Asian institutions are emerging as a major competitor for private equity real estate funds in the US property market. Headline-grabbing deals such as the recent acquisition of New York City’s Waldorf-Astoria hotel by Chinese insurer Anbang Insurance are just the tip of the iceberg.
“There is a universe of a lot more real estate out there,” said Phil Feder, chair of the global real estate practice at Paul Hastings, during a media roundtable held yesterday at the law firm’s New York offices. “But the Chinese have the ability to access capital in a way that even the largest private equity and pension funds in the US can’t.”
Attorney Joel Rothstein, however, pointed out that “it’s more than China in the cross-border capital flows.” Japan’s Government Pension Investment Fund, with approximately $1.2 trillion in assets, could potentially reset its real estate allocation one to two percent of its total portfolio by the end of the year. Meanwhile, Asian insurance companies are anticipated to deploy an estimated $75 billion in US real estate, which would come not just from Chinese firms, but also Taiwanese and Korean insurers, as a result of reforms that would allow such companies to invest in the asset class for the first time.
Capital access aside, Asian investors also have prevailed over private equity real estate firms in terms of the speed of execution, said Rick Kirkbride, chair of the hospitality and leisure practice at Paul Hastings. In fact, some institutions have able to sign a contract after just two weeks of diligence and close an all-cash deal in 30 days, something that would be extremely difficult for even the largest private equity funds to pull off, he said.
US funds, after all, are fiduciaries that must act cautiously and prudently or otherwise face a potential lawsuit from their investors, noted John Cahill, a partner at the law firm’s private equity real estate practice. Asian investors, on the other hand, have less stringent regulations in terms of obligations to shareholders, and therefore have a much more aggressive mindset with investing than would a fund.
Although Asian institutions also have a risk of being sued, “it’s really untested in a lot of these cases,” said Cahill. “They’re in some ways kind of like cowboys still. Their view is this is the Wild West to them and they’re going to make a lot of money.”
Because they don’t need to act as fiduciaries, Asian investors have been able to be much more nimble in closing on deals, with far less cumbersome documentation involved, added Kirkbride. “There is still a huge advantage to not being weighed down with all the fiduciary duties and all the lawyers and accountants. They can act quickly.”
That said, US funds still maintain an edge over their Asian competitors in one respect, said Cahill. “There’s always an advantage of the local guy over the foreign capital as far as knowledge,” he said. “Private equity funds, their network is mostly here, so they will have a better network, they’ll be better tapped into what’s going on, they’ll have a better likelihood of getting off-market deals. But once it hits the general brokerage market, and the Eastdils of the world get a hold of it, all bets are off.”