ASIA ROUNDTABLE: The specter at the party

CBRE Global Investors
LaSalle Investment Management
Phoenix Property Investors
Macquarie Capital

Investment managers in the private real estate universe will often say they are ‘cautiously optimistic’. The ultimate in non-committal comments, it serves to portray a wish to be more active without tying one’s colors to the proverbial mast.
The four participants at this year’s PERE Asia Roundtable refrain from repeating this well-worn outlook. And yet it is somewhat ironic how cautiously optimistic they are about the prospects for property investment in Asia, the world’s growth region.

That is because for Richard Price, chief executive officer for Los Angeles-based CBRE Global Investors’ (CBRE GI) Asia business and today’s roundtable host; Mark Gabbay, co-head and chief investment officer for Asia at Chicago-based LaSalle Investment Management; Samuel Chu, founder of Hong Kong’s Phoenix Property Investors; and Michael Chan, head of Asia, private capital markets for Macquarie Capital, the investment banking arm of Australian bank Macquarie, life has markedly improved since the dark days of the global financial crisis. And, having enjoyed a resurgence in fortune, these executives are pondering the potential pitfalls to come.

First the fortune. Price tells of steadily increasing institutional support for CBRE GI over recent years. The ex-ING Real Estate Investment Management man says: “Since we’ve been part of CBRE, global fundraising has been slowly increasing.” The firm hauled aboard about $8 billion in the last year and, in Asia, its China operation has been particularly “good for fundraising as well as separate accounts”.

His account chimes with that of Gabbay who says “it has been a record year” for both capital raising and revenues. The real estate investment management arm of property brokerage Jones Lang LaSalle (JLL) raised $5 billion in the last quarter alone and is “on pace” to raise $7 billion at least for 2014. “It feels like, globally, more money is coming,” he remarks. In Asia, the firm is in “deployment mode” and that has seen its regional assets under management increase from $4.6 billion at the end of 2013 to $5.9 billion at the end of the third quarter. “All the metrics are up from our perspective,” he says.

Similarly, at Phoenix, Chu recounts how his firm held its biggest fundraise to date at the turn of the year, capturing $750 million for its fifth opportunistic fund. “We were oversubscribed,” he says, “If we wanted to we could have raised more.” From a niche, Hong Kong-centric boutique formed in 2002, Phoenix now has nigh-on $4.8 billion of assets under management and, with big institutional support in tow, 2014 has seen the firm expand from its traditional markets of Hong Kong, Taiwan, China and Japan to new markets like the Philippines, Korea and Indonesia.

There have been good times at Macquarie too. As Chan notes, in the tenth year of its operation, the firm’s private capital markets team has just hit the $50 billion mark in terms of capital raised. Its early decision to switch focus from primarily acting for commingled funds to brokering transactions between large capital pools and real estate operating businesses directly has paid dividends too with the firm active in $8 billion of deals this year alone, a whopping $6 billion of those occurring in Asia.

Naturally, each is delighted by their respective progress, and rightly so. But, equally as natural, each also harbors concerns about how the party might be spoiled. And that forms the basis of this year’s conversation.

Night terrors 

Perhaps predictably, the four men around this table are looking at the macroeconomic picture as well as global property markets for clues as to what might hamper their efforts here in Asia.

Global transaction volumes continue to surge – $700 billion of real estate will have changed hands by the time 2014 is up, according to JLL, and that’s $200 billion-odd more than in 2013. LaSalle’s parent company forecasts 10 to 15 percent more activity in 2015 as well. In the face of low returns from fixed-income products and volatile stock markets, the asset class has remained a darling for institutional investors, most of which have unsatisfied allocations to it.

And yet, many institutionally favored property markets are reaching their cyclical zeniths. Combine that aspect with the prospects for increasing interest rates, slowing economic growth and a plentiful supply of capital ramping up competition for assets – JLL’s rival DTZ reports newly available capital targeting commercial real estate grew in the first half of 2014 by 15 percent to a record of $408 billion – and a previously aggressive conviction by investors towards the asset class is starting to wane. To support that point, another piece of research by placement agent Hodes Weill & Associates states how more than 60 percent of an investor pool of 231 polled by the firm expressed a decline in their conviction towards future real estate investments.

With all that food for thought, PERE asks the roundtablers what keeps them awake at night with worry. Gabbay is the first to respond: “I can’t sleep anyhow,” he quips. “But I’ll tell you the main thing we’re thinking about is where we are in the real estate cycle. Secondarily, we’re thinking about what is going to dislodge the cycle. Lastly, we ask whether that dislodgement comes from within Asia or outside?”

