ROUNDTABLE: (Re)building the case for Asia

How does one convince investors from outside of Asia to back a platform in that region when many of their previous forays in the market were not fruitful? That is the question on the lips of the participants in this year’s Asia roundtable.

Selling the Asia growth story might seem straightforward. However, where macroeconomic comparisons with the West previously did much of the convincing, today the task is more challenging.

“There have been various degrees of performance in the region,” points out LaSalle Investment Management’s chief investment officer for Asia Pacific, Mark Gabbay. “When you go to investors and say the region will outperform, their response really depends on the fund managers they have invested with in the past and the relative performance within those portfolios.”

The roundtable participants nod in agreement, and no doubt they’ve all heard similar things. Prior to the start of the global financial crisis, when record capital was raised for Asia funds, there was a belief from institutional investors that the increased risk that came with investing in the region would bring outsized returns. When that didn’t happen, then the denominator effect took hold of their wider portfolios and distressed opportunities surfaced in their home markets, many investors changed their approach to Asia and their capital commitments became less forthcoming. According to PERE Connect, of the $33 billion raised for value-added and opportunity funds globally for the year to November, just $2.8 billion was committed to Asia funds, compared to $14.5 billion to Americas funds and $10.5 billion to global funds.

The reality is the region does offer diversification, and certain markets offer attractive cash-on-cash returns that will help institutional investors build a defensive portfolio.
Mark Gabbay, LaSalle Investment Management

At Singapore’s M Hotel, site of this year’s Asia roundtable, Gabbay is joined by Olivier de Poulpiquet, co-chief executive officer and co-chief investment officer of Morgan Stanley Real Estate Investing (MSREI); Richard van den Berg, managing director and head of China at CBRE Global Investors; Terence Tang, head of Southeast Asia at Invesco Real Estate; Glyn Nelson, head of property research for Asia Pacific at Aberdeen Asset Management; and Kenny Sim, assistant fund manager for property in Asia at Henderson Global Investors. Their roles differ, but common to each is a global business intent on increasing or cementing their firm’s exposure to the region. Perhaps less obvious, but of more immediate importance, each currently is marketing Asia-focused investment funds, with the notable exception of MSREI.

None would discuss their respective fundraising activities, owing to various sensitivities and regulation. Nevertheless, each recognises the need as well as the difficulty in appropriately representing the region to their respective investor bases. CBRE’s van den Berg is the first to point out that, for a variety of reasons, most institutional investors with long-term investment horizons are grossly underweight to Asian real estate. His research tells him that 27 percent of today’s investible real estate universe is in Asia, but almost no investors can say their Asia exposure reflects that. Furthermore, he says: “Our expectations are that, over the next 10 years, it will go from 27 percent to 37 percent.”

Hand in hand with wider economic growth, Invesco’s Tang concurs that Asian real estate will continue to benefit exponentially, despite various market bubbles and corrections that have cropped up of late. “If you believe the story of economic growth in Asia, then real estate will follow that,” he says. Aberdeen’s Nelson adds: “Depending on your risk/return target, we would expect the Asia-Pacific region to form part of a global real estate portfolio, providing diversification and, potentially, accretive risk-adjusted returns.”

Benchmarking the market

While most institutional investors accept that Asia’s growth story is undeniable, a growing caution is leading to increased requirements for information, particularly in areas of risk and performance benchmarking. That is the challenge the professionals sitting around this table must meet. “Everyone had good deals and bad deals, but it’s hard to say on a net basis where the region actually stands as there are limited benchmarks,” states LaSalle’s Gabbay. “The reality is the region does offer diversification, and certain markets offer attractive cash-on-cash returns that will help institutional investors build a defensive portfolio.”

As a result, the roundtable participants support efforts from the likes of the Asian Association for Investors in Non-listed Real Estate Vehicles (ANREV), which last month launched the first industry performance index for non-listed real estate funds in Asia. However, like any nascent tool – its first results came from just 42 participating funds – it requires sustained data contributions to be effective and that requires more time and, crucially, more support.

“Industry benchmarks are really hard to produce, not least because of the range of markets – mature to developing – within which investors can take on strategies throughout the risk spectrum, from core to opportunistic,” Nelson says. Reminding the participants that it is important to remember that the institutional opportunity fund market in Asia is still in its infancy, he adds: “It’s a very new market and really only started developing in a meaningful fashion in the last 10 years.”

