ASIAVIEW: Dissidents in the dark


Last month, private real estate investing in Asia took a significant step forward towards market sophistication. Still, not everyone was happy about it.

As revealed by PERE, property services giant Jones Lang LaSalle (JLL) launched the region’s first real estate secondaries trading platform. The Secondary Market Bulletin (SMB) is a periodic dispatch by JLL listing buyer and seller appetites to a subscriber list currently 30-strong and growing. A monthly offering, the first bulletin in July offered $250 million of private fund units, ranging in strategy from Australian core to pan-Asia opportunistic.

In many respects, SMB is closer in operation to a classic ‘lonely hearts’ column in a newspaper than, say, a modern Internet dating site. The latter would be more akin to Property-Match, the real-time secondaries trading service of CBRE, JLL’s closest and bigger rival, offered out of London. Nevertheless, JLL’s effort brings some light to a marketplace that currently is shrouded in darkness.

The issue for a number of players in this most opaque of marketplaces is that they actually prefer playing in the dark – particularly sellers. From multi-managers to agents to the very fund managers subject to such transactions, the number of dissidents among those PERE spoke with was surprising. Not surprising, however, was their reason why. Opacity is good for negotiation, they argued. Transparency, by inference then, is bad.

In addition, there is a perceived difference between Asia and Europe secondaries, which makes the development of a platform unwelcome. One placement agent suggested that secondaries deals in Europe typically transact on a smaller scale than they do in Asia. A by-product of a more liquid and transparent market, he said investors would regularly “trim up or trim down” their holdings, with stakes as small as $500,000 frequently changing hands. Therefore, there is minimal wriggle room for negotiating price.

In contrast, given the nature of Asia’s opaque market, such ‘trimmings’ don’t really happen. Much larger stakes of $50 million or $100 million are not uncommon (albeit at reduced frequency), and the bandwidth for negotiating pricing is much wider. Unsurprisingly, the notion of advertising these stakes for sale on trading platforms is unappealing. 

PERE really shouldn’t need to be justifying why platforms like JLL’s SMB are important for Asia, which obviously is the third-most transparent region on a list of three

There’s also another gripe for sellers, argued one fund manager. While few managers of units subject to sales would willfully block an investor from offloading a stake (apart from selling to a competitor, of course), sales can underscore investor concerns and investor concerns can hamper subsequent capital-raising efforts. Again, for groups like that, market darkness is more comfortable.

One widely discussed case is a multi-billion dollar, pan-Asia opportunity fund established shortly before the start of the global financial crisis. Prospective buyers of units in this fund have been asking for a 20 percent discount because it is overweight in one country, the manager lost a senior executive and it has significant uncalled capital to boot. Call it opportunistic haggling by buying parties but, considering these points, it is feasible to ask what this overhang in available fund units will do for the manager’s next fundraising.

The disaffection continues. One multi-manager said, while secondaries had been very much part of his investing thesis, he would find it hard to buy from a platform like SMB given that part of his firm’s unique selling point is the ability to unearth the very ‘truffles’ others cannot. He is certainly not alone in his outlook. For this man, and others besides, it is far safer to describe JLL’s platform as a place to exit than to buy.

One point to make about JLL’s SMB, in its first iteration at least, is that individual unit pricing – current or historic – will not be publicised. That will preserve some of the opacity seemingly so treasured at the moment, although JLL already has suggested that pricing eventually might be injected into its listings as the platform evolves. Relief for those reliant on dealing ‘under the table’ therefore will be short-lived.

All that said, let’s talk in positives. The introduction of a secondaries trading platform certainly will help to iron out issues. Take pre-emptive rights, for example. PERE was told of one situation where an investor spent a long time in due diligence on the fund units of another large Asia opportunity fund with a view to buying a $100 million stake. That investor was blocked at the eleventh hour by the fund’s existing investors, which snapped up the lion’s share of what was available, leaving said investor with “a tiny little piece of little interest.” SMB surely would not promote investments where there was potential for episodes like that.

PERE really shouldn’t need to be justifying why platforms like JLL’s SMB are important for Asia, which obviously is the third-most transparent region on a list of three. The bottom line is market transparency helps get markets moving, and JLL’s ‘lonely hearts’ bulletin is another step towards achieving that. As such, it should be embraced in all corners, including those parties who today prefer life in the dark