Of the four real estate professionals, two – Price and Treacy – operate from Hong Kong, while Khoo works in Singapore and Lam in Ho Chi Minh City. Each are aware of one another’s activities however their acquaintanceship is thin such are their immense workloads and the size of the Asian market.
A year ago, PERE kicked off an Asian roundtable discussion with a question not about Asia but the drastically troubled US market. All eyes were locked on what action the government stateside would take to shore up its banking system. Since then, the notion of a world where Asia is “decoupled” from the US economy has served as a backdrop to many debates about the future real estate opportunity across Asia.
While the economic landslide in the West has not derailed Asia’s growth engine, the lack of visibility in the US among real estate investors and lenders alike was still a major concern for the participants at PERE’s third annual roundtable discussion in Singapore recently.
On the morning of 1 October, over the course of nearly two hours, four veteran GPs dissected their way through the pertinent issues of 2009. They discussed Asia’s investment market, lending climate, LP community and the specific economic backdrops of the markets in which they operate.
There was a prevailing sense of cautious optimism at the table. But while the optimism clearly derived from the region’s enduring promise of growth, caution stemmed from a fear of further write-downs in the US.
Like an infectious disease, real estate gloom emanating from the West has the ability to travel East. Or as Richard Price, ING Real Estate Investment Management’s chief executive officer for Asia, put it: “Our single biggest risk remains the US. Another severe write-down there would seriously hit sentiment over here.”
With so much of Asia’s economy currently entwined with that of the US, from lending habits, to investor trends to the businesses that acquire commercial real estate, it is not hard to see why real estate investment managers would have one eye locked westwards.
Price, Simon Treacy, MGPA chief executive Asia Investments, Frank Khoo, AXA Real Estate Investment Managers and Don Lam, chief executive at VinaCapital, have gathered in the private Tiffin dining room at the iconic Raffles Hotel in Singapore to compare notes on how they are navigating today’s Asian real estate investment market. Times have certainly changed since PERE hosted its first roundtable in Asia in October 2007. Then, one participant noted the liquidity crisis that shook Europe and North America had not impacted deal flow in Asia. Credit was available and lending terms were intact despite the slowdown elsewhere. In 2007, fund management firms, including one at the table in 2009, were evaluating how to set up appropriate platforms for investing in India. Then, buoyed by the success of Japan’s J-REITs, which had swollen to a massive $50 billion in market capitalisation, Japanese pension funds were slated to enter the LP market in a big way. Then, climate change and sustainability were key topics. 
Our single biggest risk remains the US. Another severe write-down there would seriously hit sentiment over here
A final flashback quote from our 2007 roundtable: “Banks, especially US ones, have also entered the market looking to not only provide financing but also to take equity or convertible bond positions”. In the year hence it would be tough to argue any of this had materialised.
Signs of renewal
As we go around the table with introductions, the diversity of the Asian market is also made manifest. Optimism levels around the table are for the most part coupled with caution and are very remit and focus-dependent. All agree there are pockets of positivity dotted around Asia currently.
Lam, for example, says he is bullish about his business because it is benefiting from the Vietnam government’s stimulus programme. Having fallen by 40 percent in 2008 from 2007, Vietnamese residential prices, for example, are on the rebound thanks to increased domestic demand from end-users currently benefiting from measures such as a freeze on income tax and subsidised interest rates for manufacturers. “We should have been expecting about 4 percent GDP growth this year,” Lam says of Vietnam. “Now we are looking at 5.5 percent.”
For Treacy, Price and Khoo however, a few more positive indicators are needed before their pan-regional optimism mirrors Lam’s that of Lam in Vietnam. Treacy comments: “It will pay to be cautious for the next 12 months. Psychologically we are clearly off the bottom and there is very positive sentiment at the retail level and among small and medium cap businesses. People are ready to make decisions again but the real proof will be in employment numbers. Until that increases we remain cautiously optimistic about our outlook.”
Khoo adds: “You don’t see a lot of job creation about. Head-hunters tell me they are hiring now for replacements rather than expansions.” He foresees further consolidation before the wider economy picks up.
Price also points to Asia’s banking community, which is yet to force troubled assets onto the market, something that could kick-start investment again. “Real estate fundamentals always lag the economy,” he says. “Prices have fallen because cap rates adjusted to re-establish risk spreads.”
Price predicts real estate incomes on the whole will continue to fall as companies face consolidation or worse, and this may lead banks to intervene: “As incomes fall, the debt service coverage is threatened. At that point banks will have to take action. So far they have been able to avoid doing so because they were being paid.” Psychologically we are clearly off the bottom…. but the real proof will be in employment numbers. Until that increases we remain cautiously optimistic about our outlook
Watching Japan
When discussing the state of Asia’s debt markets, Japan immediately took centre stage as the area of most interest but also most concern at the table. Despite lenders’ desire to underline current activity – see last month’s PERE interview with Deutsche Bank’s head of commercial real estate in Japan, Douglas Smith, for an example – our roundtablers have seen little evidence of increased lending. “When will they come back?” Treacy asks of banks in Japan. “I hope towards the end of the year but then their financial year end is Q1 2010.”
