Real assets, real opportunity
THERE HAS BEEN NO SHORTAGE OF REAL estate opportunities in the post-financial crisis world, however deal values in Asia have dropped as a result of many global investors buying lower-priced assets at home. The same is true here in Asia, as well CB Richard Ellis report noted that 78% of Asian deals by value were not in fact international buyers, but domestic purchasers like HNW individuals or smaller corporate groups.
Asian buyers for Asian assets
However, sovereign wealth funds in Asia have been particularly active buyers in the cross-border space, with groups like NPS buying assets including Gatewick Airport, and several properties in Australia. NPS and CIC appear to be the most aggressive institutional investors in the space, while rumors are circulating that GIC and Temasek will be active in China due to their strong connection to the China government. Industry sources have predicted that more capital will flow in to real estate projects across Asia from sovereign wealth funds further abroad this year.
PricewaterhouseCoopers’ most recent real estate report suggests that over the next few years, invested assets should increase to more than $3 trillion by 2014, bringing value in the Asian region to about 26% of the global assets, with most of this increases coming from Asia’s emerging economies – in particular China and India.
Jonathan Berney, Head of Client Solutions, Asia at EC Harris said, “We are seeing more organizations from Europe and the US raising funds, and there is a lot of cash in the market looking for deals. The calming measures across the region might make the pricing more attractive but may reduce volume in the short term.” Berney continued, “Meanwhile, more capital is coming to the region as a result of the quantitative easing measures in the US, but it is not yet being deployed. A number of funds are sitting there but still waiting to find the right opportunities. So there is cash commitment but no deals to do.”
Fundraising for the right market dynamics
Fund raising in the realty segment has been tough over the last 1.5 years, but while there will be fundraising activities in the first half of 2011, the second half may prove problematic as investors respond to global macro issues. The European sovereign debt issues in countries like Spain and Portugal, and the threat of QE2 may cause a ripple effect in the market, many believe. In addition to the psychological implications, currency volatility may also impact funds that have been operating in US Dollars.
However, dry power cannot sit forever, and funds with Asian allocations will need to put money to work. China is still top a priority for investors, although inflation and land and real estate bubbles in certain places remain an issue. Beijing and Shanghai used to be home to the golden assets that investors wanted to buy. While appetite for real estate in the PRC still lies in residential assets, allure has moved to second tier cities. There is also increasing interest in retail space in second tier cities as brands expand their reach inland. Cities of particular appeal include Hangzhou, Xian, Wuhan, Dalian, Shenyang, Chongqing, Nanjing, Tianjin, Wuxi and Nanjing.
Moving to the epicenters of Chinese business – Shanghai and Beijing – there are opportunities, but deal crowding is a problem, and investors need to possess a strong competitive advantage like a local development partner and/or creative products.
“The China market will continue to be extremely popular in the medium to long-term for real estate investment funds despite the [government’s] cooling measures,” said Berney. “There is no doubt domestic investors are becoming more interested and aggressive in real estate transactions. On the other hand, foreign investors will remain interested as China as well,” which means that any steps to quell speculation in the property markets will see their effects short-lived.
Beyond China
Singapore will also remain active because the government intervention has not been as aggressive as other markets. This will play out in the residential market, as well as mixed-use projects space. Just this month, it emerged that the Blackstone Group is planning to invest about $44 million in a Bangalore-based firm’s project. Embassy Property Development is also said to be in talks with investors including Temasek and HDFC Property Ventures ahead of a potential IPO that may earn the company roughly $530 million, according to local reports. In Japan, several real estate groups have established funds in 2010 and have been in the market raising capital to invest in advance of market recovery. In this context, paying distressed prices for good assets with long-term tenant contracts could prove lucrative.
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