ASIA VIEW: Asia’s first great wave

According to CBRE, approximately 50 private real estate funds containing $40 billion of assets in the Asia-Pacific region are slated for termination over the next two years. That might not compare with the quantum of assets that was made available for purchase on the back of the great bank de-leveraging that has taken place in the US and Europe in the aftermath of the global financial crisis, but it is still quite a significant volume for prospective buyers in the region to consider.

Unsurprisingly then, the world’s largest property services firm told PERE in the days after it published its white paper, Great Wave of Fund Expiration, that the number one question on the lips of investors and investment managers to whom it has since given presentations was “where are these assets?” Indeed, the timing out of what is essentially Asia’s first ‘great wave’ of closed-ended, private real estate funds will no doubt be one of the opportunities for its second wave – and for other kinds of buyers besides.

Dig a little deeper into the white paper and it is interesting to note how CBRE, indirectly perhaps, is also calling time for opportunistic strategies in the region. The firm says that, with many of the prime assets of the expiring vintages already exited, what is left really constitutes work for core-plus and value-added strategies.

For those appropriately positioned then, CBRE is saying there should be more than enough real estate to meet a current capital requirement of about $30 billion. These assets, it says, should be resolved largely via traditional buyer-seller transactions. 

The outcome for the remaining $10 billion of CBRE’s total, however, is arguably more interesting. What will happen there? Much will have to do with prevailing market conditions. Currently, you might predict an easier time for those managers looking to offload assets in Australia and Japan, where demand for the sector is strong.

On the other hand, you would be hard pressed to say the same for China at the moment. 

CBRE says as much in its paper, pointing out that disposing fund managers in China will be competing with suffering domestic property companies facing the same woes. Meanwhile, in Japan, exits might be needed before a long anticipated rental recovery materializes, but few doubt a recovery will occur. That means there are buyers to be found. Similarly, in Australia, there may be a mismatch in the quality of assets these funds have to offer and core properties that are most sought, but the discount Down Under is likely to be more favorable than in China.

CBRE says the optimal solution for managers of Australian and Japanese properties is to seek an extension of their funds and bet on better climes for potentially more prosperous exits to come. Chinese properties, on the other hand, generally are better off being restructured. Secondaries trading is another option.

A fourth option (if termination is to be considered the first) would be resolution by floatation. But with REIT regimes only now evolving in China and India, that solution would really be one for the future. Hong Kong and Singapore are insufficiently and often inconsistently available public markets for Asian fund managers and, Japanese assets aside, the J-REIT market does not currently favor overseas investments – even though it legally can now buy offshore. In addition, REITs typically require the majority of their assets to be sustainable income generators, and CBRE reckons that many of those assets already have been sold by these funds in question. We’re really talking about the property left over. 

Accordingly, it was not surprising that, in a poll last month asking readers to determine how the great wave of assets ultimately would be sorted, nobody selected the public markets. Somewhat predictably, half of respondents said via conventional sales, 10 percent said via secondaries and 40 percent predicted the funds simply would be extended.

CBRE says the 25 percent shortfall in liquidity should not exert a significant shock in the marketplace, and the responses to our poll support that point. That must be right. After all, what is $10 billion really in the grand scheme of things?