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| Tim Bellman and Mark Burton |
Tim Bellman: Which markets in Asia are you currently seeing value?
Mark Burton: I think Australia, from a core market point of view, has some great opportunities. I also still like China. I’ve always liked China. I think it has some outstanding opportunities, particularly in the retail and residential sector. For those of you in the audience who still like India, forgive me but I just can’t get my head around it.
Some people in the audience have asked me what I think about Japan. Japan for me is Tokyo. I think one should view the other cities with extreme caution. I look the Tokyo market, it will come back, no question.
TB: Southeast Asia is small beer in terms of Asia’s overall real estate opportunity. Should investors skip it and move into markets like China?
MB: Singapore is a mature market. It’s had a great run-up recently and I’ve just read the Singapore government is going to try and introduce curbs to try and skim the froth. But I think if you want to be a global investor, then you need something in Southeast Asia and to my mind, Singapore is as good a place as any to invest.
TB: Are there opportunities in Malaysia?
MB: Yes but its nowhere near as big a market. I believe its just Kuala Lumpur. People often also ask me about Thailand and I would have to confess that I think its somewhere to keep on the back-burner but to keep an eye on until everyone sees how the political unrest there plays out. If I wanted to have a punt, I would pick Indonesia. It was a market that had pretty exciting returns eight to ten years ago. It has a huge population. I think Indonesia could be interesting. 
For those of you in the audience who still like India, forgive me but I just can’t get my head around it.
TB: Could you offer an opinion from the sovereign wealth funds? How might they view the opportunities in Asia? Given the scale of the growth here, it surprises me how little Middle Eastern money, for example, has flowed in this direction. Or am I wrong?
MB: I can’t speak on behalf of any sovereign wealth funds. But I would say that people talk about sovereign wealth funds as if they’re all identical. They’re hugely different. They’re hugely different in terms in where they carry investments. Take CIC, for example, its stated aim is that it cannot invest in China. They’re hugely different in terms of where they are in their growth. If you look at GIC, which is probably one of the oldest sovereign wealth funds, I would suspect its investment strategy is completely different from say, the newest kid on the block in real estate, the Norwegians. Those that are closest to Asia, apart from those who can’t invest there, will naturally have a greater affinity for going into their regions. I think people tend to want to investment more in areas that they know about.
TB: One of the other things many sovereign wealth funds have done, is invest in major cities within English-speaking jurisdictions, often with British common law as the background. I moved to London three years ago and it seems half of Asia followed me. The Malaysians’ EPF, the Korean National Pension Service investing, CIC’s also. Why is somewhere like London top of their list, even though its showing signs of an Asian-style, volatile market?
MB: I think there are probably two reasons off-hand I can think of. One: London remains one of the most mature, transparent markets in the world. If you are a sovereign wealth fund and are dealing with people’s money, you can’t just go out and spend. You need to go to a market you can feel comfortable with. Two: London was pretty cheap two or three years ago. There was this unbelievable run-up followed by an unbelievable fall. I remember the IPD Index had the biggest annual fall in its career. Also, various people thought the pound was cheap so they invested in London. In my humble opinion, that’s an absolutely dotty reason to invest in real estate. If you want to play the currency markets do that. Don’t invest in real estate to play the currency markets.
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TB: But surely getting the currency right on the entry point is a pretty good thing?
MB: It is a good thing to get right but it is not a reason to invest in real estate.
TB: It’s a bonus effectively?
MB: Absolutely.
TB: And if you get it wrong?
MB: I would suggest that most sovereign wealth funds have some kind of foreign exchange overlay so that they come back to their base currency, which seems to be me to be a good plan.
TB: Is the fund management model in North America and Europe simply transferable or are there specific things that might make the Asia model different and potentially more successful? As a limited partner what would you be looking for?
MB: The fund management model is going through fairly rapid change. That’s not a bad thing. These go in cycles. Three or four years ago GPs had completely the upper hand and the LPs, if they wanted to get their money out, had to do exactly what the GPs wanted them to do, which was not sustainable. Now the LPs have a much greater say in things, do they want a greater say in things? To a certain extent they do but they don’t want to have to find themselves having fiduciary responsibility for other LPs. I think the basic fund management model should be the same the world over. It needs greater transparency, greater alignment of interest, more information for the LPs, more ability to give a point of view, which they should take.
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TB: Is there anything that really bugs you about the private equity real estate relationship between GPs and LPs?
MB: I’d clip both parties round the ear and make them realise they are a partnership. Yes, the GPs were in the ascendancy three of four years ago and yes, the LPs are in the ascendancy today. But it’s a partnership. I’ve said to LPs time and time again, you must make your voices heard on advisory boards. You must speak up and tell the GPs what you want. But it is a partnership and GPs must realise that if they want to raise funds down the road, there is nothing easier than having repeat investors.
TB: Is the traditional fund model fatally flawed? With a number of LPs, is it reasonable to suspect that if they are sufficiently aligned and will all give feedback to the GP, that could be a recipe for diverging recommendations?
MB: No I don’t think so at all. I think at the end of the day, the GP must decide what he wants to do but to have a lot of diverging opinions is very good. What I think you will find over the next couple of years is that a lot of the larger LPs will want to do more JVs rather than invest in funds because they will have greater say. They will make their decisions a lot more than clearly than they would in a blind pool fund but the fund business will still be there. There are plenty of investors in real estate that either don’t have the expertise or don’t have the capacity to go and do the investment.
The fund model is not dead. I think it's changing quickly, all for the better. But I think it will survive.
TB: One of the earlier sessions did talk about investor’s speed of execution. Are the LPs capable? How do they gear themselves up to move quickly on deals? How did you do it?
MB: Somebody told me the other day ‘Mark, one of the reasons I like you so much is because you took a decision in five minutes. It was either get out of the door or come on let's have a proper conversation. There are plenty of other LPs who could take decisions. Yes, there are some, and we all know who they are, which tend to faff around a little bit. They will lose deals but that’s just life.
TB: I’d just like to show you something. What does that look like to you?
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MB: It looks like a very poor imitation of the Chrysler Building in New York.
TB: The Chrysler Building was one of your more high profile transactions. What on earth were you thinking?
MB: Hindsight is a wonderful thing. Did I think Manhattan rents would go down 40 percent? Did I think TI’s were going to quadruple? But it would make a fascinating of an example of how to look at a multi-tenanted building in a major city that went through a total crash in real estate values. We stressed tested it, down to rents falling 25 percent and TI’s going up by double. But did I stress test it to rents collapsing by 40 percent and TI’s quadrupling? The answer is, ‘No I didn’t.’ But having said that, we went in when in-place market rents were 40 percent below market rents. Every lease that is being done, is accretive to its income, so that’s ok.
TB: It will be a case study with years to come. Let’s end with your thoughts on deals you’re particularly proud of in Asia. What were your triumphs in the region?
MB: We were one of the first to do a significant amount of Chinese retail with Macquarie and Walmart. We got into that in 2003 and they worked really well. Here in Hong Kong, we did a co-investment with MGPA on Vicwood Plaza when Pamfleet and MSREF sold it and that made money as well. We did good deals in Tokyo too. GPs must realise that if they want to raise funds down the road, there is nothing easier than having repeat investors.
TB: Are there any you missed that you think you should have done?
MB: I’m sure there are many. But if I’ve said no to a deal I never look back and wonder if I should have done it. Any decision is better than no decision.
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