Chu, another self-confessed insomniac, is most fearful of the impact of surprising government policy. “I never sleep well anyway,” he jokes before making his point. “For the past few years, I’ve seen a lot of government measures in Asia that are unprecedented. You cannot underwrite such measures.” He points to bubble-averting measures recently adopted in the residential markets of Hong Kong, Phoenix’s home turf, and Singapore, where it is has just opened an office to access Southeast Asian markets, or the introduction of a sales tax in Japan which saw it unexpectedly slip into recession in the third quarter.

“You can have a situation where there is a perfect supply and demand balance but then the government comes in with measures.” Chu admits to deals being reconsidered based on policy measures introduced in China and Taiwan, for example. “I’m often second-guessing these days what the next measure will be,” he says.

CBRE’s Price is more stoical about policy implications, “I don’t think there’s any point of losing sleep about it,” he comments. But he feels meaningful policy moves in Asia do disadvantage the region’s real estate markets more than they do western regions. “The reality is when you see regulatory volatility here it adds to that perception in non-Asian investors’ minds that this is a universally high risk part of the world and, therefore, you need to look for higher returns here. I think that’s unfortunate, particularly when you think there has been so much regulatory instability in Europe and the US with regard to monetary policy and taxation.

Seeing the signs 

Each of the four participants is used to real estate market cycles and can identify the hallmarks when a market heats up. But it is fear of the unknown that permeates this discussion. 

Macquarie’s Chan reflects: “What really keeps us up? What will be the game changer? It probably won’t come from our area, it’ll be something geopolitical, perhaps some crazy virus.”
But, he points to one fundamental, cyclical difference this time around. “One thing is very different. Money is so cheap, liquidity has been high and interest rates are low. How do these governments get out of this low interest rate environment, what policy will they put in place and what will be the knock-on effect for hard assets?”

Price nods in agreement: “Nobody forecast interest rates staying this low for this long. I think the risk that would surprise to the downside the most is how they go up. I don’t know when it will happen but I think the curve will likely be steeper than most people predict.”

Gabbay chimes in: “We are at a different point to any other in economic history. In terms of the amount of money in the world today and the purchasing power of that money, it has never been so out of balance.”

A further factor, Price believes, is the huge amount of excess labor capacity there is in the world. “There’s massive unemployment in Europe, we’re a long way from full employment in the US too. In China, there’s still a huge amount of capacity that needs using up. That could well keep a lid on things before we see a spike in interest rates. But at some point the dynamic will change and I think that is likely to lead to a rise that is larger and faster than people currently expect.”

In the meantime, there’s a palpable sense around this roundtable that these executives want to be as busy as possible converting the current, swelling demand from institutional investors to be invested in the asset class to be just that – invested.

The new gold 

Part of the task at hand for the roundtablers is to demonstrate the continual comparative attractiveness of private real estate investing to other institutional asset classes, including in Asia where prime yields have crept southwards and quite severely in particular markets over recent months.

In October, Pacific Century Place, a monolithic office tower in Tokyo’s Marunouchi, was sold by private equity real estate firm Secured Capital to Singapore’s sovereign wealth fund, GIC Private for ¥170 billion (€1.24 billion; $1.59 billion) in a deal that reflected a yield of approximately just 2.5 percent. In another example, last month PERE revealed how National Pension Service, the preeminent state investment vehicle of South Korea, had acquired from real estate investment management firm InfraRed Capital Partners, the EC Mall retail center in Beijing for RMB2.4 billion (€314 million; $391.5 million). That deal reflected a yield of approximately 4 percent. Both examples reflect how steamy Asia’s prime markets have become.

But Price counters the suggestion that prime real estate in Asia has become prohibitively expensive in Asia when considering how low-yielding other financial assets are at present. “Fixed income returns have become really skinny,” he says, “and yet nobody has adjusted what they expect from real estate. It is still a case of core gives you six to eight percent, add some risk and you can have 10 percent, and so on. I’m not sure that’s the right way to look at things. If risk-free assets are so much cheaper and less lucrative, is it right then to say real estate still must deliver the same level of returns?” 

His point is approved by the others, so he continues: “What we do is not gold. But there is a finite amount of product at any point in the cycle. That is how good investors can maintain or enhance value over time. You can’t just come in and have an International Finance Center or Exchange Square. Those take up time and capital.”

