The $5bn decision for Asia’s class of 2014

The pressure is mounting for the managers of 2014-vintage Asia-Pacific funds with capital still to deploy.

How to invest $5 billion in just the next 12 months: this is the burning question facing a number of private real estate investment managers in Asia right now.

According to data shared by real estate services firm CBRE with PERE this week, a handful of 2014-vintage, closed-end, Asia-Pacific-focused real estate funds still have in aggregate around $5 billion in purchasing power, including leverage. Given these funds typically have four-plus-one year investment periods, it effectively means managers operating these vehicles should – according to their initial fund structuring arrangements – need to fully deploy all the remaining capital within 2019.

That is a pressure for managers at the best of times. However, the stakes are even higher in the present market context with geopolitical tensions, rate hikes and general late-cycle concerns making managers, across the risk and return spectrum, wary of making any missteps. The US-China trade war and Brexit, for instance, have prompted managers to go into wait-and-watch mode, at least until the second quarter. Emerging market currencies and the Australian dollar are expected to drop in value post the March 31 Brexit deadline. That will impact underwriting of all present and future investments in the region – hardly helpful when investing against time pressure.

Consequently, will the pressure to invest time-sensitive capital push managers into making some forced decisions? Or will we see a slew of further investment period extension requests? The latter may not go down well with investors, especially if the same management fees are being charged on the extended committed capital. The savviest of investors would prefer to pay for breathing room than pay more for poorly conceived outlays by managers under stress. The savviest of these managers, on the other hand, will seek to increase communications with investors to hear their preferences.

Much will come down to individual manager takes of the current market opportunity, which the brokers, including CBRE, are downplaying in the near term. CBRE is even going as far as to advise prioritizing profit taking against an investment backdrop it believes is becoming increasingly challenging. From a decade high of more than $130 billion of investment in 2017, the firm predicts $10 billion less trading this year as a result. In its Real Estate Market Outlook 2019 report published last week, the firm promoted adopting defensive strategies including focusing on debt issuance given the more conservative lending practices materializing in key markets like China, India and Australia.

That mindset must be reconciled against current investor sentiment, which is, comparably, more favorable toward Asian investments. The latest yearly Investment Intentions Survey, co-authored by associations INREV, ANREV and PREA, revealed that 19.6 percent of a total $72.7 billion of expected deployment by the members responding to their poll would happen in Asia, up from the 17.4 percent of $53.8 billion recorded from respondents to 2018’s survey.

PERE’s data, meanwhile, show the 44 managers behind the vintage of 2014 Asia-Pacific funds raised $17.1 billion, the highest amount in the last five years. Indeed, last year saw a massive 62 percent increase on 2017. But strip out Blackstone’s record-busting Blackstone Real Estate Partners Asia II, which attracted $7 billion of that total and we are back to 2017’s level. Whether they want to invest more in Asia or not, managers have been raising decreasing amounts of equity from institutions year on year for the last half-decade besides the sector’s behemoth.

According to Blackstone’s reporting, the investment periods of its BREP funds are 5.5 years – the same as many rival funds’ total allowable time, including extensions. The manager wants to afford itself as much time as possible so as not to be caught by unfavorable market conditions. The managers behind the class of 2014 might want to think similarly and opt to either call time on their remaining dry powder or look to lengthen its fuse to avoid unwanted explosions. Which firms make these decisions – and which do not – will be interesting to observe.

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