The economic reopening of mainland China, peaking interest rates and signs that inflationary pressures are finally starting to ease should come as welcome news to managers and investors alike after what can only be described as a challenging fundraising environment for Asia-Pacific.
Over the first six months of 2023, Asia-Pacific real estate fundraising fell by roughly 76 percent compared to the same period in 2022, according to PERE fundraising figures. Managers would need to raise $34.24 billion over the second half of 2023 to reach capital parity, almost double the six-month high of the past five years.
Last year, managers achieved a five-year high of 63 Asia-Pacific-focused closed funds. Real estate managers would need to close another 51 funds in H2 2023 to replicate that figure.
Even to reach the lowest annual total recorded over the past five years, managers would need to close another 39 funds over the back half of the year.
Fundraising may have taken a hit this year, but of the 12 funds that did close in H1, Hong Kong-based Gaw Capital Partners topped the list with a $2 billion close and a roughly 41 percent share of all capital raised. The firm originally targeted $2.5 billion for its seventh
Gateway Real Estate vehicle
One clear trend from the 12 funds that closed in H1 was the increased focus on opportunistic real estate strategies; 70 percent of capital raised was for funds targeting this strategy, against just 38 percent in 2022 and 39 percent in 2021. Over the past five years, the highest level this strategy had previously reached was 47 percent in 2018. None of the funds in H1 had a value-add strategy compared with 11 percent in 2022 and 37 percent in 2021.
Investors are clearly turning to opportunistic strategies to take advantage of the volatile market conditions and to compensate for higher financing costs. Opportunistic investments may carry greater risk, but they also offer higher potential returns. In January, CBRE’s 2023 Asia Pacific Investor Intentions Survey found that nearly one-third of investors in the region planned to target opportunistic strategies this year, with markets in Hong Kong, Shanghai, Hanoi, Ho Chi Minh City and Mumbai particularly cited.
Industrial picks up pace
Another noticeable trend over the first half of 2023 was the focus on industrial real estate. From the sector-specific vehicle closings, which is admittedly a limited pool, 80 percent of funds and 95 percent of capital were dedicated to industrial versus 20 percent of funds and 5 percent of capital for multifamily and residential. This happened as e-commerce and diversification away from China boosted the industrial sector.
Southeast Asia is particularly benefiting from the manufacturing shift away from China since the pandemic. UK-based real estate firm Knight Frank points to manufacturing in Vietnam rising to 61 percent of foreign direct investment last year, while manufacturing in Malaysia reached 43.5 percent of FDI. Pharmaceutical FDI inflows to India have also quadrupled over the past five years, boosted mainly by investor-friendly policies.
East Asian markets such as Japan and Taiwan are similarly benefiting from the diversification trend. In June, Schroders pointed to Japan as a major market in the region that is still undersupplied in logistics warehouses. South Korea, in contrast, has an oversupply problem and could take several years to absorb the excess. Australia enjoyed the strongest logistics growth of any country in APAC last year, buoyed by low vacancy rates in Sydney and Brisbane.
Playing catch-up
Asia-Pacific might be enjoying industrial and logistics tailwinds, but fundraising still lags other regions and by some considerable distance. For all private real estate funds raised in H1, $31.8 billion of capital had a multi-regional focus while $28.8 billion had a North America focus. Just $4.8 billion was raised with an Asia-Pacific focus.
It is a similar story for funds in market. There is $45.3 billion being targeted specifically for Asia-Pacific, although far larger sums are being raised for North America or Europe – at $149.8 billion and $102.5 billion, respectively.
Unsurprisingly given the challenging fundraising backdrop, average time on the road for Asia-Pacific-focused funds also jumped in H1.
In 2018, it typically took almost six months for funds to close but this increased to almost 13 in 2023 as the market slowed. Between 2019 and 2021, the time taken to close Asia-Pacific real estate funds was pretty static, averaging just under eight months, but last year started to creep up as the figure hit just over nine.
There are large funds in market right now, most notably Blackstone Real Estate Partners Asia III, which is less than $800 million off its $9 billion target. This fund will no doubt go on to factor into future PERE APAC fund manager rankings.
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