Q&A

Headquartered in Bermuda with offices in Hong Kong, Tokyo, Seoul, London and Luxembourg, MGPA is a private equity group focused on real estate investment in Asia and Europe. Owned by its principals and Australia's Macquarie Bank, MGPA was formed in February 2004 following a management buyout from Lend Lease Corporation. Last September, the private equity real estate fund manager raised approximately $1.3 billion for its latest vehicle, MGP Fund II. Here, CEO James Quille, a 30-year veteran of the real estate business, shares his firm's strategy, his thoughts on the Asian market and what distinguishes China from the rest of the region.

What is MGPA's investment mandate and strategy?
Our strategy is to invest in real estate in the broadest form: acquiring single assets, portfolios, ground-up developments and operating platforms. We look at 40 cities around the world on a quarterly basis; within Asia, we are actively involved with six cities in Japan, two cities in China, Seoul, Hong Kong, Singapore and Bangkok. The sectors span industrial, office buildings, residential and retail. We identify trends in each economy and look for mispriced assets to acquire, i.e. where trends and markets don't match, presenting opportunities.

Target returns are pegged at the high teens to low 20s, but vary from country to country; say 18 percent in Japan, mid-20 percent to mid-30 percent in China, and mid-20 percent in Hong Kong and Seoul. The target returns are commensurate with the risks we take.

How much of MGP Fund II is allocated to Asia—and China specifically?
Up to $920 million of equity will be allocated to Asia, of which $200 million will mark the upper limits of our exposure in China. That means an investment capacity of some $400 million, taking into consideration that it is hard to leverage above 50 percent, on average, in China. That said, it should be stressed that we tend to look at deals individually, and there is always coinvestment capital from other investors. We are constantly evaluating opportunities so figures are more theoretical than cast in stone.

We are currently underwriting eight to nine deals in China, as well as conducting due diligence on various projects. I am quite certain that we will make our next investment in China shortly and expect the first deal to come through over the second quarter.

Is there a specific region in China that you are targeting?
Shanghai and Beijing will be our focus for now. We are researching second-tier cities, but any investment from the fund is unlikely for the medium term, i.e. the next two years.

You've made an investment in Shanghai but a lot of others, who are talking about it, have not. What are the barriers to entry? There isn't so much of an entry barrier to speak of as much as the knowledge and understanding of the market that facilitates investing in China. We have had 12 years of presence in China so we know the legal system; the capital controls, like how to invest and repatriate funds; and issues pertaining to securities and titles. It takes time to learn and understand. For new entrants to this market, it simply means a steep learning curve and being able to understand the market and the constraints within.

How much influence does the Chinese government have in the local property markets and how do you deal with those regulations?
It is not uncommon in Asia for governments to influence or get involved in the market; it happens in Singapore, and, to a certain extent, Japan too. It is something we've learned to manage, and only becomes a factor when governmental intervention or influence distorts the market. When investing internationally, one has to reconcile with the fact that status quo never stays the same.

What are the differences between China and Japan, where much of the investments from your second fund have been made?
There isn't much of a difference where fundamentals are concerned: seeking value is key. Fundamentals matter the most, upon which peculiar market factors will overlay—varying risks, for instance. The overlaying factors will play a part in how we invest. In Japan, the market is more liquid and debt cost lower, as opposed to conditions in China. Japan is also at a recovery stage, versus the growth stage China is at. What this means is: in China, we will look at generating stock for a new and emerging market where GDP is growing strongly from a low base, while in Japan, we see a market in recovery mode where demand is generated by GDP growth and the economy moving from a long period of deflation.

What do you see as potential exit routes for your investment in China?
As the exit market is still relatively new, we tend to focus on prime locations—assets that appeal to institutional investors. I don't see an exit (from MGPA) for another four to five years. In the meantime, we will focus on building or create world-class assets. If you have good assets, there will always be institutional investors there to buy them.