Macquarie’s Chan, however, believes that many of the institutions his firm deals with are cognizant that real estate portfolios are slowly assembled and is confident they will stay active across cycles. Agreeing with Price’s prior point, he says: “They do set aggressive allocation targets. But they know they can’t just pile in to the market. The core gateway cities saw cap rates come in very quickly. But, as you say Richard, some are looking at negative effective yields on some of their fixed income products so they can say they can still put money to work in some of these markets.”

Bigger menu, looser grip 

According to PERE’s Capital Watch, a list of commingled private equity real estate funds currently in the market, little more than $5 billion has been raised for Asian strategies in the year to date – well down on the years immediately before the crisis. But while the value-added and opportunistic investment strategies represented in the list used to account for the vast majority of all the capital raising in the region, the rise of core funds, separate accounts, partnerships and clubs since the crisis has somewhat colored the capital markets picture. And, while investors have returned to traditional funds, today the wall of capital chasing bricks and mortar has led in part to a greater menu of means to getting invested for them than before. Further supporting these greater options is the continual maturation of the region’s property markets.

That said, and as Gabbay points out, while they are offering more products to investors these days, the sheer volume of capital keen to buy real estate, combined with some decent post-crisis performances, have led to managers being able to regain some of the discretion on investing decisions that they previously had to concede. “Two years ago, the pendulum had definitely swung in favor of LPs. It feels balanced at this point, but, depending on how capital flows go, it could actually tilt a bit in favor of GPs – though I don’t expect a wild swing.”

However, the largest institutions, such as the sovereign wealth funds, the table agrees still are able to maintain high degrees of control when investing. Gabbay observes: “For them, it’s the ability to slow down or stop investment at any point and for any reason that is important. The ones that have lived through the crisis, the drivers for them aren’t so much the fees, the alignment or the discretion. It is that ability to contain.”

Indeed, Gabbay’s observation has been exemplified in some of Asia’s biggest markets by the Abu Dhabi Investment Authority, the largest sovereign wealth fund in the Middle East, which has since the crisis sought to take greater control positions when deploying capital. ADIA successfully negotiated the transformation of a commingled fund offered by Macquarie Infrastructure and Real Assets, another part of the Australian bank, for retail investments in China. In India, it effectively did the same thing for a residential-focused fund offered by Kotak Realty Fund, the real estate investment management business of Kotak Mahindra, the Indian financial group, although that was in partnership with fellow sovereign wealth fund, Qatar Investment Authority.

Chan adds: “These groups have lived through the crisis. They know if they can make decisions now. Some of the large investors are happy to give discretion, others are large enough to handle it. But they’re not as intrusive as you might think.”

Another post-crisis theme the table is quickly keen to dispel is that of disintermediation of allocator investment managers by institutional investors in favor of working directly with operating partners. And although that theme is at the heart of the recent deals by Chan’s Macquarie, the roundtable strongly believes only certain investors actually can entertain such partnerships. Chan admits: “Not all groups have the ability to really be a fiduciary. They can’t really have that discussion.”

Price further counters the notion by suggesting that The Blackstone Group, which this month was set to hold a final close on Blackstone Real Estate Partners Asia, its first dedicated private real estate fund for the region, at its hard cap of $5 billion, was proof that allocators are still an essential part in the equation. “They are an allocator, right? Well they attract truckloads of cash,” he comments.

Chu and Gabbay point out, in fact, that their businesses have sizeable operator components to them anyway. Chu confirms: “We have our own sourcing capabilities and that makes us operators.” 

LaSalle has attracted institutional support for both strategies which use allocation and for those which utilize its operating prowess – in the past year, the firm raised $585 million for its latest pan-Asia opportunity fund, a vehicle that will work alongside local operators, and $430 million for its third Japan logistics fund, a vehicle that uses LaSalle’s own operational capabilities.

But Chu adds that investors still have a relatively limited choice in Asia for their private real estate investments so, whether operator or allocator, those with strong track records should prevail anyway. “Asia is a huge market but there aren’t many Asia-focused managers. You probably have more investment managers in New York City than you do across the whole of Asia.”

Again pointing towards the larger institutional investors, Gabbay admits firms like LaSalle can find themselves disintermediated when asked to match their equity investment in a transaction, something a group like logistics giant Global Logistic Properties can manage more easily. “We cannot participate on that basis. That’s simply a different strategy.”

But thankfully for Gabbay, and his fellow roundtable participants, disintermediation has not thus far proven to be a theme to have unduly impacted their efforts to raise and invest capital in Asia of late. In fact, judging by the two and a half hour conversation held today, little related to the constituent parts of the private real estate investment universe has. 

