Download Accessing the Asia real-estate story

Accessing the
Asia real-estate story
Reprinted from AsianInvestor October 2010
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Real Estate Roundtable
Accessing the
Asia real-estate story
Real-estate investors of all stripes debate the opportunities for
investing in Asian assets as the region demonstrates continued
economic strength after the global financial crisis.
Tell us about yourselves and the property investment businesses that you
work for.
Richard Yue: I run a company called Arch
Capital, which is based in Hong Kong.
We’re a boutique real-estate privateequity fund management company with
specialty in developing and managing
residential and retail mixed-use
investments. Our footprint is ex-Japan
Asia with a focus on Greater China and
Southeast Asian countries, including
India. We have just made our fund’s first
investment in Singapore.
Participants
Richard Yue
CEO, Arch Capital
Chris Calvert,
CEO, Cambridge Industrial Trust
Management Limited
Richard David
CEO, Treasury China Trust
Luke Sullivan
Senior vice president, portfolio
manager, Cohen & Steers
Chris Calvert: I’m responsible for running
the Cambridge Industrial Trust which is
a Pan-Asian mandated industrial REIT. It
is one of five such vehicles listed on the
Singapore Stock Exchange (listed July
2006) and has a market capitalization
of around S$500 million. It has just
under a billion dollars of assets under
management. We have a balanced mix
of institutional and private investors. All
the current assets are in Singapore. We
may look to make acquisitions outside
Singapore in the future.
For our first three years of life we were
listed on the UK AIM board.
We have S$2 billion in assets. We have
a team of 80 people in China, and we
handle the whole process from execution
through to development management
and asset management.
Richard David: We listed on the Singapore
Stock Exchange this year and we have a
focus on commercial real estate in China.
Luke Sullivan: Cohen & Steers is a manager
of income-oriented equity portfolios
specializing primarily in global real-estate
Moderator
Simon Osborne
AsianInvestor
securities. Our firm currently manages $26
billion and I’m the Asia Pacific portfolio
manager based in Hong Kong.
How do you perceive today’s real estate
markets and what has been the impact
of the global financial crisis?
Calvert: The global financial crisis has
changed the way investors have looked at
Reits. Before 2009 a lot of investors saw
Reits as being a capital play, but in our
view Reits should always be considered
as a defensive asset class and principally
an income product that provides a stable
and secure income stream. Lately, that
perception of it being a defensive play,
with the ability to provide some longer
term growth, has been accepted more
widely again.
Sullivan: Asia has withstood a lot of
external pressure and has come through
the turmoil in a strong position. We’re
optimistic that lessons have been learned,
especially where some firms used
financial engineering to the ultimate
detriment of their shareholders. What
the crisis highlighted is that investors
want assets that can perform through
the cycle. We’re now seeing continued
resilience and a re-rating of assets with
these cashflows.
Yue: Banks generally preserved lending
lines for their best, existing customers.
Aligning ourselves with strong local
partners ensures our access to credit.
Through the crisis some property
investment firms took on too much
leverage and risk, and were badly hurt.
Has investor risk appetite returned?
David: They are looking more at the
cashflows that emerge from assets, and
that applies not just for Reits, but more
broadly.
Yue: Developers with large landbanks and
moderate leverage were under pressure as
they had undergone a cash squeeze. But
they are now back out buying land again,
and building landbanks. Many were saved
by the slush of bank liquidity which came
along with the stimulus packages that hit
the markets.
Sullivan: From a risk perspective, some
investors have gone into their shell. We
are trying to allocate capital to companies
where we believe they have the right
capital structure. For example, not simply
relying on short-term debt throughout a
development cycle.
Luke Sullivan: Allocating to companies with the right capital structure
David: Although some firms have come
under pressure, the banks have been
quite patient in Asia, and one explanation
of why this may be so is because lessons
were learned in the Asian financial crisis
in the late nineties. I think that’s partially
true, but the bank’s patience was also
helped by the fact there was no currency
crisis in Asia this time.
Yue: In Asia, distress never showed up
on the hard asset front. Developers,
learning from previous cycles, generally
have much lower gearing at present.
Banks are better capitalized and have
certain limits on their real-estate
exposure. Throughout the crisis, we
were able to get project level finance in
China, Macau, India and Thailand. The
banks were lending because there was
plenty of liquidity.
David: When we were UK listed, most
of our lenders were European. We’ve
now refinanced 80% of our debt with
Asian banks. For good projects and good
sponsors, financing is still there.
“People are looking for economies
of scale from platforms. Where there
are a lot of small vehicles, there’s the
opportunity for consolidation.”
