November 2013 will long be remembered in the Philippines for the widespread devastation caused by ‘super-typhoon’ Haiyan. An increasing death toll and the leveling of central areas of the country have rendered other domestic events comparatively insignificant.
Nevertheless, just days before the typhoon struck, the country’s largest real estate transaction to date took place. It saw New York-based private equity and real estate firm Apollo Global Management exit from five prime office buildings in the capital of Manila to local conglomerate SM Investment. In less tragic circumstances, the deal might have received more attention.
Speaking before the storm, Eric Manuel, director of capital markets in the country for Cushman & Wakefield, said the sale by Apollo effectively saw the Philippines’ real estate market graduate from “investment backwater to investment grade.” He noted that he since has been inundated with inquiries from Asian and US investment managers seeking further investment opportunities in the country.
The portfolio comprised 1.6 million square feet of space and generated a net operating income of roughly PHP1.3 billion from blue-chip tenants that include law firm Baker & McKenzie, Sony, Deutsche Bank, Intel and JPMorgan Chase. A source close to the deal said the assets were representative of an occupational market that is expanding.
Bidding for the assets was hotly contested, with 20 parties initially interested. In an indicator of how foreign capital was keen to gain exposure to the country, it is understood that another US private equity firm had entered into exclusivity to buy the assets at one stage during the summer. That firm was understood to have been one of two international bidders in a final short list of five that included Philippines conglomerate Ayala Corporation, prior to SM Investment prevailing.
The exact price of the transaction was undisclosed, but Cushman & Wakefield has estimated that SM Investment paid between PHP19.4 billion (€331 million; $445 million) and PHP22.7 billion for the assets located in Bonifacio Global City, a highly urbanized part of Manila.
One source connected to the sale process said the exit would see Apollo’s investors receive an equity multiple of roughly 2.5x on an initial investment of about $100 million.
Apollo inherited the office portfolio following its takeover of Citi Property Investors (CPI), the real estate investment management platform of Citigroup, in 2010. The properties were acquired by CPI in 2008 via its CPI Partners Asia Pacific opportunity fund, which attracted $1.3 billion in equity from investors. At the time that CPI bought into those assets, the Philippines was largely off the investment radar.
Cushman & Wakefield’s Manuel, however, emphasized that the situation is changing as President Aquino’s administration steps up its efforts to improve the country’s infrastructure, noting that the infrastructure surrounding the offices in Apollo’s portfolio played a pivotal part in their sale. With the right infrastructure, the Philippines’ demographics and urbanization trends could make it Asia’s next growth story, he said.
Still, Manuel warned international investors that domestic capital is highly competitive for real estate assets in the Philippines and ambitious to benefit from the government’s efforts. Unaware of the storm to come, he added that the country was not broadly affected by the global financial crisis and, as such, financing was readily available for domestic borrowers.
These combined factors have convinced Manuel that international investors might invest in Philippine real estate on a case-by-case basis, but they are unlikely to build an investment strategy for the country. Nonetheless, Apollo’s successful exit from five offices signals an important step in the market’s maturity. How much that thesis will be affected by last month’s natural disaster remains to be seen.