All have seen Japanese loan-to value-ratios hover at a lowly 50 percent and even these loans are not being issued in volume. Price says: “When you think values have dropped at least 30 percent, that leaves a huge gap in most capital structures.”
Lending across other Asian markets has certainly waned over the year. Lam recalls how HSBC, a lender to VinaCaptial in Vietnam for five years, recently called up and withdrew its facility, blaming a reduced country limit. The company found it was successful in switching to local credit instead, but that move is not something others can pin their strategies on easily.
In Japan – still Asia’s biggest economy – the number of corporate bankruptcies in 2008 grew by 11 percent to a record 33 companies, according to data by Tokyo Shoko Research, eclipsing the previous record of 29 bankruptcies in 2002. The same research house said the rate fell by 1 percent in August from the year before, but there is still increasingly visible vacant space. This summer office agent Miki Shoji recorded Tokyo’s office vacancy level to be 7.25 percent, a 57-month high, while Osaka was 9.19 percent vacant and Nagoya was 11.74 percent vacant.
Although the issue of filling commercial space differs from country to country, nobody at the table identifies a market blessed by queues of tenants. While, rent levels across many of Asia’s other major cities are stabilising, a glance across Hong Kong, Singapore, Mumbai, Shanghai and Beijing will show vacancy levels have also continued to rise.
Good, bad, ugly
2009 has seen a reduction of GP platforms still in growth mode. The global investment banks have opted out of this space, leaving more mainstream private equity, property services and insurance firms to ready themselves for tomorrow’s opportunity. High-profile casualties in Asia include platforms managed by Merrill Lynch, Citi Property Investors and insurer AIG, a huge underwriter of the much-maligned CMBS market. All three are seeking sales of the management of their Asia real estate investing platforms. Predictably the hundreds of LPs which have invested in the region, particularly in the last couple of vintages, are feeling burnt as many of the investments they backed now require oxygen.
With all this investor disappointment, how do those managers still in the game, or just entering the region presently conduct themselves as they seek to preserve their existing LP base or attract new commitments? Treacy responds first: “The stability of the firm and the senior management is most important as investors want to make sure the GP is going to be around for at least the life of the fund.”
Treacy promotes a fiduciary mindset above all else and repeats the well-tabled concept of improved communication with investors. But, he stresses, improved communication does not necessarily mean more phone calls or visits. The content of each communication must be more responsive to the needs of the LP. “It’s about staying close to the LP, listening to them, adapting quickly to the changing environment, providing increased information and reassurance on where the portfolio actually sits – the good, the bad and the ugly,” says Treacy.
He reveals at MGPA its 100-plus-wide investor base receive quarterly webcasts for each of its funds. These typically include a 20-minute PowerPoint presentation followed by a 20-minute question and answer session. In addition, the firm twice a year holds face-to-face meetings. “I essentially live on the road monitoring the markets and investments as well as visiting LPs at least once a year,” he admits.
Price highlights it is important to be mindful that LPs don’t reside in the market as GPs do: “When you are in the market you forget it is alien to most of the people that are investing with you.” He underlines the importance of delivering information so that it can be easily conveyed by the initial recipient, who is often not the decision maker, on areas like capital allocation: “You must be able to communicate not just to those with immediate responsibility but also enable them to report up the chain.” All agree the right terminology and not smothering LPs is also important. Treacy says this ultimately is the responsibility of the platform boss, such as those sat around our table.
For a relatively new entrant to Asia like AXA REIM, risk management is a paramount consideration. The firm has a lengthy track record with LPs in Europe, but investors will be cognisant of peer institutions burnt in previous vintages. Some will have invested in other formats and other vehicles in Asia before and some could be making their first plunge with Khoo’s platform. He says: “During the good times people forgot about risk management. Obviously you can’t mitigate all risk but as long as you understand what you are facing, you won’t be caught blindsided.” One way Khoo intends to deflect risk is to co-manage AXA REIM’s debut vehicles alongside a domestic manager. Following China and Japan, AXA REIM will seek partners with significant standing in Australia and India. Once these funds are operational, the firm will have the infrastructure in place to launch initiatives such as a fund of funds.
LPs need GPs
The dilution of GP discretionary control is another talking point of 2009. While Asia is trailing Europe and the US in the number of club-style fund launches where LPs are afforded increased powers such as investment veto rights, these structures have been tipped to compete over the coming years as a means of enticing investors to continue exposing themselves to real estate, in the east too. But Price argues: “While I can totally understand the trend, my fear is you may end in a situation where the LP is building a problem of another kind in a couple of year’s time.”
