EXCLUSIVE: Troubled Trophy fund value increases 18% at Q3 valuation

According to Venator Capital Real Estate Partners, the Chinese development fund’s manager, a recently completed five-for-one property asset swap and a generally more positive outlook for the remaining property has resulted in a Q3 valuation of $509m.

The future of one of the most controversial funds in Asian private real estate investment is looking brighter after its latest valuation resulted in an 18 percent increase, PERE can reveal.

The Trophy Property Development fund originally attracted approximately $1 billion of equity from 145 investors ranging from large US pension funds to individual bankers from Goldman Sachs when it was raised in 2008. But after its investments failed to perform as expected, its valuation was written down by more than half.

The original capital was raised by a Hong Kong-based hedge fund manager called Winnington Capital which it deployed in five minority stakes in large, mixed-use developments by the listed developer Shui On Land. But after costs escalated beyond the fund’s means and the developments threatened to take longer than the fund’s life, Winnington, Shui On and the fund’s LPs fell out.

With Shui On effectively assuming responsibility for the assets’ financing obligations, the valuation of the fund’s equity was written down to as low as $430 million.

However, the conflict led to an agreement that saw the fund’s management spin out to form a new group called Venator Real Estate Capital Partners, and the five minority stakes swapped with a majority stake in the most valuable of the five developments, a site called Taipingqiao (TPQ) 116 in the upmarket Xintiandi district of Shanghai.

According to Venator, a combination of the completion of that asset swap, which happened in September, and a more positive outlook generally for TPG116, which has begun construction, were chiefly responsible for the fund’s valuation uplift of 18 percent to $509 million.

Alex Walker, Venator’s director of fund management, told PERE: “The essential reason for the uplift in NAV is the asset swap itself and consequently the change in what the fund actually owns. In Q2 the fund was the owner of five minority stakes in mixed-use master plan projects and, following completion of the swap on 5 September, the fund is now the majority (80%) owner of TPQ 116.”

He continued: “Methodologically speaking, there are some changes related to the swap that contribute to the uplift in NAV. For example, JLL apply a discount to non-controlling minority interests [and] there is one quarter less of discounting. But it is effectively a reflection of the change in the fund’s asset base and the positive outlook for the TPQ 116 project.”

He added that TPQ was making “excellent progress”. The site, which ultimately will accommodate 271,468 square feet of residential space over approximately 300 homes as well as 330 parking spaces and a clubhouse is already partially completed. Walker said piling work was done and the first floors of the asset will be finished by the Chinese New Year.

He said: “Pre-sales will start this time next year and we are confident of the outcome of the project given the strong fundamentals for the submarket and the JV partnership with Shui On Land.”

There has been a range of predictions about what the final valuation of TPQ116, and subsequently the Trophy Property Development fund itself, will ultimately be once the asset is developed and sold off. 

While investors in the fund are understood not to be expecting a complete return of capital, various PERE sources have indicated that a successful development and sale could see 0.7x to 0.815x returned which would constitute a better outcome than was expected prior to the asset swap.