PERE Asia: Managers taking more risk for less return

The mega-funds in Asia are attracting the bulk of the capital but they are also straddling different investment strategies with varying levels of risk, remarked the panelists at PERE’s annual real estate conference in Hong Kong.

Real estate investment fund managers in Asia are moving down the yield curve but taking on more risk, heard delegates at PERE Asia, the annual real estate conference in Hong Kong.

Mark Fogle, head of real estate and managing director for Baring Private Equity Asia said a flight to quality by investors has resulted in a reemergence of the mega- fund managers raising bulk of the capital in the region. However, he voiced his concerns about the investment approach of some of these managers.

“We have gone through a major global financial crisis to now a euphoric capital raising environment and the hunt for yield in a low interest rate environment. In the last year or two we have seen fund managers move down the yield curve while taking the same risk. Opportunistic fund managers are doing value-add funds, value-add fund managers are launching core funds. However if we don’t deliver returns to investors as a collective, there will be less of us around in the next cycle.”

Fogle also drew attention towards how some of these mega -funds are finding it hard to deploy large sums of money owing to the limited availability of assets in the market. 

“They go up and down in asset size, ranging from investing $400 million in equity to $30 million. Even for opportunistic funds, managers take 80 to 90 percent leverage so the equity check is only around $100 to $200 million,” he said.

According to Suchad Chiaranussati, managing director at SC Capital Partners however, Asia continues to lack quality real estate fund managers, which is the reason behind global investors allocating lesser percentage to the region.

“The global allocation to Asian real estate is still low. Pensions funds in the US and Europe have between 5 to 12 percent allocation to real estate globally, and only 5 percent of that overall allocation is for Asia. In my view, the allocation to Asia should be three to four times more.”

According to Goodwin Gaw, chairman and managing principal of Gaw Capital Partners execution ability has become a paramount factor for a GP’s success in the region.

“The rules of the game have changed in China and have started to mimic what is happening in the Western world. Earlier it was only about having the right relationships but now you need to be able to execute and add value to an asset,” he said.