CBRE Global Investors
LaSalle Investment Management
Morgan Stanley Real Estate Investing
Secured Capital Investment Management
It did not take long at this year’s PERE Asia Roundtable to realise that many real estate investment managers in Asia are rubbing their hands together at the prospects they believe still are very much alive in their region. And that is despite the world’s ongoing economic woes. But over the course of the one hour and a half of discussion it becomes clear the problem for these folk is that their hands are somewhat tied by a need to raise capital before they can take advantage.
Thanks to stringent marketing restrictions for US dollar denominated funds, the four firms at this Hong Kong-based roundtable: Morgan Stanley Real Estate Investing (MSREI), LaSalle Investment Management, CBRE Global Investors and today’s host firm, Secured Capital Investment Management, part of PAG, cannot discuss the specifics of their capital raising endeavours.
But PERE has previously reported that, with the investment period of its $4Bn MSREF VII Global opportunity fund winding down, MSREI is starting the process of raising capital again; and already has reported that Chicago-based LaSalle is looking for $750 million for its fourth pan-Asia opportunity fund, LaSalle Asia Opportunity Fund IV; that CBRE Global Investors is in the market with a second China opportunity fund, aiming to coral approximately $500 million; and, Secured Capital is currently mid-haul for its fifth opportunity fund, Secured Capital Real Estate Partners V, with a $1 billion target.
This year’s participants: Hoke Slaughter, head of Asia at MSREI, Ian Mackie, head of private equity at LaSalle, Peter Kim, head of acquisitions for Asia at CBRE Global Investors and J-P Toppino, chief investment officer of Secured Capital and managing partner at PAG, do agree that, while there’s undoubtedly institutional capital around the world available for Asia, each has felt from discussions with LPs a lack of imperative to act quickly.
LaSalle’s Mackie explains: “A guy at a pension fund in the US isn’t going to get a pat on the back for committing to an opportunity fund anywhere at the moment, including Asia. He’s also not going to be scolded for not committing. So what’s he going to do?”
Toppino furthers the point by stating that US investors in particular are more sold on “the US core story” and even when they venture further up the risk spectrum, for investments like distressed debt for example, “their own backyard” often prevails as a more favourable alternative than venturing to the Far East. Kim concurs. “It’s a challenging capital raising environment but I think if you were to ask our colleagues in the US – they’re having a great year. We can see, on a risk-adjusted basis, the US institutions are favouring their own backyard.”
Underlining their point, PERE’s Capital Watch which lists capital raisings in the year by closed-ended, commingled value added and opportunistic funds, has recorded that more than $14 billion was raised for US strategies by the end of October compared to a paltry $3 billion raised for Asian strategies – equal to the amount collected alone for LaSalle’s third Asia opportunity, LaSalle Asian Opportunity Fund III, in 2008. PERE is aware of a number of Asia closings expected before year end, but these won’t see the region compete with the capital being corralled stateside.
Toppino says investors’ decision making processes have become far more detailed, take much longer, and often involving different personnel than they used to. “Even for some existing investors the chances of meeting the same team is not high. So things take a little longer, there are more introductions, more presentations. We speak directly to boards, which we generally weren’t required to do before.” For Toppino, many investors are keen to rebuild trust with their managers as they nurse wounds from poor fund vintages leading up to the global financial crisis: “They want to look in your eye and make sure they can trust you, which I completely understand” he says.
But Toppino also points out that since the onset of the crisis many firms have either gone bust or exited the marketplace. “I would say this: the guys who are alive today? These guys you can probably trust.” In his home market of Japan, he says most of the firms that shouldn’t have been in the business in the first place have already been weeded out.
One group within the private equity real estate space to have visibly contracted is the investment banks. Whether because of poor performances or regulatory pressures, the market has lost Bank of America Merrill Lynch, Citigroup and ING among others, and Deutsche Bank’s platform RREEF has faced an uncertain 2012 too. So it is notable that MSREI is persevering. That considered, how is Slaughter’s dialogue with its investors going? “It’s a very consultative process,” he says, “When we see our investors they want to talk about our access to deal flow, the negotiating dynamics. They want to know if their macro strategy fits what we’re doing on the ground.” Regardless of what has happened to investment bank platforms in general, Slaughter is experiencing comparable treatment from investors to his non-investment bank peers. Adopting similar language to Toppino, he says: “They aren’t only listening to what you say but how you say it.”