Henderson’s Sim believes the industry is developing in the right direction, however, and points out: “The first ANREV index is an important step in providing global institutional investors with a meaningful measurement benchmark.” Henderson was one firm to participate in ANREV’s index, and the firm chairs the organisation’s performance measuring committee.

The participants know that somewhere in each institutional investor’s portfolio there must be some risk taken, as generating outsized returns in the low interest rate environments of the US and Europe is otherwise a tall order. That’s where Asian real estate comes in.

Invesco’s Tang believes that ultimately these investors will have to accept the current opacity of Asian real estate and make the requisite commitments if they are to address the geographical imbalance of their portfolios. “If you don’t have enough, you have to put more in,” he says. Sim agrees, adding: “Global institutional investors will continue to look towards Asia due to a combination of diversification reasons, higher returns relative to their local markets and a growing range of Asian real estate fund products.”

Given the dearth of merited research, many investors are basing their risk assumptions on “the enormous amount of articles and news” focused on property in the region, and they span from “very positive to very negative,” says van den Berg. As a result, he is often asked to present to his investors a series of worst-case scenarios. “They really want to know the portfolio they are facing,” he adds.

Therein lies the answer for these firms. To a greater or lesser extent, each roundtable participant has a portfolio in the region from which to draw data. CBRE Global Investors last month completed its $1.2 billion acquisition of van den Berg’s previous employer, ING Real Estate Investment Management, in a deal that inherited the firm approximately $5 billion in Asian assets under management, an amount built up since 1995. Those assets and that period of time in Asia – “We’ve seen it all,” he says at one stage – provides him data he feels he can depend on.  “The best data you can get is from your own projects,” he states.

For MSREI, which has approximately a third of its $45 billion in assets in Asia, the scale of its research in this respect is as comprehensive as anything it might find externally. Expanding on van den Berg’s point, de Poulpiquet says: “We have the luck of having invested very significantly in Asia and having gone full-circle on our investments.”

Indeed, MSREI has been a net seller of assets in Asia of late. According to research from data provider Real Capital Analytics, the firm has exited more than $5 billion of its Asian real estate over the past 12 months alone, more than any other private equity real estate platform currently active in the region. “Some of the data we are using comes from the experience of our team in closing a large number of leasing and disposal transactions and from our proven network of local operating partners,” de Poulpiquet says.

On the multi-manager front, Aberdeen was one of the first to set up in the region, and it currently manages approximately $1 billion of assets from which to draw insights on what is happening in the region.
The Chinese opportunity

With an increased demand for more “granular information,” as LaSalle’s Gabbay terms it, the need to showcase a “detailed top-down and bottom-up” understanding of Asia’s real estate markets, as well as impacts on the region from external events, is as important as ever. This becomes abundantly clear when talk shifts to China and, more specifically, Chinese retail.

With the Chinese government determined to stem housing price inflation while concurrently switching its focus from industry and exports to domestic consumption, positioning a retail real estate strategy is a must for private equity real estate firms active in the country. Underlining the importance of the sector, van den Berg says: “We think that, over the next five years, the growth in retail consumption is going to be 18 percent per year. There has been an enormous push over the past 10 years.”

We have the luck of having invested very significantly in Asia and having gone full-circle on our investments.”
Olivier de Poulpiquet

For firms like CBRE and Henderson, working out which part of China’s ‘retail spend’ to target takes some consideration, and there may not even be one right answer. According to van den Berg, there are three distinct segments of the Chinese retail market to evaluate. First, there is the discretionary spend space, consisting of high-end shopping malls adorned with international luxury brands like Louis Vuitton. The middle segment continues the discretionary theme but concentrates more on domestic brands. Lastly, the lower end consists of community shopping centres aimed more at the “necessity spend” – things like food.

For van den Berg, top-end retail investment is a long game, perhaps not suited to the shorter investment horizons of private equity real estate funds. “For investment funds of five, seven or 10 years, investments in those centres could miss out on the upside that comes thereafter.” For him, community retail offers better prospects.

Typically developed in residential areas, “these types of shops are very local and practical to that environment,” van den Berg explains. “You don’t need to be a whiz-kid to be able to lease those out.” Rented to local businesses on short-term tenancies, turnover for community retail units is often high, but there generally is no shortage of replacement occupiers. Importantly, this type of retail offers two distinct exit possibilities, both of which are conducive to the opportunity fund model.