One problem, Price suggests, is that most of these investors are not staffed in the numbers or with the relevant experience to cope with the responsibilities that come with managing direct investments or taking an active role on investment committees.
Lam says the very notion of diluted discretion is a result of GPs bending over in 2008 to appease LPs. He admits he has been asked to offer such a structure but counters: “If you hire a GP then you must let him make the decisions.”
But on this subject, the table is not united. Treacy believes the existence of differing investment structures is positive for the market as a whole and warns: “I wouldn’t underestimate the LP, to be honest. I think it is very healthy for LPs to access the market in many different ways. I would encourage club deals. Unless they do a few, they won’t know if it is right for them. Asia is big enough for all types of competition and we will support them as best we can.”
It has been commonly thought that only the larger and better-resourced organisations such as sovereign wealth funds can really make an effective go of club structures. Over the past year, traditional cornerstone investors like the Abu Dhabi Investment Authority (ADIA), the Qatar Investment Authority and the National Pension Service of Korea have signalled their intentions to engage in more direct forms of investing through consortiums and separate accounts, effectively ditching new commitments to blind pool funds along the way. In the case of ADIA, it has been busy recruiting investment specialists to help realise its strategy. In Asia, the gulf investor recently recruited Puis Ho, CPI’s head of investments for Asia and Rob Walker, a fund manager in China from Australia’s Macquarie Group. However, Price, who admits ING REIM has also lost a senior teammate to an investor in recent months, says he does not foresee GPs suffering a brain-drain.
The notion of club investing brings with it that of LP joint due diligence. Price
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Frank Khoo |
And it isn’t just LPs which should scrutinise one another – Khoo says GPS are assessing LPs harder too: “We realised there are two types of LPs. One with a short-term view on the market and one with a longer term view. Obviously those with a longer view have stickier money and they are the LPs we want.”
The table discusses the fact that investment clubs are hampered by the “voluntary” capital call, which is sometimes hard to corral quickly. Treacy says: “The best deals typically come and go within two weeks in Hong Kong, maybe three weeks in Japan, four weeks in Singapore and six in China. If you don’t have the capital under control it can hard to close the deal and that’s the risk with non-discretionary clubs. But let’s see. Having a reputation for closing is critical for GPs with discretionary funds or mandates. It helps them do more deals and see more-off market deals.”
Pondering pan-Asia
2009 has seen pan-Asia funds garner less favour with investors, and so many fund managers are now plotting country and sector-specific vehicles. But Treacy sees room for both and regards one as precursory to the other: “As international investors get more comfortable with a region they can go down a layer and start constructing their own portfolios. Either way, having seasoned local teams or partners in various markets is critical to underwriting and implementing their asset plans.”
Price sees this topic as having relevance to GPs too. By his logic, fund managers can mitigate their own operational business risk by operating a number of vehicles to generate a diversity of fee income rather than fewer all-encompassing funds: “In terms of running a sustainable business and keeping the team stable through a cycle, having a diversity of revenues is extremely important,” he says.
As part of running a diversified platform, Price says ING REIM in Asia runs a regional bonus pool which benefits his fund managers in Korea as much as it would those in, say, Japan. When one country performs well while another performs badly, through no fault of the firm’s staff, they are still rewarded for their efforts: “It’s a good way to keep your people incentivised through market cycles,” he says.
Local buyers
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On the growing prominence of local buyers, Price asks: “How therefore does everyone feel about accessing the deal-flow and returns our non-Asia LPs are attracted to? My personal view is, unless the deal has some complexity, like it is a multi-country portfolio, it will be difficult for us to compete.”
Khoo jumps in: “This is about perception of risk which foreign investors would price differently to domestic buyers. My perception of risk would be very different in Vietnam than say, Don (Lam), given his expertise there.”
Despite its country-specific horizon, Lam regards VinaCapital as an investor of foreign money and says in Vietnam such a status is a positive: “We feel that local banks see us as a higher quality borrower so we are able to borrow at a better rate than locals.” This “reverse discrimination” he says, is a result of government desire to attract overseas investment. Many of the assets VinaCapital buys are also sold by the government and Lam says: “If we bid the same as a domestic buyer, we are likely to be selected because it aids government statistics.” He adds local buyers often seek to flip land for a quick profit which is unpopular with the state.
No passage to India
Nobody at the table has invested in India before and judging by the overarching sentiment today, the country is going to see very little change in that position anytime soon. Of the four GPs here, only Khoo has a plan to raise a fund for the country and even that must wait in line. He recounts flying to Mumbai the week before and was encouraged by queues of buyers seeking mid-tier residential units from developers. The others stayed out of the country and their decision appears to be vindicated. This year alone, PERE has learned of a number of international fund managers who plan to shelve or cancel India fund launches. Names include: Cordea Savills, Protego Real Estate Investors, Catalyst Capital and Rutley Capital Partners. Many have blamed investor fatigue towards the country.
