from the global 3PLs - in exploring build-to-suit opportunities within these markets, especially around current major BRI projects," he said.

Trade connectivity

A major theme that is being observed right now in several Southeast Asian markets is investment in infrastructure that enhances people and trade connectivity to increase the scope for growth in domestic trade as well as industrial and agricultural exports.

"Thailand and the Philippines are good examples of this dynamic," said Michael Camerlengo, Partner, Infrastructure Advisory at KPMG Transaction Advisory Services.

In Thailand, he said, the Eastern Economic Corridor (EEC) is a special economic zone development initiative that is attracting a lot of attention. There are plans underway to connect the country with China, via Laos through high-speed rail infrastructure as well as the expansion of the U-Tapao airport and Laem Chabang Port.

"These connectivity projects will lead to significant industrial and logistics development and construction opportunities along the corridor," said Camerlengo.

Whereas, in the Philippines, he said the government has been embarking on its 'build, build, build' programme which is directed at improving and expanding infrastructure across the country. This includes a high volume of expressway and bridge projects related to better connecting the archipelago as well as reducing flood-related risks across the country.

"Similar to Thailand, these projects will lead to increasing transaction volumes in industrial and agricultural real estate in areas that are proximate to these enhanced and new networks," said Camerlengo.

Real estate investment

Over the last couple of years, Chinese real estate investors have shifted their focus away from the US to Europe and Asia as the country's economy and currency gained strength.

Chinese investment in US property assets dropped 64 percent in 2017 from 2016, to $5.9 billion, according to Real Capital Analytics (RCA) data, highlighted by Colliers in its report titled: The Dragon Spreads its Wings over Asia, released last year.

Conversely, the report added, Chinese investment in Asian property assets increased 34 percent to $12.5 billion, while Chinese investment in European property assets surged 336 percent to $18.7 billion, during the same period.

The report further noted that Chinese investment in Southeast Asia and South Asia reached $2.5 billion in 2017, nearly four times the level of 2016 and the second highest level ever (after $4.1 billion in 2013).

Looking ahead over five years, Colliers said China's ambitious "One Belt, One Road" project, coupled with the firm Chinese economy and RMB (Renminbi) strength, ought to drive Chinese investment in emerging Southeast and South Asian markets.

This was reflected in CBRE's China Investor Intentions Survey 2019 which revealed that Chinese buyers retain strong intentions to invest within Asia, partly due to opportunities to purchase assets in sectors expected to benefit from the BRI.

"Emerging Asian countries, such as Vietnam and Thailand, registered increasing interest from Chinese investors. The survey found 46 percent of respondents chose Emerging Asia as a most preferred investment region, 4 ppts higher than last year," said Sam Xie, Head of Research at CBRE China.

He said Southeast Asia continued to benefit as labour intensive manufacturers relocate supply chain out of China.

"Riding on this trend, Chinese logistics developers and investors continue to develop logistics infrastructure and build supply chains in emerging Southeast Asia in anticipation of growing demand," said Xie.

Meanwhile, he added, the residential markets in many Belt and Road countries are emerging to be preferred destinations for Chinese investors.

While there's currently no forecast or projection in terms of investment volumes (as all outbound investment activities are subject to state approvals), Zhang of Cushman & Wakefield pointed out that China outbound real estate investment into belt and road averaged around $3 billion (excluding infrastructure) for the past six years.

Daniel Yao, Head of Research East China at JLL agreed that there are increasing interests from Chinese developers (but not many from domestic institutional funds so far) seeking opportunities of buying land plots over the past couple of years in Southeast countries, including Vietnam, the Philippines, Cambodia, and Indonesia.

According to RCA data, Chinese real estate investment volume for development sites in Malaysia and Thailand has been $73.84 million and $25.78 million respectively in the first half of 2019.

This comes after Chinese investors spent $87.69 million and $27.62 million in Cambodia and Indonesia respectively for real estate transactions for the whole of 2018, according to RCA.

"China, and its key cities, in particular, are growing connections with other countries and cities, not only under the umbrella of BRI but also in more organic ways," said Yao.

For Chinese developers, he said, residential and commercial (especially for office-use) land plots in both mature and emerging locations are the most sought-after.

Mitigating risks

While most of the concerns about BRI including debt trap are primarily related to mega infrastructure projects involving government entities, real estate projects executed through joint ventures (JV) between Chinese and local companies are also prone to risks.

"One major risk we see is political in nature such as a change in government," said Eng of Knight Frank.

Richard Fu, Senior Associate Director, Belt and Road Outbound Consulting Team, Consulting Department, Cushman & Wakefield, said political risks are difficult in BRI investments.

"Getting China investors and local partner to reach an effective partnership is also difficult. To ensure economic feasibility, we would suggest investors to have deep and systematic study before conducting actual investment," he said.

Eng pointed out that the 'debt trap' concern mainly involves local governments who undertake the project with a Chinese state-owned enterprise partner.

In order to safeguard themselves, he suggested that local companies undertaking BRI projects should conduct their proper due diligence before making major capital expenditure decisions.

"While major projects are unlikely to be cancelled once announced, they could face major delays in completion which in turn will lower returns to investors," warned Eng.

KPMG's Weir pointed out that there are always risks associated with development projects, BRI included.

"Whether construction-related, regulatory, commercial or people related, all risks need to be carefully identified, assessed, quantified and mitigated before proceeding with a new development," he said.

By way of example, Weir said, a common people-related risk on BRI projects includes navigating cultural differences and similarities as a foreign investor into a new market.

When it comes to commercial risks, he said identifying the customer demand profile for the project is key - whether it be office, residential, hotel or retail development, adding that identifying who the end-users will be, what their requirements are and expected demand levels will ultimately determine the prospects for financial success and key risk factors to address.

"Once this dynamic is well understood, assessing the optimal debt and capital structure that will be sustainable in the long run becomes a more straightforward proposition," said Weir.

From an investment perspective, said Zhang of Cushman & Wakefield, forming a JV with the local developer seems to be a most effective way of adapting to local markets and mitigating potential risk in planning, construction and sale/lease.

Additionally, Knight Frank's Eng said they are starting to see greater scrutiny now on how the BRI label is being used on projects across the region and how their structures (both debt and partnerships) are being assembled.

(Reporting by Syed Ameen Kader; Editing by Anoop Menon)

(anoop.menon@refinitiv.com)

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