Calvert: I’m hearing different messages.
Markets have been choppy for the last
couple of months, so it may not be
over quite yet. In Singapore we saw a
tremendous recovery in the first half of this
year. With the emergence of the European
sovereign debt issues, and the slowdown in
China’s growth cycle, there’s still a fair bit
of caution out there and this may present a
challenging second half of 2010.
Our investors are saying that capital
and risk management should remain
a top priority, and we agree. That said,
some unit-holders have said to me that
they’d be happy to see the trust’s gearing
increase. That surprised me given how
recent the crisis was. There are mixed
views, but ‘keep it steady’ is the main
message, and err on the side of caution.
Sullivan: I’d also say that people are
looking for economies of scale from
platforms. Where there are a lot of small
vehicles, there’s the opportunity for
consolidation and reduce expense ratios
for unit-holders. Sensible M&A is one
aspect I’d like to see eventuate in many
Asian markets.
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conservatively suggesting the Manager
reduce gearing.
China property: a bubble?
David: I’m in the ‘non hot’ camp. I’ve
been involved in that market for 11
years, and this is about the fifth set
of austerity measures I’ve witnessed.
They’re trying to dampen down demand,
but this is not a typical boom/bust
cycle. Demand there does endure. The
only way to stop this on/off austerity
cycle every two years is to tackle social
housing countrywide. That will only
resolve itself if income from auctions
for land sales isn’t such an important
component of local government
revenue.
Yue: Demand is there for housing. Market
drivers are still strong: urbanization,the
growing middle class, rising incomes,
growing consumption. Inventories of
developers are dwindling, affordability is
still reasonable.
David: The government’s influence is so
overarching. Take hotels for example. In
2001, the central government said “No
more 5-star hotels in Shanghai”, then the
World Expo came along and they didn’t
have enough premier hotels.
Richard David: Chinese demand for real estate is structural
To what extent is activity back to precrisis form? Are people attempting the
same sort of deal structures?
Sullivan: Slightly concerning, we are
observing some undesirable features in
recent IPO deals. Companies wanting
to raise a significant amount of money
are finding that investors are somewhat
more discerning. There have been some
IPOs, some successful and some not, with
deferred management fees over paying
dividends, with management fees paid
out of shares, and sales/leasebacks that
don’t reflect underlying economics in the
properties. In our discussions at pre-IPO
stages, we are doing our best to encourage
cleaner structures.
David: Given our experiences, I can
definitely endorse that the cleaner
and neater the structure is, the better
reception it receives from investors.
Yue: Moving away from IPOs, I would say
that land prices are one particular issue
that is returning to pre-crisis levels. In
China and Hong Kong there are record
prices being paid. That means they see
sentiment and property prices going
higher.
What about gearing? Are investors comfortable with it?
Calvert: Some investors are currently
comfortable for Cambridge Industrial
Trust to be leveraging up. Although,
just a year ago (post the aftermath of
the global financial crisis), they were
Yue: Our China strategy is to focus on 2nd
and 3rd tier cities in housing, retail and
mixed-use, and to be beneficiaries of the
new major infrastructure that enhances
transport links. We think there may be
some overheating in tier-1 cities but for the
longer term, we are still bullish on them.
Sullivan: We do get concerned by some
of the commercial developments where
there is a strata sales as part of the
project. These normally lead to disjointed
property management, especially in
shopping centres, and less future capital
appreciation.
David: The Shanghai government
has imposed restrictions on precisely
“The cleaner and neater the structure
is, the better reception it receives
from investors.”
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this. We’re in commercial rather than
residential because the entry point for the
latter is tricky. The developers are good
at their job, ‘build and sell, build and sell’,
all a bit of a sausage factory. What we do
is more tenant-led where there isn’t too
much competition, rather than building
a shopping centre and trying to sell a
hundred lots from it.
Yue: Chinese developers are very good
at building and selling residential. But
on the commercial and mixed-use front,
foreign partners can still add value and
there are still plenty of opportunities.
What other Asian markets are attractive?
Calvert: The Trust will maintain its focus
on Singapore. While it’s a relatively small
market, it’s a closely controlled market
from a demand and supply perspective,
and that keeps things in balance. There
aren’t too many surprises for investors
looking for income streams from
Singapore industrial properties.
But if competition makes Singapore
too expensive and we cannot identify
value, we may look further afield, and
consider markets like Malaysia, and
potentially Indonesia. We are seeing
some attractive ‘value’ opportunities
presenting themselves in these two
markets.
