PERE: Last month, Grosvenor’s Asia business posted a 12.8 percent return for 2009, thanks largely to asset sales in China. Is the firm taking advantage of China’s rising market ahead of a bubble popping?
Nicholas Loup: When we decided to sell, we were in an unusual situation where capital values had moved really quickly but rental values were still under pressure. They were producing a relatively low yield, particularly relative to the jump we have seen in capital values. Therefore we took the decision to sell some of the residential.
How much of this good fortune was brought on by China’s government stimulus efforts?
Stimulus is certainly one reason for the surge in values across some of China’s large coastal cities. The Chinese authorities had also relaxed some of its previous restrictions on the residential market in general. There was already pent up demand that existed irrespective of the stimulus so effectively, we benefited from a double whammy.
Now the government is looking to be more restrictive in its policies to defend against the residential market overheating. Do you feel you now have more barriers to entry?
There remains a very compelling opportunity for residential in China because of the urbanisation story and growth in disposable income. We take a long term view of the business. Short term fluctuations don’t matter to us.
The sales were from your operating business portfolio. Where will the proceeds be reinvested?
We are also moving into retail. We will redeploy some of the proceeds from the residential sales into high yielding retail property.
How will this investment strategy sit with that of the $600 million retail fund which closed in late 2008?
We are starting to look at development opportunities as opposed to existing assets, which is the focus of the fund.
Could the two strategies work together in a co-investment capacity?
The fund is not set up to invest in development opportunities because of risk exposure and timescale needs so they remain separate activities.
Can you explain why the retail fund has not closed on any investments to date?
There was a deliberate decision during the volatility of the first half of the year not to commit to projects but we are now actively looking at a number of deals. In fact we are in due diligence on four particular opportunities (totalling $250 million). I expect we should get some assets under our belt, probably in this quarter.