Chinese takeaways

Last week, PERE hosted its second Asia conference at the Island Shangri La Hotel in Hong Kong. More than 150 delegates gathered for the two-day event to share their thoughts on the current Asian investment market. There were more themes than can be recounted on one posting but here we provide a flavour for those who missed the event:

1. Stay close to the capital: GPs are unlikely to see much in the way of commitments in 2009 from US pension funds. However, they must maintain dialogue with investors given they will return in 2010 to invest at similar levels to those witnessed pre-global slowdown. One former chief investment officer of a US pension fund warned fund sponsors to stay close to pension fund consultants as these days, the funds are outsourcing significant decision making powers to these gatekeepers.

2. Secondaries stand-off: Significant deals in the secondary market are yet to materialise. One speaker said: “The bid, ask spread is very wide at the moment, maybe 20 percent to 30 percent off fourth quarter valuations.”

3. Give me the bad new first: Limited partners called upon the funds they are invested with to deliver bad news concerning their commitments as soon as possible. They also said new clauses were being considered in agreements with GPs to increase LP control over their commitments, including termination clauses.

4. The shorter the sweeter: GPs focused on generating high returns from development funding may find LPs requesting shorter investment vehicles. One GP noted he had been asked to form a vehicle of just five years in length with an option for an extension of a further two years to take advantage of developments whose capital has run dry. He said: “One LP told me, if you are going into the market today we assume you can access developments that are half finished so therefore you can turn [the development] and sell it off [in a faster time.].”

5. Trouble Down Under: Australia’s REIT market has and will continue to implode. As a result, bargain hunters should get ready to deploy their capital. The Australia-focused round table discussion highlighted that sovereign wealth funds were heading the queue of wannabe buyers, so there is competition. Macquarie Capital data presented at the conference said there are 27 A-REITs facing what it penned as “corporate distress.”

6. Japan is flavour of the month: There is a general consensus among firms that Japan will provide the best bet for investment among Asia’s markets, but for the next three to five years only. Those with an existing network of contacts on the ground now will benefit more than those yet to expand into the country as existing relationships will open doors to distressed asset sales of core properties at opportunistic prices. 

7. China will not die: Deal volumes in China will increase before capital values do. China’s long term investment story is intact and 45 percent absolute returns are still possible but expect its real estate values not to bottom out before the end of the year. Delegates considered that 10 percent of China’s employment base is real estate related so expect the government’s incoming stimulus package not to ignore that fact. As one delegate put it: “The government will not allow its real estate sector to die.”

8. But watch our for Beijing: While the Chinese government won’t strangle the real estate sector, certain speakers warned that premier Wen Jiabao has a track record of reneging on rules that allow foreign investment with little warning. REIT’s have been on the cards for more than ten years, speakers noted, but as the sector needs a kick, don’t be surprised if they are implemented all of a sudden.

9. Asia 2009-2010 will be good vintages: For those with significant dry powder in waiting, 2009-2010 will provide “as good a vintage year for investors as we’ve seen for a long time.”

10. The Yeti: The spectre of limited partner defaults has become private equity real estate’s Big Foot: everyone was talking about them everyone was scared of them but no one had actually seen one.