Asian SWFs get real

As Asia’s funds diversify away from their traditional equity and fixed-income staples into new alternative asset classes, new international patterns are emerging in real estate investment.

Korea goes global for property

South Korea’s National Pension Service (NPS) is leading the charge for Asian LP and SWF commitment to real estate. In a bell-wether deal, it will buy HSBC Holding’s headquarters building in London for £772.5 million ($1.3 billion), in the largest single real estate investment deal this year.

HSBC, Europe’s largest bank by market value, has divested its Canary Wharf building not once but twice. Back in June 2007, it sold the asset to Metrovacesa SA, the European property group, for about £1 billion ($1.6 billion). It then bought it back for £838 million ($1.4 billion), making £250 million ($415 million) profit, 14 months later.

This time, HSBC was forced to sell the building under its divestments plans across cities including London, Paris and New York, to boost its cash reserves to cover the over $50 billion loan losses and asset writedowns it suffered by investing in US home mortgages.

Under the terms of the agreement, HSBC will retain full control of occupancy for the remaining 17.5 years of the existing 20-year lease period, at a current rent of £46 million ($76.4 million) annually. The deal is expected to close by the end of 2009. NPS was advised by JP Morgan Asset Management and Berwin Leighton Paisner, while CB Richard Ellis Group Inc. and Linklaters LLP represented HSBC.

Separately, NPS earlier this month paid £268 million ($443 million) for 88 Wood Street, a modern skyscraper in the east of the City of London, and 40 Grosvenor Place, an award-winning building located behind Buckingham Palace in London’s West End.

As of end September 2009, NPS has KRW 270 (233 billion) of assets, including KRW3 trillion ($2.6 billion) worth of real estate holdings at end August. Its appetite for the European real estate market is apparently increasing with the attractive prospect of picking up assets at the right time, when the market is still undervalued. The values of offices in the City have fallen nearly half from the market’s peak in July 2007, according to Investment Property Databank.

“The London real-estate market has gone through a price correction since hitting the bottom in the first half of 2007 and profitability for investment has improved considerably,” NPS said publicly. 

A real estate report from Aviva noted that, in terms of current market pricing, whilst values are still falling in the ‘secondary,’ or lower-quality, end of the market, there are already signs that valuations for some parts of the prime market, which have been stable for the past few months, are beginning to rise. Avivia also said in the report that valuations across the market as a whole were expected to stabilize within six months, and possibly sooner.

NPS invests Asia Pacific

Meanwhile, NPS is also planning to pour more capital into Australia’s property market. The SWF is reportedly partnering with US private equity firm the Carlyle Group to acquire Aurora Place, a landmark building situated in the centre of Sydney’s business hub area, for A$700 million ($642 million).

This 44-storey building is owned by an unlisted wholesale property fund managed by Commonwealth Bank, Colonial First State Global Asset, which has seven superannuation fund investors, including Unisuper, Australian Reward Investment Alliance (ARIA), the Australia Post Superannuation Scheme and Telstra Super. The Colonial fund bought Aurora Place in 2001 for A$485 million ($444 million).

Although neither bidder made comments on their possible purchase, and NPS formally stated it was not reviewing the deal, an NPS spokesman said earlier that the firm is looking at overseas property assets as part of its long-term policy to diversify away from fixed-income investments. Earlier reports placed it in a similar partnership with Carlyle to buy a property in Tokyo.

Since NPS opened up to private equity investment with its first ever commitment of $200 million in a Korean fund of H&Q Asia Pacific, the Asian buyout firm, the nation’s official fund has gradually increased its commitment to alternatives onshore, and now is seen as the time for it to move into offshore investments. NPS’s aim is to double its international assets to 15% of total holdings by 2015, after the government ruled that it could no longer hold more than 10% stake in a Korean company.

Alongside NPS, the Korea Investment Corporation (KIC) formed in 2005 in order to manage assets entrusted by the government and the Bank of Korea, is also planning to expand into more opportunistic alternative investments, including real estate and distressed assets as well as private equity.

Singapore steps out

Although the US subprime mortgage meltdown induced investors materially and psychologically to reduce their exposure to real estate, some experienced funds, particularly in Asia and Middle East, apparently see this downturn as the golden opportunity to invest in both property assets and property companies, while asset owners suffer from portfolio value drops.

GIC Real Estate (GIC RE), one of the world's ten biggest property funds, operated under The Government of Singapore Investment Corporation (GIC), is certainly a fund that has not stopped injecting their capital into the market.
   