To aid investors in making the right decisions, the roundtablers have noticed many are leaning more on consultants for guidance. Addressing the other participants Mackie notes: “The consultant process has phenomenally expanded. A cynical view is that everyone is covering their backsides, but consultants’ level of due diligence on us, and I suppose you guys too, has ticked up dramatically.” He adds that figuring on the “approved manager” lists of these consultants, particularly the largest ones like Townsend Group or Cambridge Associates, is hugely additive. As Toppino states: “Benchmarking opportunity funds is virtually impossible so going to the consultants is a good way to look at a lot of funds and judge relative performance.”
Kim says: “It’s not unreasonable or illogical that consultant due diligence has been heightened. Just as we’ve learned from the travesties of the past, investors have learned too. Has the role of consultants gained in importance? I personally don’t think so. I think they’re as important as they’ve always been. It’s just that there’s a wider range of questions being asked in light of what we’ve all experienced over the last few years.”
Appetite for discretion
Since the onset of the crisis investors in private real estate have assumed more control over their investments. One consequence of that is manager discretion when it comes to investing decisions has been chipped away. Slaughter offers: “It’s natural to see investors wanting more control in a down-cycle.” But he warns that investors who tighten their grip on manager discretion too tightly better have the resources to compensate. “As the market heats up there is a premium on being nimble and on speed. We’re talking about getting an investment committee memo on the Friday and being able to approve a bid come Monday.” In Mackie’s experience some investors are alive to the issue already: “Actually I’m now seeing discord between some LPs as some try to absolutely screw down the discretion to a very small box while others say that doesn’t work,” he says.
Kim does not see the pendulum of power swinging back in favour of GPs anytime soon and CBRE has moved decisively to position itself as a separate account manager of choice in response. “It’s fair to say we’ve raised more separate account capital, year to date, than through traditional, discretionary, closed-ended, blind pool structures.” He says the firm is currently putting together a second series of managed accounts for one investor. Accustomed to its decision making process now their relationship has matured he argues that approval seeking has become more efficient as a consequence. Kim says separate accounts have other virtues too like less of an expectation for managers to co-invest significant amounts of equity.
Slaughter injects: “That works fine for core or core plus where there are less moving parts. But for the higher degree-of-difficulty situations you’re reconvening constantly as a deal iterates and I think there’s a place for managers able to do that.” But the MSREI man admits there is a current need for compromise and referenced a discretionary vehicle which offers co-investment rights as a possible compromise.
One high profile example of that happening is the National Pension Service (NPS) of Korea’s commitment to New York-based Blackstone Group’s $13.3 billion Blackstone Real Estate Partners (BREP) VII fund. NPS invested $300 million into BREP VII after Blackstone offered Korea’s preeminent pension fund the opportunity to invest $300 million also into its $9.4 billion acquisition of the US assets of Australia’s Centro Properties Group in 2011.
A widespread upswing in the offering of co-investments is one by-product of challenging capital raising conditions. But like diluted discretion for opportunistic strategies, it is not appropriate in every scenario. Toppino says: “Some of the things we look at are a bit complicated in terms of numbers of assets and transaction timing. These types of transactions are difficult for groups to co-invest realistically.” Secured Capital has acquired approximately $17.5 billion of assets since its formation in 1997 and a third of that was distressed debt investments, a space where it is currently most active.
When talk switches from investing structures to fees the table has further observations to make. Mackie says investors are most focused on catch-up provisions, hurdle rates and commitment fees. “I don’t think there is any pressure on asset management fees” he says. Toppino says the days of deal by deal promote are practically gone. And Kim adds: “The days of charging 100 basis point acquisition fees and 100 basis point disposition fees are also gone. I think we’d all agree that’s right.”
He goes on: “We’re actually finding our investors are keen to keep opportunistic fee hurdles at 20 percent, particularly for markets like China where they think development projects should still return well over 20 percent.”
Kim’s comments seem an appropriate juncture for PERE to ask participants to relay their take on the Chinese market in light of a couple of years of stringent, market-curtailing regulatory measures, the country’s relatively diminished growth prospects – GDP estimates range now between 7 percent and 7.5 percent versus more than 10 percent in recent years – and the handover of power from president Hu Jintao and his government to successor Xi Jinping last month. Slaughter moves immediately to dispel a commonly-held belief that Chinese developers represent a major distressed opportunity. “Developers are definitely under pressure, but they’re hanging tough. They prefer to cut-price on inventory and/or to work out their bank debt than to recapitalise with private equity on a highly dilutive basis. So the opportunity is not as robust as you might think.”
Kim sees things slightly differently. “It depends on the quality of the developer. I would agree that is the case for the stronger developers. But the weaker guys have come knocking on our door.” That does not mean CBRE Global Investors will suddenly add names to its list of Chinese development partners, however, preferring instead to stick with its stable of “known partners”.
