I recently was asked to share my thoughts on how the formation of the ASEAN Economic Community in 2015 will affect the Thai industrial real estate market at the RICS ASEAN conference held in Bangkok earlier this month (edit:July 2012)
What follows is more or less the transcript of my speech.
The AEC certainly seems to bring about a sense of optimism, perhaps it’s the free flow of skilled labour and the opportunities it will bring? I think so long as barriers such as language and culture can be overcome, skilled workers will seek out opportunities and better pay. For example, accountants can demand much higher salaries in markets such as Singapore and Malaysia where they can command almost three times as much.
After the formation of the European Union their share of the global FDI inflows rose from about 30 percent in the 1980s to about 50 percent in the 1990s and has until recently remained there since.
The formation of the AEC, which aims to create a single ASEAN market and production base, is also expected to lead to greater economies of scale that would improve its competitiveness and make it more attractive to foreign investors.
Industrial properties caught up in the ever growing realms of global production networks, are at the forefront of globalization and as such this is the sector that we expect to be the most directly affected by the formation of the AEC.
To assess how much FDI will come to Thailand and affect the real estate sectors here I think it’s useful to understand how Multinational Manufacturers select which country to invest in.
Knight Frank helps firms to do just this. In our experience firms have four major criteria that they use to assess and select a country for investment; Cost, Capability, Market Access, and Risk.
Cost is perhaps the most obvious and accounts for about half of the total weighting in the firms’ decision making analysis.
They seek to reduce set up costs and so look for markets with the lowest capital expenses, (such as land acquisition & construction costs),
They seek out the lowest operating costs (wages, utilities, rents, taxes etc). and it is in this category that they account for the impact of investment incentives from governments and developers.
After which firms look at the depth of capability that the country has to offer its manufacturing operations.
The Quantity and quality of the Human Resources: their skills, qualifications, productivity, and standard of English.
They require world-class infrastructure, in the form of roads, rail, ports and the access that subject locations have to these transport modes.
They seek data on the interruptions and availability of utilities: water, power, natural gas
They prefer markets with established production networks: where an agglomeration of efficient suppliers, competitors, support institutions and service providers are present.
The next category that they look at market access, where they seek the lowest lead times through close proximity to their customers or suppliers in the local or regional markets
Then finally, risk is considered. In our conversations with manufacturers the biggest risk that they seek to mitigate before all else, is the security of their intellectual property.
Before they invest they will look at the willingness and effectiveness of government to provide written IP protection commitments.
They will then consider other risks such as government stability and the frequency of natural disasters.
I have read this week that some are concerned that demand for industrial estates in Thailand will fall after 2015: I don’t share that view. Investments continue to flow to Thailand despite rising land values and wages, in fact Thailand already finds itself in the position where it has become difficult to compete on cost with countries like Cambodia Laos Myanmar and Vietnam. The sunset of the Thai garment industry is a testament to that.
For firms whose sole driving force is cost, and only require low or semi skilled labour the CLMV nations will look increasingly attractive as their physical and legal infrastructure and linkages with ASEAN improves.
But, this will take time, and whilst cost is important, from a manufacturers perspective, the other criteria (capability, market access & risk) when taken together are given just as much weight in their decision making analysis, and it is here that Thailand competes today, and not just with its ASEAN neighbours, but on the world stage, against such countries as China.
To attract more manufacturing FDI after 2015, the challenge then for Thailand will be the same as it faces today: to compete higher up the value chain.
It is not reasonable to expect to turn back the clock and compete against CLMV on costs, so implementing well thought out policies designed to upgrade the industrial infrastructure and human capital will be vital. But it certainly won’t hurt to reduce expenses either.
One of the stated aims of the AEC is to create an integrated and harmonized customs landscape to promote the Free Flow of Goods.
It will take time to iron out the kinks, but improved logistical linkages with the member states of the AEC should reduce the transportation costs of goods and raw materials, boosting ASEAN competitiveness.
So as countries invest in infrastructure and create new trade routes, we can expect to see demand for integrated-logistics space increase at strategic transport hubs, but
We believe that most of the growth will be organic, increasing in line with manufacturing FDI centered close to existing industrial hubs, however we may also expect to see some growth in distribution centers as more ASEAN made products find their way to the Thai market.
BUT I don’t expect 2015 to bring about rapid change. We have been moving towards the AEC since 2006. Its effect is already being felt; it seems that every week another firm announces an investment that positions them for future growth due to the AEC.
Last year Thailand’s biggest export destination (24%) and its second biggest supplier (after Japan) was ASEAN itself, and as the ASEAN economies continue to mature, and the inter-industry linkages deepen, the opportunities should grow too.
So the three key takeaways that I’d like to leave you with today are:
- The AEC increases competition for all and therefore creates opportunities both at home and abroad.
- The impact on the industrial real estate sector is already being felt today, and the growth will continue as we move towards 2015 and beyond
- But it is the implementation of policies to upgrade infrastructure and human capital that will be vital if Thailand is to capitalize on all that the AEC has to offer.
So how about you? How do you feel the AEC will affect your country / market / business?