FEATURE: The land of smiles

When talking about investment markets in Southeast Asia, Malaysia, Indonesia, Vietnam, Laos and even Myanmar frequently are labelled as ‘interesting’ by opportunistic real estate fund managers. Despite their interest, however, such managers have yet to deploy any meaningful capital in those markets. Unstable political regimes, concerns over land entitlement and legal disputes, limited exit options and volatile currencies and interest rates are a few of the factors deterring them – even if the macro-economic picture appears enticing.

Thailand, meanwhile, seems different. PERE spoke with the founders of two of the best performing pan-Asia real estate investment managers, Arch Capital Management and SC Capital Partners, and they suggest the country stands out from the crowd.

Based on some of the deterring factors mentioned for other countries in the region, it might seem reasonable to lump Thailand in the same bracket as its unfancied neighbors. Notably, the country experienced a coup d’état in 2006, it repeatedly has been battered by adverse weather and its currency has oscillated by 40 percent over the last decade (most recently, falling by 14 percent since April).

Thailand’s saving grace, however, might be that both Arch Capital and SC Capital can boast stellar returns in their respective fund series from investments in the country. Indeed, based on some eight transactions, Arch Capital says it has generated IRRs of 40 percent on occasion, while SC Capital claims to have done even better. It has made a similar number of investments and produced IRRs as high as 67 percent.

“I have never lost money in Thailand,” exclaims Suchad Chiaranussati, who currently is investing his firm’s third pan-Asia fund. “The worst deal we have done there made an 18 percent IRR.”

Betting the house

For both Arch Capital and SC Capital, there is a right way of tackling Thailand and there is a wrong way. Both firms have placed their bets firmly on the country’s demand for housing and are largely steering clear of its commercial real estate. For them, hospitality and retail assets are ‘interesting’, but it is in residential that they believe the surer money is to be made.

There is good reason for that belief too. In a report at the turn of the year, Thai news service The Nation predicted that demand for housing in the country will continue leading to impressive pre-sale figures by its top seven developers. According to the news service, their sales in 2012 totalled more than THB124 billion (€2.9 billion; $3.9 billion), and that figure was expected to be bettered by the end of this year.

Indeed, Bangkok and its immediate vicinity are expected to see increased demand for housing to the tune of between 5 percent and 10 percent this year. However, it is in Thailand’s regions that even greater demand is expected as the country’s middle class becomes increasingly affluent and urbanization continues its apparently one-way trajectory.

Despite an argument for expanding his focus to include regional markets, Arch Capital founder Richard Yue is adamant that a reliable transportation system is a prerequisite for his firm to attract the sort of customer for which it is developing homes, and that points only to Bangkok. “Our buyers are office workers,” he explains. “They are white collar types who want quality but also convenience and good proximity to transport.”

Bangkok has 59 subway stations, putting the city’s subterranean transport system in a similar league as Hong Kong, which has 84 subway stations, and Singapore, which has 102 subway stations. “Build near a subway station and you can count on product flying off the shelf,” says Yue. And in his experience, that is precisely what has happened.

Arch Capital has committed approximately $100 million of equity to Thailand since its formation in 2006 and only has three assets in the country still on its books, all of which reside in its current opportunity fund. “For our previous funds, all our investments in Thailand have been exited,” he notes.

Not scalable enough

While investment in housing may be a no-brainer, investing in Thailand’s commercial real estate is less clear cut. According to CBRE research published in August, there have been eight consecutive quarters of growth for prime office rents in Bangkok. In the third quarter of this year, rents for the city’s Grade A office space increased 8.6 percent to BHT8,800 per square meter, compared to the same quarter last year. Rival property services firm Jones Lang LaSalle, meanwhile, reports that the increase in rental rates has precipitated a 13.7 percent increase in capital values to THB 2,925 per square meter.

