COMMENT: Asia’s unresolved $10bn

CBRE’s The Great Wave of Fund Expiration white paper published on Monday reveals approximately $40 billion of real estate in Asia is to become available for sale in the next two years.

The 15-page paper takes the temperature of the region’s private real estate funds market, which the firm reckons is really only one ‘great wave’ of funds old. Funds were formed for real estate investments in Asia previously, but as CBRE sees it, the 84 funds raised between 2005 and 2008 account for a bulk of the equity raised for the region so far.

It says 50 of these funds, responsible for the aforementioned $40 billion of assets, are slated for termination in 2014 and 2015. When you consider also how capital markets support is once again returning to the sector, it is becoming increasingly likely that we are in the midst of the second wave of funds dedicated to the region.

This second wave won’t be quite as ‘great’ as the first wave though. Using historical data to predict future investing patterns, CBRE forecasts the market will only likely absorb about $30 billion of these particular assets. Funds will constitute part of that buying power but there will be other kinds of buyers besides.

CBRE also infers that the second wave will herald lower risk and return strategies than many of the opportunistic strategies that dominated the first wave. No doubt, the pool of assets that already has been managed through one cycle of funds and thus has seen its risk reduced will play some part in the strategy of the incoming funds.

When PERE spoke with CBRE following the publishing of the paper, the firm said most of the prime and liquid assets held by the first wave of funds have been sold already. The remaining ones generally require further asset management, but would hardly fall into either distressed or development categories – the two most recognizable hallmarks of an opportunistic strategy. Better it finds homes with core-plus and value-added strategies.

From this you might infer that the next generation of opportunity funds will be best off tackling the unresolved $10 billion.

In the paper, CBRE details four options for managers finding themselves with assets that sit outside of what the market can naturally absorb. They are: extend, restructure, secondaries or IPO. Which route they take depends really on prevailing market conditions. CBRE notes that 65 percent of the assets are in Australia, Japan and China. There currently is stronger demand for property in the first two of these markets than in the third, and that will naturally inform which of these routes they take.

Whatever transpires, the unresolved first-wave fund assets in each of these markets likely will be sold at some interesting discounts – and that is precisely what opportunistic capital is all about. Meanwhile, the lion’s share of the legacy investments – the naturally resolvable properties if you will – are destined for the region’s now lower-risk and return investors.