Yue: We like Macau. We are not into
gaming, but we bought a large tract of
residential land years ago. The economy
in Macau is driven mainly by the growth
in its gaming sector with annual gaming
revenue now reaching $20 billion a year,
up tenfold since the handover and now
multiples of Las Vegas and with only a
fraction of the hotel rooms. GDP growth
is approaching 30%, yet property prices
have hardly moved compared to its
neighbors.
As a Special Administrative Region
influenced by the Chinese economy and
with a currency linked to the US dollar,
property prices have a lot of upside in
the current low interest and inflationary
environment. The Hong Kong-Zhuhai
Macau bridge will promote the fuller
integration of the Pearl River Delta
region. We think the Pearl River Delta
will become a super economic bloc
integrating Hong Kong, Guangzhou,
Macau, Shenzhen, Dongguan, and Zhuhai.
In five years time, Macau will be a totally
different place.
David: We’re limited by our Greater China
mandate, but we’re also into the Zhuhai
area, predominantly around logistics and
retail opportunities. I buy into the ‘super
region’ idea for the Pearl River Delta,
because whilst people have always drawn
rings around groups of cities in China,
now with infrastructure being built
between those cities, such as the fast train
networks, those links can really come
into being. Infrastructure is making these
ideas real today.
Sullivan: Hong Kong landlords look
like winners over the next few years.
There is a shortage of supply and the
landlords that have the upper hand will
be extracting higher rents. Eventually
rents may become prohibitive and
firms may relocate elsewhere, but in the
current environment, tenant demand will
continue to grow.
What are the developments in the
Reit sector? Are there any important
reforms taking place?
Sulllivan: In the last 18 months, there has
been the most activity in Reit reform in
Japan. A lot of that has been driven by
necessity, with smaller players merging
with stronger firms. Its still an insular
market insofar as international equity
investors and more accessibility of foreign
capital would be a welcome next step.
Calvert: The Singapore market has
been more proactive with regulation.
Authorities have worked closely with
Reits to see how this sector can become
Chris Calvert: Singapore Reit trusts will look to other markets with greater value
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more efficient. For example, with the
introduction of dividend reinvestment
plans, the authorities have recognized
that this is a positive means for Reits to
retain cash on their balance sheets, while
allowing unit-holders the opportunity to
subscribe for units at a discount and not
incur brokerage fees.
Now investors are far more focused
on manager’s expertise and track record,
and how they can add value rather than
focusing entirely on growth strategies.
Sullivan: Regulators need to look at
alignment of interests. Sponsors with a
strong platform can create a lot of value
for their Reit, although personally I’d
like to see more thoughtful regulator
scrutiny on future transactions involving
related-party transactions to ensure that
minority shareholders aren’t prejudiced.
In other developments, our research
has indicated that US-listed property
securities have outperformed core and
core-plus products in the last decade. As
institutional investors reflect on these
historical trends and think about the
structural shift to stronger economic
climates, we believe there will be a greater
shift to listed Asian real-estate products
over time.
How would you recommend that investors who are keen to increase their
property portfolios express their view?
Yue: My investors are mainly institutional
and many from Europe. Increasingly
they want to diversify out of the euro and
into economies that are growing and to
currencies which are strengthening. The
bookends of growth in Asia are China and
India. Investors are seeking funds with a
specific focus, specialized in certain areas,
and experience in managing the asset
class, be it residential or commercial.
Overall, there has been a sea change in
the real-estate private-equity landscape.
A number of financial institutions have
moved out of the unlisted real-estate
market and we have seen platforms
being sold. We still see strong demand
for capital from private equity, especially
in markets where capital markets are still
Richard Yue: Some private-equity providers have exited despite demand for capital
developing. It will be interesting for the
remaining players in this space. In the
unlisted world, small is beautiful.
Calvert: I agree. Shareholders have to
push Reit managers to demonstrate their
ability to manage their asset class and
demonstrate track record and prove their
understanding of the fundamentals.
From our own perspective,
shareholders should ask Reits if, for
example, properties are close to major
arterials, or if there is flexibility in the use
of the property, so that they can be rented
for multiple uses if necessary.
“In the unlisted world, small is
beautiful.”
David: The last three to four years
have shown the beginnings of the
China consumer boom, and that still
has years to go. So investors should
align themselves to that Chinese
consumer theme. That could be
accomplished by building out a retailoriented portfolio.
Sullivan: On a longer term view,
we’d suggest exposure to consumer
trends in emerging markets, primarily
through shopping centres in Thailand,
Philippines, India and Indonesia, for
example. While there is limited listed
means to achieve this now, especially
in a concentrated portfolio, we’d expect
over the next four to five years there
will emerge more listed companies
through which to invest. n