The bottom line for Chinese developers with regards to private equity capital is that it is expensive. While it has a stronger seat at the bargaining table in light of reduced bank and trust available finance, it is rarely a developer’s first choice for capital. Nevertheless, Slaughter says lunches with mainland developers are a lot more promising these days. At the top of the market, they had access to all kinds of low-cost capital, so it was hard to have a productive conversation. Now we talk seriously about deals but crossing the bid-ask divide is still tough.”
He offers up an anecdote: MSREI has a strong relationship with a “blue chip development partner” which had been working on a particular site in a provincial capital for a year. Scant competition meant the partner had the opportunity to buy the site in auction at a base price, there was full alignment of interest given a high level of partner co-investment and it was a low-leverage structure. “This deal could weather any storm,” he says. The issue? “It pencilled to maybe a 16 percent IRR and 1.5x equity multiple,” which is difficult for opportunity fund investors to digest, especially US capital that expects a risk premium for investing in China. “It’s actually Asian capital that’s more aggressive in these situations,” he says, “they’re less worried about the ‘China resi bubble and see the overriding strengths of the trade; good partner, good real estate, good structure and 45 percent gross margin.”
“That’s the most important metric,” Toppino responds, the rest of the table nodding in agreement. Speaking to the opening point of this roundtable coverage, the sense of frustration at the table is palpable.
So where are the best opportunities in China and, conversely, where are the banana skins to avoid? There’s consensus that residential development in Tier II cities looks attractive from an urbanisation perspective while large-scale commercial projects in Tier III cities can be disastrous. In terms of build-to-core strategies, offices in Shanghai “are a very interesting play. Shanghai is under-officed,” Slaughter says.
Tokyo commercial, regional residential
What of Japan? Predictably Toppino pinpoints distressed debt as the most attractive play currently. The thesis certainly has institutional support given a hugely successful capital raise by Secured Capital’s closest rival, New York-based Fortress Investment Group, which is poised to round off fundraising for its second Japan fund, Fortress Japan Opportunity Fund II, on a cool $1 billion. For its part, Secured Capital has already garnered approximately $200 million in a first closing of its latest fund, Secured Capital Real Estate Partners V (SCREPV).
Explaining Secure Capital’s strategy, Toppino says: “We’re basically buying debt at 60c of non-re-inflated collateral value which is cheaper than when we bought in 1999 or 2000. Liquidity is good for the type of collateral we’re buying right now and it doesn’t matter if Tokyo re-inflates or not,” he says, adding that even if underlying assets were to drop in value by another 10 percent, hypothetically speaking, “we could still get mid-teen returns”.
CBRE Global Investors believes today is the right time to sell stabilised assets in Japan, and it is also active in Korea.
Show me the money
Each participant at this year’s roundtable speaks confidently about what he regards as the current opportunities. And each is confident that sooner or later, institutional investors from around the globe will commit more capital to the region than they are currently. Referring again to US investors, Toppino says: “If every investor only wanted to invest in US core, then eventually everyone would lose money from it. That’s not a safe play.”
Mackie builds on Toppino’s point by reiterating that Asia really offers the only region of growth given what is happening currently in the US and Europe. “And private equity is still the best format in terms of being able to form relationships on the ground, structure deals the way you want them, form the governance, and so on,” he remonstrates. “That has to remain the longer term view.” Unsurprisingly, the table agrees.
The roundtable talked for more than one hour and half but the overarching message could be spelled out in seconds: whether distressed debt in Tokyo, small-scale residential in the Japanese regions, Korean residential, tier II China residential or even Shanghai offices, there are plenty of interesting entry-points to deals that are cause for excitement for these roundtablers. But, as always, the most essential ingredient is the capital and, for various reasons, that is lacking at the moment.
President and Chief Investment Officer
Secured Capital Investment Management
PAG Real Estate
A long-serving executive at the firm, Toppino has Secured Capital’s DNA in his veins, joining an earlier iteration, Secured Capital Corporation, in 1993 in the US. It was stateside where he honed his specialism in real estate debt acquisition and advisory – in particular, the acquisitions of non-performing loans. His skills were well suited to the Japanese market where he relocated to in 1998. Since then, he has overseen the purchase of more than ¥1.3 trillion of assets. He was instrumental in Secured Capital’s merger with Pacific Alliance Group in December 2010. Today, Secured Capital manages approximately $3 billion net of assets under management. The firm will rely on his skill set in the near term as it regards distressed debt in Japan as the most attractive investment space currently.
