Asia and distressed real estate are the opportunities of the moment as the market enters an uncertain new year. Richard Lowe reports
Asian markets have become an attractive destination for investor capital. The region looks more capable than anywhere else of decoupling from the US economy and so avoiding the knock-on effect of a recession were it to hit. Europe, in contrast, looks vulnerable to contagion from both US troubles and those currently affecting the UK and Spanish markets.
Now is arguably a good time to increase allocations to Asia, therefore, especially for investors that have an underweight exposure to the region. The difficulty, of course, lies in how to gain that exposure. Plenty of investment products, at least, have been launched to meet the growing investor demand.
For instance, ING Real Estate has planned a second China fund for 2008, expected to be worth €700m, in response to the growing enthusiasm for Asian property, while Cohen & Steers is launching a new Asia Pacific Real Estate Securities fund that will invest in REITs and other listed property companies in the Asia Pacific region. Both real estate private equity firm Rutley Capital Partners and Singapore-based CapitaLand are reportedly looking to raise funds investing in the Indian residential sector.
But pension funds may be looking to gain Asian exposure by investing in a global fund with an allocation to Asia. Calum Mackenzie, property research analyst at Aon Consulting, confirms that many clients are enquiring about global funds now that they are comfortable investing in Europe.
However, while numerous pan-European fund managers are saying they are capable of ‘going global', Mackenzie believes they are invariably not yet in a position to offer a truly global direct real estate fund.
"A lot of the global funds are being pieced together so you have a UK fund of funds, a European fund of funds and an Asian fund of funds, and the managers are putting them together under one umbrella," he says.
"It is different to the global equity concept where you often have one manager picking stocks across all markets."
Fellow research analyst Aidan McLoughlin believes this market will develop once managers can really "actively allocate across regions". In the meantime, investors may decide to invest in discrete Asian products.
"They may not wait for global fund," he says. "It may be they will add Asia onto an existing portfolio rather than wait for a global one - at least initially."
Mackenzie adds: "If a pension fund wanted to make the step into Asian property, there are suitable vehicles out there, both in direct and in funds of funds."
Naturally, both Mackenzie and McLoughlin are quick to point out the importance of approaching Asian investments with clear objectives and due diligence.
"There are an awful lot of unknowns with the Asian markets," Mackenzie says. "They would have to fully understand what they are going into and what the motivation is. Is it for diversification or for a performance kick?"
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ndeed, informed investors will approach their Asian forays with a good deal of caution. As Christian Boehm, chief executive at APK Pensionskasse, notes, now is a good time for European investors to diversify into Asian real estate, but they must bear in mind the risks associated with the region, not least currency risk and the variance in legal systems.
"A lot of money is pushing now to this kind of investment," he says. "If there is a lot of money and a lot of buildings under construction, you have to look at the quality of the buildings and the risks in different countries."
Boehm believes it would be foolish to assume that Asian property will provide a safe haven for capital where high growth rates and returns are guaranteed.
"I'm really convinced we have to be very careful to choose the investment managers. There is no free lunch," he says.
However, Boehm admits that the current explosion in Asian investment vehicles has had a positive effect for investors: it means they have a wider choice.
"Not all products are really for pension funds, but if you have a lot of different products you will find the perfect match that will fit for you. So, there are some good opportunities."
APK increased its exposure to Asia in December by committing capital to several undisclosed closed-end vehicles.
We have already committed some investment," Boehm reveals. "We see the Asian property market as a more difficult market to be invested in, so we really have to look at the investment expertise of the companies. At this moment, we think we have found a really good investment company."
As property markets enter a difficult phase, the ability of investment managers to add value and to capitalise on distressed assets becomes increasingly beneficial. Consequently, institutional investors are rightly looking at ways to benefit from disruption in the market.
"We are undergoing a period of uncertainty," says Andre Andreasen, real estate investment manager at ATP. "Managers' value-added capabilities are even more essential now the market is not just going up.
"And we - that is pension funds - prefer new fund offerings without pre-specified assets where managers are able to take advantage of the fact that highly leveraged buyers are out of the market and that we see some sale of assets from distressed sellers. These are the things managers should be able to deliver in order to cope in a market like this."
Managing Partners Limited is reported to be establishing a fund that specifically aims to take advantage of the turmoil and distressed prices that are expected. And a number of UK fund managers are rumoured to be preparing similar ‘vulture funds'.
"We are hearing on the grapevine that a lot of the large fund managers are considering or have already set up vulture funds to target a lot of these distressed assets," Mackenzie says.
Vulture funds will boast that they can purchase units at a discount to NAV. However, investors need to establish their perceptions of net asset values before assessing the worth of such an approach.
"The level of NAV is quite unclear at the moment," Mackenzie says. "Whether they are actually trading at a discount or whether they are trading at fair value needs to be made clear."