The first is strata-selling, or selling by unit or by floor. “There are lots of local entrepreneurs that take that type of stock,” injects van den Berg. Second, is selling “en bloc” once rents have been stabilised. As the roundtable participants agree, this sort of retail investment is considered “low-hanging fruit,” which would benefit either a residential or a straight retail focus – or both.

de Poulpiquet particularly appreciates selling real estate on a strata basis, something MSREI has done in both China and India. “It just gives us more ways of exiting our investments,” he says.

Invesco’s Tang and Henderson’s Sim are a little more bullish on the concept of bringing luxury retail brands from China’s Tier I cities to its Tier II cities. “There are opportunities in cities like Nanjing or Chongqing,” Tang suggests. But, like van den Berg, he too likes the community shopping segment, “particularly when anchored by a good hypermarket or technology retailer,” he adds.

Sim chimes in: “China’s growing love of luxury is underpinned by a large and sophisticated wealthy class that sees luxury brands as symbols of wealth and social status.” With that theme in mind, he identifies investment opportunities in cities like Tianjin, Chongqing, Nanjing, Chengdu and Shengyang, pointing out that Chinese retail real estate asset management is “relatively nascent” in itself and something that firms like his can bring to the table.

Breaching the Great Wall

Of course, having a strategy for Chinese real estate is one thing, but finding individual opportunities is another thing entirely. Still, the roundtable participants are convinced a window is opening, and they are positioning themselves accordingly.

The only pieces of land they wanted to sell were in the suburbs. Sometimes you had to drive as much as an hour to get there only to find the land had roads that still needed building, but that’s all that was available.
Richard van den Berg, CBRE Global Investors

Central government regulation is pushing Chinese lenders to restrict their real estate activities, rendering many domestic developers unable to continue expanding their businesses. Without their investment, local authorities are struggling to meet their own capital obligations. According to one report by Reuters last month, Hangzhou, the capital of the eastern Zhejiang province, has targeted land sales to pay back 82 percent of its debt but currently is unlikely to meet that target. The report suggests Hangzhou is not alone, with other cities also struggling to offload land through the conventional auction format. Consequently, talk of local governments conducting off-market and discounted sales to developers has surfaced.

Enter private equity real estate firms. Whether partnering with a developer in the acquisition of land or buying direct from or into a local operator, firms today are finding a seat at negotiating tables they previously were not invited to. In Chengdu, for example, CBRE is considering investments within the city’s ring roads for the first time and at a 20 percent discount to peak pricing. That is a far cry from recent years.

“The only pieces of land they wanted to sell were in the suburbs,” van den Berg recounts. “Sometimes you had to drive as much as an hour to get there only to find the land had roads that still needed building, but that’s all that was available.” Looking forward, he expects discounts to push out further still, perhaps by as much as 40 percent. Sim also is experiencing more local developers willing to negotiate downwards on pricing, predicting “more opportunities for joint ventures and equity stakes in favorable projects in the coming quarters.”

de Poulpiquet offers an anecdote. MSREI currently is in discussion with a “very well-established” residential developer who “in the past would never have spoken to us because our cost of capital was way too high and they had access to liquidity.” Now, with established developments at the pre-sale stage, “they need to refinance but have zero access to liquidity because of bank tightening.” In this example, MSREI expects to make a preferred equity investment, expecting to see its capital back before the developer sees a penny.

Rising sun

For Japan, however, the omens are less clear. Still, if any firm has clarity on the market it is LaSalle, for whom Japanese real estate accounts for more than 50 percent of its $8.2 billion in assets under management in Asia.

While it is hard to ignore the second largest real estate market in the world when constructing a diversified regional portfolio, LaSalle’s Gabbay says that, looking forward, portfolio concentration in Japan needs to be closely watched and tied to risk and return considerations. Nonetheless, he believes there is enough deal-flow in the country and that risk-adjusted returns are generally good. “We’re pretty positive on an entry point to Japan in 2012,” he adds. “You just have to be patient and pick your spots.”

Gabbay’s belief is supported by parent company Jones Lang LaSalle. In October, the real estate services firm reported that Japanese investment volumes had tipped $4.7 billion in the third quarter – up from just $1.5 billion one quarter before – as sentiment returned following March’s disastrous earthquake and tsunami.

