Last month, PERE revealed that the Hong Kong-based investment management firm PAG was formalities away from raising $400 million for the first close of its $1 billion core Asia fund.
With PAG actively raising capital for its debut core vehicle in the region, and with increasing numbers of other firms also understood to be launching pan-Asia core vehicles, the spotlight is once again on these lower risk and return private real estate investing strategies.
Of little doubt, overseas and regional investors are gravitating towards core investments in Asia. Of 300 investors polled by real estate consultancy CBRE for its annual investor intentions survey, 43 percent said they would prefer to invest in core over opportunistic and value-add investments.
But while interest may be a given, there is less unanimity on what kind of vehicle structures are currently best suited for core: open-ended vehicles with low volatility or closed-ended vehicles with better performance possibilities.
PAG, which merged with Japan-focused private equity real estate firm Secured Capital in 2011, has a track record of investing in core-like strategies, though it is better known for its more opportunistic investments, which are closed-ended in structure. Comfortable with limited life structures, in March last year, the firm launched PAG Real Estate Partners, a closed-ended core vehicle. The firm intends to deploy the capital in assets with strong cash flow across nine gateway cities in Asia, according to marketing documents.
Another proven opportunistic fund manager in the region, the Singapore-based SC Capital Partners, led by entrepreneur Suchad Chiaranussati, is also plotting a core fund, with a fundraising target of between $400 million to $500 million. He said his firm was responding to demand for core property in the region from European and North American investors.
And Similar to PAG, SC Capital’s core fund will be closed-ended in structure, something Chiaranussati admitted did not chime with all the firm’s prospective investors. “A very large component of investor interest is tending towards open-ended, low volatility and low performance sharing structures,” he said.
He admitted that there are challenges in raising a closed-ended fund in the region given the relatively smaller pool of investors interested in such a structure, and also the fact that the LPs in his previous funds typically invest in opportunistic strategies, not core.
“What we are looking for is capital that is willing to have a performance feature: if we have done well, we should make money. That demand for a performance-related core fund comes from a smaller group,” he said.
London-based firm M&G Real Estate, on the other hand, has been operating an open-ended core fund in the region since 2007 that has a portfolio of $1.8 billion in real estate investments in Hong Kong, Japan, Singapore, South Korea and Australia. Scott Girard, the firm’s chief executive officer and chief investment officer for Asia, said that the firm raised equity in excess of $330 million via the M&G Asia Property Fund in 2014, a sign of the increasing momentum of core investments in the region.
But on the question of structure, he said: “If we were to launch a core strategy in the market today, I can’t see any reason why we would adopt a closed-ended fund.”
“In the case of a closed-ended strategy, [one needs to] take significant amount of risks to generate returns – hold high leverage positions or take some amounts of development exposure,” he added. “Active portfolio construction [on the other hand] is possible in open-ended funds.”
Regardless of structure, a more pertinent issue might be capital deployment. Many investors are concerned about the dwindling number of core deals available in Asia, according to Terence Tang, managing director of capital markets and investment services in Asia for Colliers International. He said that Japan and Australia are the only two markets that can provide lower-risk core products in the region at the moment. And even these markets might dry up soon, he added.
“The yields have started to compress so quickly in Australia and Japan, that the window for core investing in these regions will close in about one year’s time,” he predicted.
Core investing in Asia is gathering momentum, but still at such a nascent stage, it is not without its considerations, structuring being one of them.