LandLease (Asia) Property Limited (LL) wants to infiltrate the Hong Kong real estate sector. Louisa Martin and her senior advisor Marco Li have two main possibilities to achieve this goal, direct and/or indirect investment. By investigating the different investment possibilities they want to understand the merits and demerits, including risk and return of the possible investments. Bearing these outcomes in mind, they can form a new strategy for the company. We will discuss 4 different subjects as stated in the assignment: * The merits and demerits of direct real estate investing are highlighted; * The potential benefits for LL of allocating its assets to indirect real estate; * The opportunity of assembling real estate property assets for listing as a REIT; * Propose a strategy for LL, taking into account the fundamental issues and opportunities available to LL. 2. Direct Real Estate investments, merits and demerits
As is know, LL operates mainly in direct commercial investments back in Australia, where a lot of benefits are earned in this way of investing. Geltner and Miller (2007) give a definition of direct real estate investments: direct ownership of the underlying asset.Two possibilities of direct investments in Hong Kong arise in the LL case: ownership can be required or one should engage in direct development of assets to include in the portfolio. High returns are generated when investing directly in real estate; this is generated by cash flows from lease contracts. They can use more debt financing which can favour their tax situation. Another merit is the possible increase in NPV. By owning the title directly, the company can use their own expertise and knowledge to change the negative NPV of a project to a positive NPV. Also by investing in direct real estate the company is able to choose their investment sector. Again they can use their own expertise and knowledge, which can reflect in high returns. The drawbacks and demerits of investing in direct real estate in Hong Kong are also discussed in the LL case. Direct investment requires abundant time, professional expertise and large amount of capital. Since LL does not have the expertise in the Hong Kong real estate market yet, developing quite good and solid relationships with local banks for future financing probabilities is of great importance. Joined venture or co-investing may be a good alternative to diversify and mitigate risks with local (HONG KONG) property companies. These firms are more professional and familiar with local knowledge and practise and will reduce the investment risk and increase the return. One of the merits discussed is the entry barrier due to high land bids and dominant Asian property companies. Also formal differences (taxes) and informal business differences (cultural) should be taken into account as disadvantages. Some other risk possibilities should be taken into consideration, for example managerial issue, ownership, and currency risk, policy and culture difference. These are the factors that influence the return of direct investments significantly. The cyclical concerns that Louisa has will have to be taken into account as well. The Hong Kong market is highly dependent on trades with the rest of the world. Due to a decrease in growth in world economy the real estate sector was dampening. Declining transaction volume resulted in lower liquidity and therefore allocation become more difficult, thus risk increases. 3. Indirect Real Estate Investments, merits and demerits
One of the major downsides of direct investment in real estate is the high entry barrier. Both the direct acquirement of assets as well as the development of assets would involve substantial capital requirements. Indirect investment in real estate lacks these high entry barriers, which forms it into an attractive alternative for direct investment. Originally the Hong Kong real estate sector provided two mechanisms that supported...
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