This reduction of fund launches has meant most of the capital raised for India in 2009 has been raised by Indians, many of which are taking the Qualified Investor Placement route (a pre-initial public offering format where Indian banks underwrite placements before selling them on) such as Unitech and Indiabulls Real Estate.
Price says he is particularly relieved about not entering India, having been asked by his superiors to investigate setting up an Indian platform between 2005 and 2006: “There was quite a lot of pressure from the group for us to go into India but we took the view it was wrong to go into the market just because we could have raised money for it,” he says. “It is difficult to justify putting the corporate infrastructure in place. That is not to say the demand or opportunity is not there. Personally I’d like to see more foreign investors seeing the realisation of their first investments.”
Against the world
So having digested a number of 2009’s themes, how does Asia real estate investing shape up against the mature markets of the US and Europe, both of which are offering distressed core assets with opportunistic returns? In short, the answer depends on when these returns must be realised. Khoo comments: “If you have a short-term horizon then I suppose there are opportunities all around the globe but if you have a medium-to-long term horizon then nowhere in the world will provide you with higher growth than Asia.”
Price adds: “You can look at all the data you want but the biggest single indicator for real estate is economic growth. Ultimately do you want to take a tactical bet on the US or UK as a recovery play or to follow what fundamentally drives a market?” In 2010, GDP growth is predicted to be 9 percent in China and 6.4 percent in India, according to International Monetary Fund figures released last month, while US growth is penned to be a paltry 1.5 percent. For Price the figures speak for themselves.
Make no mistake, our roundtablers want investors to become bullish about opportunities – any opportunities – in the West, because this enthusiasm will drive dollars to Asia. However, once more investors treat real estate in Asia as a long term play, perhaps in roundtables to come the action in the West won’t be so prominent a topic.
Roundtable participants
Richard Price
Chief Executive Officer
ING Real Estate Investment Management
Price has overall responsibility for ING REIM’s business activities in Asia, which he oversees from the firm’s regional office in Hong Kong. Having amassed more than 15 years of experience of advising on real estate investment in Asia, Europe and the US, he finds himself at the helm of a platform with more than 100 staff across the six offices in Asia and with approximately $4.5 billion of assets under management. His time in Asia started alongside that of the firm when in 1996, he was appointed to grow the platform from an initial office in Beijing. Asia currently represents a small portion of ING’s global real estate investment division, which has €67.9 billion in assets under management, but Price is keen to grow the platform to ensure it proportionately mirrors the market opportunity.
Simon Treacy
Chief Executive Officer, Asia Investments
MGPA
Treacy was one of a team of ex-Lend Lease executives who left the Australian real estate firm via the management buyout of its global real estate funds in 2004 to form MGPA. The platform manages more than $11 billion of real estate assets today of which approximately $8 billion is in Asia. Before taking the helm of the Asia investments platform from MGPA’s office in Hong Kong, where he moved in 1996, he was country manager for Japan for six years, Asia fund manager based in Shanghai amongst other investment roles in Singapore and Bangkok.
Frank Khoo
Global Head of Asia
AXA Real Estate Investment Managers
Khoo’s move from Pacific Star to AXA REIM in September 2008 caused quite a sensation in the Singapore real estate investment market. In Khoo, AXA had recruited a seasoned deal-maker to build it a presence in the region. At the point of his arrival, the French insurer had already invested $500 million of the $2 billion committed by its investors to Asian real estate, but under Khoo’s leadership, AXA REIM plans to have 20 percent of its $40 billion of assets under management in the region within five years. Khoo, who reports directly to global chief executive Pierre Vaquier, has more than 17 years of real estate experience under his belt.
Don Lam
Chief Executive Officer
Vina Capital
Former PricewaterhouseCoopers partner Lam co-founded VinaCapital in 2003 alongside chairman Horst Geicke and director Chris Gradel. The firm started with the management of a single $10 million fund and has since grown into a platform managing more than $1.6 billion across four vehicles. Lam wears both private equity and real estate hats and in 2006 brought three funds to the market comprising: VinaLand Limited, an AiM-listed fund which invests in real estate; DFJ VinaCapital Technology Fund, a venture capital vehicle managed in joint venture with California-based venture capital specialist Draper Fisher Jurvetson; and Vietnam Infrastructure Limited, the first fund dedicated to infrastructure investment in Vietnam. In his previous job at PWC, Lam led the firm’s corporate finance and management consulting practices throughout the Indochina region and numerous debt and equity placements for local companies as well as market entrances by overseas firms.
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