PERE Asia: SWFs to invest in secondaries RE

Institutional investors, particularly sovereign wealth funds, are now beginning to look at investing in the real estate secondaries market, with many funds raised around the global financial crises being restructured to create liquidity, heard delegates at the PERE Asia Summit 2015 held in Hong Kong.

“Sovereign wealth funds will typically not be buying whole portfolios, but they certainly are taking substantial stakes in certain funds they would want to recapitalize,” said Paul Parker, managing director of Landmark Partners. Much of this interest is led by the disappointment of many LPs who had made investments in the 2006-2008 vintage funds.

According to Marc Weiss, partner at Partners Group, a big driver of deal flow in the secondaries real estate market is lackluster performance of close-ended funds raised around the time of the global financial crises, and also because some limited partners are unable to execute direct deals.

The secondaries market saw around $5 billion worth of transactions in 2014, with the last three years’ combined generating $12 billion in volume. Real estate secondaries comprised 10 to 15 percent of the overall global secondaries market, numbers that are set to increase further, according to Parker.

While much of the secondaries activity is currently focused in the core real estate space in the US and Europe, fund managers as well as fund of funds in Asia are now expected to venture into secondaries.

According to Catherine Hong, portfolio manager at Morgan Stanley Alternative Investment Partners, real estate funds in the region, which were raised around 2008 and are now past their termination dates, are being recapitalized and converted into secondaries. Opportunistic and value-added real estate funds in China could be divested through the secondaries market, added Hong.

The other potential market cited was India.

“A lot of funds raised in India during the 2006-2008 time frame are approaching maturity. LPs are coming to us [saying] that the underlying sponsors haven’t been able to realize and sell assets. Lps need to decide what to do to get liquidity,” said Parker.

While most fund managers would be interested in secondary sales in India, both Parker and Weiss also agreed that issues such as lack of transparency and liquidity would dissuade substantial investor demand for such transactions in the country.