With GIC RE, the Singapore government was already playing a leading role in the global real estate sector, long before the more recent Asian newcomers’ forays into realty, and has established its footprint worldwide.

In September 2008, GIC RE injected about A$3.8 billion ($3.5 billion) into Australia, including 13% and 6% stakes respectively in troubled property managers GPT Group and Mirvac Group, worth a combined A$580 million ($531 million), after GIC’s sister Singapore SWF Temasek Holdings invested A$302 million ($276.7 million) in Australand, Australia’s large diversified property group, in August, lifting its holdings from 54% to 59.3%.

GIC RE also paid $1.3 billion to buy the China and Japan operations of US business ProLogis, the world's largest owner, manager and developer of distribution assets, in December.
Seek Ngee Huat, president of GIC RE, said that weak markets favor those with the capacity to take strategic positions, and so the subprime meltdown presents opportunities as well as threats.

What Seek said apparently reflects the firm’s view on investment strategies, indicating current value slides in properties would give greater opportunities for investments.

In Australia, GIC RE also owns numerous assets, including Queen Victoria Building, a Romanesque Revival-style shopping centre in Sydney.

CIC sends China first aid

Meanwhile, China Investment Corporation (CIC), China’s $200 billion sovereign wealth fund, is also following its neighbors’ tactics.

In August this year, CIC joined a fundraising exercise to rescue Australia’s largest industrial property trust, Goodman Group, which has suffered massive losses and write-downs.
The Chinese government fund injected A$500million ($460 million) as part of A$1.8 billion ($1.6 billion) fundraising for Goodman, giving CIC a 19.9% stake in the Aussie company.

Aside from CIC, the Canada Pension Plan Investment Board (CPP IB) also established a new strategic partnership with Goodman, focusing on the development of logistics assets in mainland China.

After Australia, whose real estate market is in relatively better shape than the West, CIC has also been looking at London, like NPS.What CIC has done is ally with Qatar Holding, the investment arm of Qatar's sovereign wealth fund, to rescue falling UK realtor Songbird Estate Plc. The two firms bailed out £880 million ($1.5 billion) of loans owed to Citi by the AIM-listed realtor, majority owner of London’s iconic Canary Wharf, at a 5% discount.

The deal emerged as Canary Wharf faced a sharp decline in rental income as high-profile tenants including Lehman Brothers, Bear Stearns and Merrill Lynch left the building, in some cases as part of their post-crisis collaps. Now the two government firms hold 95.6% of Songbird, which has 69.3% of the major East London business hub.

Meanwhile, CIC has also reportedly agreed to invest about $1 billion in Los Angels-based private equity firm Oaktree Capital Management, which has strengths in distressed and real estate investment. At end 2008, the firm hired Collin Lau, former managing director of the private equity fund at Starr International, owned by Maurice Greenberg, former chief of American International Group, to lead its real estate team. 

Australia also invests

One more major SWF investor worth mentioning is the Future Fund, Australia’s superannuation fund, which has paid £200 million (A$375 million) for a 33% stake in a Birmingham shopping centre. The vendor of the shopping centre was Land Securities, which developed the Birmingham centre in 2003 with Henderson Global Investors and the UK property group Hammerson, manager of the asset.

Joel Rothstein, a real estate, securitization and structured finance partner at Paul Hastings, told AVCJ, “The real estate investment community is now a global community. Starting in the mid-to-late 1990s, real estate funds and investors, particularly from the US and Europe, increasingly looked beyond their borders for investment opportunities.”

Chairman Seek at GIC Real Estate also mentioned that the firm believes the real estate space would become very competitive, with other institutional players.

Investing in real estate will always bring relatively higher risks. However, if players read market moves and trends deep into the future, they can enjoy high returns, comparable to HSBC’s $415 million profit over just a year.

 “In the last few years, however, we have seen the rise of a new group of global real estate investment players, in the form of sovereign wealth funds and investor consortiums, particularly from Asia and the Middle East. These newly emerging and influential players are now looking beyond their borders and particularly to developed markets like the US and Europe. These developed market,s now and in the near term, offer the opportunity for distressed asset plays with the prospects for aggressive returns,” said Rothstein, adding that “As a result, in the next few years we will increasingly capital outflows from the Middle East and Asia into developed markets, and also into developing markets, as well closer to home.” 

