Asia Pacific is emerging as a significant market for real estate ‘secondaries’ and so-called ‘tail-end solutions’, according to Partners Group.
A crop of real estate funds launched in the mid-2000s are set to come to an end over the next two to three years, creating a $1bn (€900m) pipeline of secondary market trading opportunities, Bastian Wolff, head of Asia Pacific property, told IPE Real Estate.
He said the $1bn was part of a $5bn “global pipeline” for “tail-end solutions”, where secondary market specialists can buy into funds with a few years left before expiry.
Last year, Singapore’s sovereign wealth fund GIC and New Zealand Super placed $1.5bn worth of secondaries onto the market between them, which Wolff describes as “traditional” secondaries, where large investors sell portfolios of holdings in a variety of funds because of a change in portfolio management strategy. The aim can be to reduce the number of external managers, allocation reweighting, or a shift to direct property.
The California Public Employees’ Retirement System (CalPERS) also sold $3bn of real estate stakes, marking the largest transaction ever in the real estate funds secondary market.
“Asia hasn’t been an easy market in the past few years,” says Wolff.
“And more recently, with China slowing down, there are more reasons to be bearish on Asia. This is one of the drivers for more traditional secondaries coming to market.”
Given economic uncertainty, Wolff says some large investors are selling out of non-core funds to focus on core assets with predictable and stable income, or to retreat to the safety of their home markets.
Of the $1bn that Partners Group invested in real estate secondaries globally last year, Wolff says 70% went into transactions involving tail-end solutions.
The Zug-based asset manager can be expected to make more allocations to the secondary market, in the medium term to capitalise on an increasing number of these opportunities.
Wolff says that the 2005-07 period saw a large amount of capital raised to acquire real estate in Asia. These vehicles are closed-ended with a life of eight to 10 years and typically pursue value-added or opportunistic strategies.
“That means those funds are coming to the end of their life and many of the portfolios have residual value in there with two or three assets remaining – sometimes a piece of land, or a retail property in its lease-up phase,” he says.
“If you were to try to sell these assets in the current market they wouldn’t be fully priced. And some of them have tremendous upside value when fully leased or developed.
“We are essentially identifying those funds that have residual value, potentially to buy into them and to work on liquidation solutions for the assets with existing LPs [limited partners].
“Such transactions require restructuring and good communication between the LPs and the GPs [general partners]. In some cases, additional equity is needed. It is a binary outcome because so many things have to go right.”
The approach can involve rolling over assets into a new vehicle, with Partners Group making an offer to investors to take over the assets.
Wolff says the “reasonable” transaction size – usually between $50m and $200m – makes such deals worthwhile.
The concept of tail-end secondary solutions is rather novel in Asia. So much so that when Wolff spoke at a recent industry forum, he was approached by fund managers keen to explore opportunities.
“If we can deliver successful solutions, it will be a win-win for both LPs and GPs, and will trigger more deal flows for Partners Group,” he says.