How do you get into Asia's real estate market without acquiring direct exposure to specific buildings? Warburg Pincus managing director and head of China real estate Joseph Gagnon explained at the PERE Summit Asia 2014 in Hong Kong that his firm has focused on building and growing real estate platforms instead.
Gagnon confessed that most investors are attracted to the clarity and liquidity that comes with owning hard assets. But he said: “The problem with that approach is that the barrier to those opportunities is, essentially, capital,” he said. And with cash-rich Asian investors learning the virtues of real estate and flooding the market, he has seen cap rates compress significantly over the past decade.
As a private equity firm, on the other hand, Warburg Pincus has chosen to break into real estate by building up real estate developers or companies, through which the firm gets indirect access to an entire portfolio of assets.
The entity-level investment approach comes with its own host of challenges, Gagnon said, such as living with a minority stake and having to constantly be available to the entrepreneurs.
But those challenges are exactly what make the strategy more niche and harder to replicate. “We think we have a differentiated spot to really be a partner,” he said. “You have to be on the ground, you have to have a presence and essentially reinforce why this partnership was set up in the beginning.”