The Wealth Report 2022 – Risks and Opportunities in Asia Pacific, Q&As with Christine Li

Is inequality a rising risk in Asia and will taxes rise as a result?

The pandemic has exposed the harsh realities of social divides, which has reverberated beyond its socioeconomic implications. Such vulnerabilities can have real consequences on economic growth and resilience as large parts of the population are plunged back into poverty. Raising or implementing other forms of taxation are policy options to consider redistributing income and reduce economic disparities, and in light of what has happened during the pandemic, governments will be keen to explore various options to close equality gaps, particularly in the region’s emerging economies. However, it should not be the only consideration. As a recent report released by Knight Frank India has shown, solving the affordable housing conundrum also deserves a lot of thought as the lack of a proper roof over one’s head is a key driver of social divides.

What concerns for the economy do you have that investors should be aware of?

There are lingering concerns of a flare-up in the pandemic although we believe that such concerns are abating with higher availability of vaccines and oral medication. Variant or no variant, most governments are likely to take bolder strides to continually lift restrictions and reopen economies. Inflationary pressures and policy tightening are now emerging to be the main risks, which will combine to create uncertain conditions for investors to navigate through.

To what extent is ESG on the minds of Asian developers, lenders, and investors?

With investors increasingly benchmarking portfolios through a sustainability lens, ESG commitments are emerging as a core agenda for owners and developers seeking to access finance and reduce portfolio risk while regulations to drive sustainability are also expected to gather pace. A detailed examination of transactions in the region also shows that price premiums for a top-rated green office asset can reach as high as 18%. While sustainable properties have the potential for ESG premiums, the looming brown discounts exerted on non-compliant assets will grow steeper. Commitments towards ESG targets will become increasingly vital in reducing the incidence of stranded assets. It will also enable value creation opportunities and ensure the continuity of real estate as long-term profitable investments.

What are the factors that might hold back investors when considering ESG-focused investments?

The lack of industry-wide benchmarks and data in assessing investments are key impediments to the wider adoption of ESG driven investments. ESG remains a multi-faceted concept with different aspects and exactly what it constitutes is still evolving. Adding to the confusion is the lack of a standard that ties all three components together, while the Social facet is clearly still open to a host of interpretations. This renders investments with ESG tags to suffer from information asymmetries as well as the incidence of greenwashing. Still, the incorporation of such dimensions into investments is a critical step in the right direction. Tackling environmental degradation and climate change is emerging to be one of the greatest and urgent challenges of our time.

Given Asia’s reputation as a hub of tech and innovation, are you seeing much appetite from Asian investors for digital real estate?

Digital real estate remains an obscure asset class that remains untested and unfamiliar to most Asian investors. While investments in the metaverse have captured the public’s attention of late, it remains highly speculative and with an uncertain future. It should also not be seen as an equivalent to a physical real estate asset that can confer the same stability and income-generating qualities. As such, I do not see the likelihood of it gaining widespread acceptance by investors in physical real estate.

How do you see allocations to commercial real estate changing in 2022?  And what are the drivers?

The pandemic has accelerated a number of structural trends, and this is redefining the use of real estate in the region, investors will be keen to recalibrate their strategy towards sectors that will benefit from recovery and reopening themes while at the same time future-proofing their portfolios in the post-pandemic era. This means elevated demand for prime grade assets to navigate transformation pressures and a doubling down on ESG considerations.