When the music slows at this party, these guys predict the problems will more likely come from an area that is non-real estate related, probably a global, macroeconomic force of some kind. Until then, however, each will continue to tread cautiously optimistically on the current trajectory their work takes them.

Michael Chan
Head of Asia, private capital markets
Macquarie Capital

The sole advisor participating at the roundtable this year, Singapore-based Chan is responsible for Macquarie Capital’s Asia private capital advisory business, the most active part of the platform in 2014 with $6 billion of the $8 billion brokered in the year. Macquarie Capital real estate is the real estate component of Sydney-based Macquarie’s capital advisory, capital markets and principal investing division Macquarie Capital. It has been in operation for a decade during which time it has brokered $50 billion of private real estate transactions.

Samuel Chu
Phoenix Property Investors

Chu, a 26-year real estate investment and corporate advisory specialist, began his career with First National Bank of Chicago and the Bankers Trust in New York. He has worked for Deutsche Morgan Grenfell Capital Management and Sa Sa International too. But his star really started to shine with his firm Phoenix Property Investors, a Hong Kong-based private equity real estate business he founded in 2002. Originally investing high net worth capital locally, the firm has since grown into a pan-Asia, institutional investment business with almost $5 billion of assets under management.

Mark Gabbay
Co-head, chief investment officer, Asia
LaSalle Investment Management

Ex-Lehman Brothers co-head of real estate for Asia Pacific Gabbay joined LaSalle in 2010 as its chief investment officer for Asia and promoted him to jointly lead its efforts in Asia a couple of years later. The 19-year industry veteran is well versed in both equity and debt investing, although he has been focused on the former for the Chicago-based firm. Indeed, in 2014, the firm has been particularly acquisitive, increasing its assets under management in the region from $4.6 billion at
the end of 2013 to approximately $5.9 billion today. The firm manages approximately $50 billion of assets globally.

Richard Price
Chief executive officer, Asia
CBRE Global Investors

Price is one of the senior executives inherited by the Los Angeles-based real estate investment management giant following its 2011 takeover of ING Real Estate Investment Management, a firm he worked for since 1996. The 18-year industry veteran today oversees a regional platform with just shy of $4 billion of assets under management. The firm’s most significant activity in Asia during 2014 came in China, where in June it raised $470 million for a country-dedicated investment fund focused on mixed-use and residential developments.

Public interest
PERE asked the roundtable to introduce transactions that best tell an investment story of private real estate investment in Asia in 2014. They chose to explore investments by private investors that accessed prime real estate via the public markets.

Deal 1: CPPIB, DEXUS’ privatization of the Commonwealth Property Office Fund in Australia
When: April
Event: After a couple of bids, Canadian institutional investor, Canada Pension Plan Investment Board, and Australia’s biggest office landlord, DEXUS Property Group, succeeded in taking private the Commonwealth Property Office Fund, a listed-vehicle containing 21 prime office properties in Australia in a deal worth A$2.83 billion (€1.98 billion; $2.46 billion).
Roundtable comment: Chan: “This was an example of large institutions becoming more open to the ways they access the real estate. It’s not all about cycle timing, it’s also about mechanism.”

Deal 2: Qatar Holding’s HK$4.78bn investment in Lifestyle International Holdings
When: October
Event: The investment division of the sovereign wealth fund of Qatar acquired a one-fifth stake in the department store operator in Hong Kong and mainland China in a bid to bolster its western heavy retail property exposure with comparable investments in the east. The deal saw it pay just a 1 percent premium on the Hong Kong-listed firm’s prevailing share price in a deal that also inherited it a seat on Lifestyle’s board.
Roundtable comment: Chu: “The media reported wrongly that this was all about local players selling. It was more than that, these families have been investing for a long time but are moving into a second generation and seem to be changing direction, giving Qatar a great opportunity to buy. If they couldn’t get the physical assets – which they couldn’t – this was a next closest way to get invested.”

Deal 3: Brookfield Property Partners’ $750m investment in China Xintiandi
When: October 2013
Event: Brookfield Property Partners, the listed property investment firm of Brookfield Asset Management, invested and then syndicated among institutional investors, $750 million of equity into China Xintiandi, a specially-devised listed entity that contained prime Shanghai real estate developed by Hong Kong developer Shui On Land.
Roundtable comment: Gabbay: “We’re talking about preferred, perpetual capital at a time when Chinese developers couldn’t raise a lot of money. That was certainly a 2014 theme.”