Most adversely affected by the tragedy was the office sector. “Office fundamentals have softened in Tokyo after the Tohoku earthquake with rents continuing to slip,” Aberdeen’s Nelson says. “However, in the residential space, we’ve seen asking cap rates trade within a range over the past six months or so.”

Accepting that there are always exceptions, the roundtable participants are not convinced Japan offers much for opportunistic strategies, partly on account of a patient and willing lending market able to extend maturing debt on fairly relaxed terms. However, they do believe Japan can be a good market for cash-on-cash returns.

de Poulpiquet agrees with that comment, citing five deals MSREI has completed in Japan in the past 18 months. However, with an average equity investment of $25 million to $30 million each, he does not see much in the way of scale. “A potentially more scaleable approach to investing in Japan is through buying distressed loans and CMBS in order to access interesting assets,” he says.

Whether the earthquake itself throws up opportunities is another matter. Among such opportunities, Gabbay thinks the earthquake has impacted logistics requirements and certain users could move further inland, creating development opportunities with potentially high returns. While talk about logistics opportunities is theoretical at this stage, LaSalle has gone one step further in the residential sector, acquiring a condo conversion in Tokyo with a view to offering people an alternative to high-rise apartment accommodation. “Even the good buildings are designed to move (during earthquakes), and that can be unsettling. We anticipate some home ownership demand coming from individuals that would prefer to live in low-rise units versus the high rises,” he says.

Indeed, some firms are bent on raising opportunistic capital for the country regardless, such as Fortress Investment Group. The New York-based firm recently launched a second Japan opportunity fund after deploying the $800 million raised for its first.

Others are less inclined to do so. Goldman Sachs Real Estate Principal Investment Area, for example, recently informed investors in its $2.3 billion Whitehall Street International 2008 global fund that it would not invest the remaining capital of the vehicle in the country, and Lone Star Funds has scaled down its predicted allocation to Japan in its recently closed $5.5 billion Lone Star Real Estate Fund II to roughly 20 percent from 33 percent in its previous fund.

What shoe fits?

In addition to evaluating the best investment strategies for Asia’s largest markets, the roundtable participants also are considering what investment structures work best in an environment where investors are demanding more control over their capital commitments. Club structures, whereby managers require various approvals before deploying capital, are becoming increasingly popular in Asia, Henderson’s Sim points out. “We are seeing a greater demand for such products within specific markets among the more sophisticated investors that we deal with,” he adds.

Still, the roundtable participants remain largely faithful to the traditional, blind-pool commingled fund model, even if they submit that future funds are likely to be smaller and more focused than they were prior to the global financial crisis. Indeed, PERE Connect research reveals that the largest Asia-focused fund currently fundraising has a target of $2 billion, half the size of the $3.9 billion closed by MGPA for its third opportunity fund in 2008. Furthermore, the majority of firms seeking capital for the region are holding out for less than $1 billion.

Aside from fund size, de Poulpiquet – currently leading investment on behalf of the $4.7 billion Morgan Stanley Real Estate Fund VII Global, the latest in MSREI’s global opportunity fund series, which closed in May 2010 – believes regionally focused funds reflect “a pretty smart approach.” However, he also believes the flexibility of investing via a global fund has enabled his firm to switch continental focus easily and that has paid dividends. “Look at our latest fund,” he says. “For 18 months, we have invested a lot in the US and have done pretty well, but nothing in China and India. With a global fund, you have that flexibility.” He does acknowledge, however, that investors could argue that they can do the diversifying themselves by selecting a range of managers across geographies and asset classes.

One firm that has taken the more focused route is Henderson Global Investors. Henderson’s Sim notes that the London-based firm currently manages about 55 funds and segregated accounts globally, but it has applied a focused approach to its Asia exposure. With assets under management currently in the region of about $1.5 billion, he expects the number of Henderson-managed Asia products to grow over time. “We are actively engaged in key markets like China to deliver appropriate products for our investors to match their return and risk requirements,” he says. “As a firm, we are very committed to the region.”

Ultimately, each firm represented by the roundtable participants wants to offer investment products that both demonstrate a keen ear for the wants of its investors and a thorough understanding of its target markets. In the absence of enough veritable data, these firms expect to convince investors of their strategies by drawing from their own experiences. Whether that approach is enough remains to be seen. Still, regardless of how much risk analysis exists, many institutional investors have gaps in their portfolios that must be filled by Asian real estate if they are to balance their exposure.

