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Asia Pacific is one of the few bright spots for retail expansion in a still recovering global economy. Yet gaining access to those high growth markets is no easy task.

It is no wonder that Asia Pacific is on the short list for international expansion. Consumer spending is strong and growing across much of the region thanks to economic and job growth and a burgeoning middle class of consumers who have an appetite for modern shopping centers and Western retailers. In China, for example, retail sales have been growing at a rate of about 18 percent per year.

In order to tap into that burgeoning retail industry, international firms must overcome barriers to entry and market risks. Certainly, retailers and developers need to adapt their concepts to fit the cultural differences that exist and position themselves to better compete in the local markets. On top of that, the industry has to account for a myriad of different government requirements, policies and permitting regulating both new development and foreign investment.

The biggest stumbling block for international firms is obtaining the local knowledge and local execution capabilities that are critical for success. Local knowledge is essential to the entire development process from securing sites and the necessary approvals through construction and management of properties.

“There are a whole host of hoops that parties need to go through in order to successfully launch a shopping center. Knowing how to navigate that in terms of the local rules and regulations is a tricky process and one that really requires local knowledge,” says Benett Theseira, managing director, Southeast Asia for Pramerica Real Estate Investors in Singapore. Pramerica is the real estate investment management business of U.S. based Prudential Financial Inc.

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Gaining a local edge

Retail markets throughout Asia are in the midst of a major development boom with China and India the clear leaders. China alone is expected to produce 98.7 million sq. ft. of new retail space this year across 18 cities, while India is on track to deliver about 12.3 million sq. ft. of new retail space among its eight most active cities.

Yet it can be a challenge for international investors and developers to break into markets where local firms often have an inside track on available land and new development opportunities.

What complicates the development and investment process further for international players is that the government process and requirements vary widely from country to country. “It is all different, and you really need to understand those markets in quite a lot of detail in order to execute a project well,” says Theseira. China, for example, has an added layer of complexity as the retail development process varies from city to city.

Obtaining good local knowledge is all the more critical because these markets are often not transparent, even in basic components such as available planning data. Pramerica has relied on a strong local team for much of its success in the region. Pramerica’s AsiaRetail Ltd. is a $3 billion fund that currently owns properties in Singapore, Malaysia, China and Japan. Pramerica has been active in Singapore since 1995 and the group made its first retail acquisition in that country more than a decade ago. Pramerica used that expertise to expand into Malaysia, and then started building a team of local experts in China when it began expanding in that country a few years ago.

“The sophistication of retail in many of the emerging markets is still on a learning curve, and the ability to recruit capable people is still a challenge,” says Theseira. “To be successful, you need to develop the people and the team.”

Another challenge for international investors is that they are facing much stiffer competition than even a few years ago. Local competition has increased as domestic players have become more knowledgeable about the retail sector and have greater access to capital.

Ten years ago, international players coming in with capital had a number of local parties who were interested in teaming up with them. Now that is less the case, because the local developers don’t necessarily need the money. In order to land those local partners today, foreign investors and developers need to bring something else of value to the table in terms of knowledge, processes, or access to international tenants, notes Theseira.

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Maneuvering shifting markets

Local expertise is also essential when navigating the ongoing changes taking place among the emerging and more developed markets across Asia. For example, one of the biggest changes on the horizon is a further relaxation of India’s foreign direct investment (FDI) restrictions. India announced that it plans to loosen the current 51 percent cap on foreign ownership of single-brand retail, a move that is expected to open up the market to more international investors and retailers. The changes are expected to take affect this year or in early 2013.

One of the main constraints to new development in Singapore is the high price of land and the limited supply of building sites available. The local Urban Redevelopment Authority (URA) is proactive in monitoring and releasing land for new development. However, the process is very controlled and mindful of current balance of supply and demand, which has kept vacancies low—currently ranging between 0 percent and 3 percent, notes MacDonald.

On the opposite end of the spectrum, too much building in China and India is creating concerns that overdevelopment that could lead to high vacancies, a lack of rent growth and even project failures due to poorly executed projects.

Particularly in China, loose development restrictions have been key to fueling rapid growth. Traditionally, the government has allowed the market to regulate itself, which has some retail experts worried about a retail real estate bubble. That climate is prompting notable changes in China. “Because of the overheating of the market and too much capital—whether local or foreign—local governments are taking certain measures to cool it down,” notes Theseira. China has made it more difficult for foreign capital to enter the market. “Over time that will get easier as the efforts to cool the market start to show some success,” he adds.

Via : Retail Traffic – By Beth Mattson-Teig, Contributing Writer