The old saying about no one ever getting fired for buying IBM is applicable to the real estate lending market in Asia. You might say that Asian lenders are now of a mind that nobody ever got fired for providing debt to an established, respected private equity real estate platform.
I learned this while in Singapore recently to moderate a roundtable discussion among a group of seasoned GPs, profiled in a special report on Asian real estate that accompanies this month's issue of PERE. More generally, it was interesting to see the extent to which the chaos in the West was affecting buyer and seller psychology in the East. The crumbling values that are already making their way across North America and Western Europe haven't yet hit Asian shores as hard, but market participants there are bracing for what comes next. The trouble is, nobody is quite sure what category of tsumani is on its way, and therefore the question of value cannot be fully answered, and paralysis has set in.
“I was talking to a banker just this morning and his comment was that in the old days, real estate lending was all about the quality of the asset. Now it's increasingly about the quality of the platform and the quality of the GP and the people.”
The logic behind the IBM saying (forged in the 1960s and 1970s when IBM was considered the bluest of blue-chip stocks) was that even if the stock went down, the stock-picker couldn't be faulted because he had placed a bet on a sterling reputation. By contrast, the guy who presumably “got fired” spent hundreds of man-hours analysing a less-well known company, placed his bet and watched the stock sink anyway. His pink slip read: “You idiot – you squandered our money on some obscure, B-list business!”
If they really want to understand value at the asset level today, underwriters of real estate financings in Asia have their work cut out for them. If a lender targeting the Sacramento market now has a tough time arriving at the right value for an asset, imagine the range of potential performances to be assigned to, say, an unbuilt township on the outskirts of Bangalore. Both cities will be affected by a Western recession, but at least Sacramento has a better idea of what to expect. In the meantime property investors targeting Bangalore, and other booming Asian cities, are still debating the extent of “decoupling” where it exists, and even whether it exists. These debates will eventually be settled, but not before a large amount of additional capital is put at risk.
The uncertainty has created a market where, according to the GPs I spoke with, lenders are now far more willing to “leave it to the experts”, as Leong Chi Meng, a managing director in Singapore for ING Real Estate, puts it. Another GP, MGPA managing director John Saunders, related to our discussion group: “I was talking to a banker just this morning and his comment was that in the old days, real estate lending was all about the quality of the asset. Now it's increasingly about the quality of the platform and the quality of the GP and the people.”
Saunders continued: “Frankly, this person's comment was, they find it very hard to get a feel for what the value of the real estate asset could be going forward. So many parameters are changing. They want someone running a vehicle who understands how to maintain liquidity, how to work assets, due diligence.”
The enhanced value in the eyes of lenders of the platform over the underlying assets dovetails with long-term trends among institutional investors. Increasingly, these investors don't want direct ownership of, for example, an office tower in Seoul. Instead, they are willing to (lavishly) pay an expert manager to own and add value to that and other properties on their behalf.
As anyone who's ever owned an investment property can attest, it's tough work and the headaches often have less to do with the attributes of the property itself than with the owner – was it bought right, let to the right tenant, run right, improved within budget? Did the landlord run out of cash right before the toilet broke?