Managing Director, Head of Asia
Morgan Stanley Real Estate Investing
Another of the roundtable’s long-serving executives, Slaughter has worked for the Wall Street investment bank for the past 22 years – the whole time in the real estate sector. He has worked across the spectrum of real estate mergers and acquisitions and capital markets, both as a principal and in an advisory capacity. In 2008, he moved to Morgan Stanley Investment Management, the division responsible for MSREI, a move that included relocating to Asia and heading MSREI’s activities in the region. MSREI currently manages approximately $35 billion of assets, about one third of which are in Asia. The platform employs more than 100 staff across offices in Tokyo, Shanghai, Hong Kong, Singapore, Mumbai and Sydney, the latter of which has hooked much of MSREI’s focus in the past year.
Head of Private Equity
LaSalle Investment Management
Mackie is another whose tenure with one firm is long, having worked for iterations of Jones Lang LaSalle since 1978. His involvement with the Chicago-based giant started in Australia via a 50:50 joint venture between a property company he founded called GRA , Jones Lang Wooton and Prudential Financial. Since 2000, Mackie has led the management of LaSalle’s Asia Opportunity Fund series, including the region’s second largest fund of its kind in the region, LaSalle Asia Opportunity Fund III, which closed in 2008 on $3 billion. He has led acquisitions although latterly, his focus has been on investor relations and his role has “morphed” into a head of client capital coverage function. LaSalle in Asia currently manages $7.6 billion of assets in Japan, Korea, Shanghai, Hong Kong, Singapore and Australia and employees about 200 staff.
Head of Acquisitions in Asia
CBRE Global Investors
Kim has held more different business cards over recent years than the other three roundtablers -although not of his doing. He spent most of his career at now-stricken bank Lehman Brothers – 11 years in its investment banking and fixed income divisions. His last role there was head of Asia real estate investment banking. He joined ING Real Estate Investment Management’s team in Asia in 2008 and took the helm of the Phoenix Real Estate Fund, a $772 million fund previously managed by another imperilled business, New City Corporation. When ING REIM was acquired by CBRE last year, Kim found himself working for the world’s largest real estate property services firm. Today, the Asia division of CBRE Global Investors manages more than $5 billion of assets in Korea, Japan, China, Malaysia, Singapore and Taiwan and has 112 staff.
Mulling the milestones
The roundtable picks four transactions over recent years which, for their markets, should be regarded as hugely significant.
Transaction 1: JAPAN
The deal: GLP, CIC’s $1.6 billion acquisition of Japanese logistics portfolio from LaSalle.
When: December 2011
What happened: Singapore-based logistics real estate investment manager Global Logistic Properties and partner China Investment Corporation purchased 15 warehouses in the greater Tokyo and Osaka areas from the first logistics fund of LaSalle Investment Management in what was the largest deal for the asset class in the country. CBRE Global Investors’ multi-manager division later bought into the deal.
Mackie comments: “As an asset class, logistics in Japan has been virtually unrecognised, certainly from an institutional point of view. Our thesis was that would change and it has. We had eight initial bids for that portfolio and that is really encouraging for that market.”
Transaction 2: AUSTRALIA
The deal: NPS’ A$685 million acquisition of Aurora Place in Sydney.
When: January 2010
What happened: Korea’s National Pension Service of Korea was the first of a batch of large Asia state funds to invest directly and heavily outside of its own borders and it’s A$685 million (€555.7 million; $706.7 million) capture of the Aurora Place office in Sydney has been heralded as one early deal that got the ball rolling. According to a report by Bloomberg, NPS signed an agreement to acquire the 44-story Sydney Harbour office from the Commonwealth Property Investment Trust, a fund managed by Colonial First State Global Asset Management, last week. The fund had owned the building since 2000.
Mackie comments: “A lot of people thought ‘wow’ where did they come from? They’ve been up and running everywhere else since.”
Transaction 3: SINGAPORE
The deal: The sale by Goldman Sachs REPIA to Deka Immobilien of Chevron House in Singapore for $547 million.
When: September 2010
What happened: It was a case of cutting losses for Goldman Sachs’ real estate unit Real Estate Principal Investment Area after originally buying the 33-storey office for $730 million in 2007. Since then, office rents in the city-state have skyrocketed.
Slaughter comments: “the deal traded at maybe $1,800 a square foot. Since then you’ve seen the market climb the ladder right up to the $2,300 a square foot level. It’s hard to chase the market at these levels.”
Transaction 4: KOREA
The deal: CBRE Global Investors purchase of the Hewlett Packard Korea Building in Seoul for a consortium of Korean institutional investors, believed to include Samsung Life.
When: October 2012
What happened: CBRE Global Investors was selected by five Korean institutional investors as the investment manager for a core, domestic office property.
Kim comments: “This was significant because it was a large core deal, where we as CBRE Global Investors, an international manager, managed to secure and arrange a club for five domestic investors.”