The participants

Olivier de Poulpiquet
Co-chief executive officer and co-chief investment
officer, Morgan Stanley Real Estate Investing

At MSREI, de Poulpiquet jointly leads one of the most headline-grabbing real estate investment management platforms in the world. The firm currently manages approximately $43 billion in assets worldwide (as of June 30), of which a third is in Asia. It operates core and special situations funds, but it is best known for its opportunistic fund series. The latest, Morgan Stanley Real Estate Fund VII Global, closed in May 2010 on $4.7 billion. MSREI has yet to make many large investments in Asia with this fund – most outlays have happened stateside – but that position is about to change. de Poulpiquet, who rejoined the firm in April 2010 after an interlude with Italy’s Pirelli Real Estate, moved from the bank’s London office to its Singapore office this year to oversee MSREI’s transformation from a net seller to a buyer.

Mark Gabbay
Chief investment officer, Asia Pacific
LaSalle Investment Management

Hong Kong-based Gabbay is a relative newcomer to Chicago-based LaSalle Investment Management, but he joins a firm well established in Asia. Of its $47.9 billion in assets under management, more than $8 billion is in Asia. While a significant amount is in Japan, LaSalle also has exposure to Korea, Hong Kong, Singapore, Australia, China and Macau. Prior to joining LaSalle, Gabbay spent two years working for Japanese financial services firm Nomura after almost a decade with Lehman Brothers, where he was, at one stage, managing director and co-head of Lehman’s real estate group for Asia Pacific. Today, he works alongside LaSalle’s Asia opportunity fund president Ian Mackie, targeting new deals in the region.

Terence Tang
Head of Southeast Asia
Invesco Real Estate

Tang is one of approximately 65 staff to transfer to Invesco Real Estate in January after the firm completed the takeover of AIG Real Estate’s Asia business. That transaction inherited Invesco – already a sizeable real estate business in the US and Europe – a platform with $5.4 billion in assets, adding to its $500 million in assets already under management in the region. Invesco Real Estate currently is looking at further opportunities for investment within the Asia-Pacific region on behalf of its global investors. Reporting to managing director Cheng-Soon Lau, Tang focuses predominantly on acquisitions in Southeast Asia.

Kenny Sim
Assistant fund manager, Asia property
Henderson Global Investors

London-based Henderson Global Investors has approximately $20 billion in assets under management across about 55 segregated accounts and closed-ended funds, although more than half of those assets are based in the UK. Henderson’s team in Asia is responsible for approximately $1.5 billion in assets comprising direct property investments, fund of funds investments and public securities managed from offices in Singapore, Beijing and Hong Kong. Sim’s current remit is focused on Henderson’s direct investments, particularly those in China. Prior to Henderson, he worked for Eastern Life Assurance, where he was responsible for investment analysis and asset and development management for various deals across Asia.

Glyn Nelson
Head of property research, Asia Pacific
Aberdeen Asset Management

Aberdeen Asset Management is a pure asset management company with $288 billion in total assets under management as of August 2011. Its real estate assets across both its direct and multi-manager platforms total $34 billion and are invested through a suite of products that include segregated accounts and open-ended and closed-ended funds. In Asia, Aberdeen manages real estate capital primarily via a fund of funds series, the third and latest of which currently is looking to raise between $300 million and $400 million in equity. The firm was one of the earliest real estate multi-managers in the region, offering its first Asia-Pacific fund of funds in 2006. Singapore-based Nelson joined Aberdeen in 2009 after a stretch as head of real estate intelligence service for Asia at property services firm Jones Lang LaSalle. He also previously worked for Jones Lang LaSalle’s rivals Richard Ellis and DTZ.

Richard van den Berg
Country manager, Greater China
CBRE Global Investors

van den Berg is one of a 135-strong platform that previously was under the control of Dutch banking giant ING Group and is, as of last month, officially part of the world’s largest property services firm, Richard Ellis. ING Real Estate Investment Management’s Asia business was the second of three platforms that made up the largest consolidation the sector has seen, and one that resulted in CBRE Global Investors becoming the largest real estate investment manager in the world with $94.8 billion in assets under management.
Today, Asia accounts for just $5.5 billion, the majority of which was managed by ING REIM, although the efforts of van den Berg and his colleagues are expected to see that figure grow significantly over the coming years. The framework for this growth is already in place, with the ING REIM acquisition inheriting CBRE offices in Tokyo, Seoul, Shanghai, Taipei, Hong Kong and Singapore.