Jonathan
Brasse
At the end of September, the Asian Association of Investors in Non-listed Real Estate Vehicles (ANREV) published research that found that, of the Asian property fund universe it measures ($244.8 billion and growing), opportunity funds are the most common investment style, accounting for 45.1 percent. That made sense, even if one might have expected the percentage to be higher still.
ANREV also found that core was the second most common investment style at 33.6 percent. That seemed surprising, even taking into consideration the size of the large, predominantly core markets of Japan, Australia and Hong Kong.
That one third of investment in Asia real estate is core goes to show the appetite today for safe assets. Indeed, in the weeks that have passed since publication of that research, there have been at least three fund managers orchestrating new core property funds. Two of them, Pramerica Real Estate Investors (PREI) and MGPA, have announced their intentions, while the third has yet to do so at press time.
Interestingly, common to each of these managers is a tradition of launching value-added or opportunistic vehicles in Asia. But it appears, on this evidence, some private equity real estate platforms are offering products to meet a desire among institutional investors wanting elements best offered by core real estate: things like transparency, low risk and solid income streams.
Another commonality between these platforms is the decision to introduce open-ended products, which offer better liquidity, rather than closed-ended vehicles. Each has its particular reason for doing so, and not all can profess to it being down purely to pre-planning.
In the PREI situation, investors in its two closed-ended Asian Retail Mall funds were split between a desire to retain exposure to Singapore (a market that PREI chief executive Victoria Sharpe described as “land-locked”) and the need to harvest the funds’ 12 shopping malls as originally planned. For PREI, the Pramerica AsiaRetail Fund was more of a best solution available than it was deliberate pioneering.
The motivation for Asia- and Europe-focused MGPA was to raise institutional capital via a vehicle that does not demand 20 percent returns. For them, liquidity-keen German institutions were identified as the source of that capital.
Of course, MGPA does have approximately $500 million of dry powder remaining from Asia’s largest-ever private equity real estate fund, the $3.9 billion MGPA Asia Fund III. But, as Tom Mills, MGPA’s chief executive officer for Japan, admitted on stage at last months’ EXPO Real conference in Munich, the firm can’t justify using that capital on a lot of the deals it sees. “We are seeing deals with reasonable to low risk but that just can’t meet the return expectations of an opportunity fund,” he said. “It’s a shame not to be able to do those.” 
We are seeing deals with reasonable to low risk but that just can’t meet the return expectations of an opportunity fund. It’s a shame not to be able to do those
Tom Mills, MGPA
In PERE’s undisclosed example, which is for an incoming Australian fund, the firm in question is keen to shift the emphasis of its division in the country and sees seeding an open-ended core club vehicle as an ideal way of maintaining its management capacity while also realising a sale. As the fund manager said: “If you accumulate a core portfolio, you don’t want to sell and have to start all over again.”
Although there are just three examples to speak of right now, PREI’s Sharpe predicted that more such products should follow. Indeed, she is convinced there will be more vehicles like the Pramerica AsiaRetail Fund, not least because it is a real possibility for PREI itself in its other focus markets, such as Japan. She also wouldn’t bet against an open-ended core real estate fund in China within the next five years.
If that’s true, here’s a warning to those seeking to flee China amid concerns of overheating: once you’re out, it might not be so easy to get back in. Singapore was an opportunistic market just 10 years ago and now its “land-locked,” to quote Sharpe. It’s China’s nature to do things quickly, so when core centres are built there, expect owners to tighten their grip on their assets.
As with any fledgling movement, if that is what this is, there will be challenges. The main threat to Asian open-ended core funds is credibility. Units of Pramerica’s fund, for example, are to be priced quarterly based on appraisal net asset values, and places like Singapore are easy to measure with confidence. However, few other markets offer comparably comfortable quarterly pricing appraisals, the likes of which global institutions could confidently trade upon as they do in Europe or the US.
That said, let’s not blow the wheels off this wagon. ANREV’s findings and PERE’s three examples are just another marker on Asia’s road to market sophistication. That is undeniably a good thing.
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