Despite these positive indicators, Yue says a dearth of multi-national companies seeking to take additional Grade A office space in the Thai capital gives opportunistic platforms like Arch Capital little with which to work. For him, Thai companies would need to compensate by demonstrating demand for better accommodation, but he has seen little evidence of that in 15 years of engagement in Thai real estate.

“The local demand is simply not sophisticated enough yet,” Yue says. Subsequently, he does not think Thai offices offer a scalable enough opportunity for institutional capital.

When – or if – that position changes, Chiaranussati predicts international institutional capital might face competition from domestic state investment entities and insurers, which increasingly are seeking to diversify their asset bases to include real estate. “Initially, they are looking for core and core-plus opportunities domestically,” he says. “That will institutionalize the market.”

Tales from the coup

Although both Yue and Chiaranussati speak positively about their investments in Thailand, their experiences have not been free of consternation, particularly when the Thai government was subjected to a coup d’état in 2006. The first unconstitutional leadership change in the country in 15 years actually happened during one of Arch Capital’s investor meetings in Bangkok.

“By the end of that day, the yellow shirts had seized the airport,” Yue recalls. “Only half of our LPs got out in time.” Faced with potential danger, Arch and its local development partner, a Thai-based Chinese family company, arranged for coaches to transport the other half to Phuket, where they were able to catch flights. “Two days later, Phuket was closed too,” he adds.

SC Capital, meanwhile, had just launched the largest development project in Bangkok, known as Millennium Residence, as the military coup took place. “It was one problem after another with red and yellow shirts everywhere, but we lived through it and have now exited from the project,” Chiaranussati says. He claims not to have lost money during the ordeal, but he admits opting for a defensive measure in forward-selling half its position in the development to Singapore-based rival Alpha Investment Partners. “That helped us to de-risk the transaction,” he explains.

SC Capital’s success in the face of such an event has Chiaranussati placing a particular onus on entering an investment in Thailand on favorable terms. “As long as your underwriting is solid, you will be able to make your 2x [equity],” he says. “Even during the coup, we didn’t lose money.”

The right exposure

What is the right exposure to Thailand? For Arch Capital, it has been approximately 10 percent of its total assets. For SC Capital, the figure is higher – about 20 percent.

Given their stellar performances so far, it might seem counterintuitive that both firms have not committed more capital to Thailand. Yue responds to the suggestion by pointing out that, while the country offers lucrative acquisitions, Arch Capital has yet to commit more than $25 million to any single investment. More regularly, it commits between $10 million and $15 million.

“I don’t have unlimited resources,” Yue states. “A $15 million deal takes the same resources as a $50 million deal.”

Talk to opportunistic real estate managers about Southeast Asia and you’ll hear mostly about Singapore, perhaps a little about India. Outside of those markets, the region has not yet shaken off its ‘interesting’ tag. Still, on a limited scale, those looking for any heat in the region will likely find some in Thailand, ‘the land of smiles’.

State aid
An initiative led by Thailand’s Government Pension Fund could help firms invested in the country’s residential market

When it comes to Thailand’s THB556.5 billion Government Pension Fund (GPF), most private equity real
estate executives are interested in its appetite to expand the reach of its coffers to include international real estate. Last September, it took its first significant step to that end, mandating Cleveland-based The Townsend Group to deploy $250 million predominantly into core funds in North America, Europe and Asia.

For firms like Arch Capital and SC Capital, which are invested in Thailand’s housing, a more recent initiative by the GPF might have additional relevance. Last month, the state pension plan launched a promotional campaign alongside six Thai developers to enable government employees to benefit from special discounts when they buy their homes. It follows a similar effort by GPF with Thailand’s banks, which launched a decade ago to offer beneficiary interest rates. In some cases, state staff will be able to combine the two initiatives.

While not quite an equity commitment from the country’s state pension plan directly into one of their funds, any measure that helps people buy houses is going to be welcomed by a real estate investment manager with a strategy of investing in Thai residential.