China’s money tree

Prior to the global crisis, large foreign real estate funds like Morgan Stanley, Goldman Sachs and GE Real Estate had all joined in a high-priced bidding war for commercial assets in first-tier Chinese cities, especially Shanghai and Beijing. However, the crisis has swept many high-profile companies away, at least temporarily. In contrast, local cash-rich investors have been beefing up their portfolios and capabilities. 

From September this year, the new Chinese Insurance Law will allow Chinese insurance companies to invest directly in the domestic real estate market, with an estimated RMB100 billion ($14.6 billion) of insurance money expected within the next few years. These new rules will accelerate competitions among domestic investors with onshore funds.

However, big-name foreign investors are also still targeting deals in China. Despite difficulties in fundraising over the last 18 months, MGPA, LaSalle Investment Management, and Merrill Lynch raised $3.9 billion, $3.2 billion and $2.7 billion respectively for their Asia-focused real estate funds in 2008. In addition, the Carlyle Group has raised over $500 million for its Carlyle Asia Real Estate Fund II, and is continuing to raise to meet  its target of $1 billion.

Rothstein said that his firm has been retained to conduct due diligence on a number of projects by hungry investors. “In the coming months and year, it will be interesting to see how many of these deals will actually be consummated.  In the meantime, we certainly view this as a growth area,” said Rothstein.

While China’s rural population is continuously moving into the cities seeking a better life, demand for roads and buildings is increasing, bringing investment opportunities. And although cash-rich domestic companie,s such as insurers and banks operate onshore funds which have easy access to local money, foreign investors could have co-investment opportunities. 

Prospects for Asia Pacific

The Asian Public Real Estate Association (APREA), a non-profit industry association based in Singapore, seeks to encourage greater investment in the real estate sector in Asia Pacific through the provision of better information to investors and members, including SWFs, financial institutions, and managers of REIT funds and investment. The organization recently created a new membership category of “pension fund,” aiming to attract funds from Europe and North America, where pension funds are slowly coming back to the market, as well as other regions, to obtain more information about Asian real estate industry.

Peter Mitchell, CEO of APREA told AVCJ, “ We have had various enquiries from pension funds about getting involved with APREA over the last couple of years, and our executive committee has spent time considering how best to respond. This is in a larger context, where, particularly as a result of the global financial crisis, investors are looking for forums to gather and discuss issues, and sources of information. It is one of a number of initiatives for the benefit of investors.”

Asked what has been the take-up so far, Mitchell said, "It has just been put in place so it’s too early to say. However, there has been immediate interest from Australia. Given the level of interest prior to the financial crisis, we expect over time that as things improve and the benefits I have referred to are communicated and felt, that we will also attract US pension plan sponsors and endowment funds.”

The December 2009 report on Emerging Trends in Real Estate, an annual investor survey by the Urban Land Institute (ULI), noted that many Asian markets have begun to show positive signals toward the end of 2009. Transaction volumes have rebounded, albeit from a very low bas,e and led overwhelmingly by China. KK So, Real Estate Tax Leader for Asia Pacific at PricewaterhouseCoopers, said “Pricing has improved across the region. While the upturn has been modest in most cases, moves have been substantial in some asset classes and geographies, especially in China.”

According to the ULI report, despite the suddenly bullish sentiment, resurgence in most Asia Pacific markets (China excepted) is tentative and fragile. And although Asia Pacific governments are expected to be able to sustain their market stimulus measures, the broader near-term prospects are probably linked to developments in the West and in particular the US, where deleveraging continues. The report concluded that, with Western economic recovery still in the balance, it remains to be seen whether the optimism in Asia Pacific markets is justified.

ULI CEO Patrick L. Phillips said, “Although Asian real estate markets never reached the level of stagnation seen in the US and Europe, and the ongoing activity there is encouraging, it is important to keep the outlook for growth in perspective. The idea that the recession is likely over gives rise to the widespread notion that global economies will now revert gradually to the same trajectories as in the past, which is normally what happens when recessions end. This is particularly true of Asia, which has avoided the worst of the fallout.”

China has been said by many analysts to be at risk of a bubble, although it is too early to say whether this has occurred. Yet global investors are still eyeing opportunities to inject their capital.

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• Topics
• Real estate
• Real estate
• Europe
• Southeast Asia
• North Asia
• Australasia
• Temasek Holdings
• The Carlyle Group
• Oaktree Capital