APREA's recent VIP conference reaffirmed regional fundamentals - with an eye for new opportunities, reports Shayla Walmsley
The word ‘bullish' barely does justice to the positive consensus on Asia's regional economy at September's APREA VIP Asia investor roundtable. Participants in the Singapore conference largely agreed - with caveats - that the region had escaped the worst of the global economic crisis.
In a panel on Asia-Pacific trends in capital, property and sectors, the pan-Asian panel agreed that macro fundamentals remained strong.
Asian economies had suffered the knock-on effects of the global economic crisis - "the credit issue, general panic, and capital seizing up", according to Benett Theseira, president of private equity firm Pacific Star. "But from a macro perspective, it is a fundamentally strong regional economy. Most governments have strong balance sheets and reserves, and are able to stimulate their economies. The fundamentals are pretty much intact."
The regional risk is that economic growth depends on exports to Western markets - an incentive to stimulate domestic markets and to develop intra-regional trade. "Domestic demand would offset the negative impact of damage to exports but it takes time to catch up," said Theseira in a post-session interview.
Fellow panellist John Saunders, CEO of MGPA, pointed to rental growth, especially in Hong Kong and Singapore. "Hong Kong has been showing strong growth for some time," he explained afterwards. "The government in Singapore has stuck with its policy of making Singapore attractive to private equity and hedge funds. The downturn was hard but now it is paying dividends. There's a shrinking supply of office space [in Singapore] and a shift in the balance of power from the tenant to the landlord."
China's sector shift
Continued regional macro growth is, of course, predicated on China's continued economic performance. Panellists at a country focus session on China had few doubts, given government measures to cool a residential market widely believed to be sustainable in the long term.
Residential remains the sector to beat for two reasons, said panellist Stanley Ching, senior managing director and head of the real estate group at CITIC Capital Holdings. The first reason is a sense among investors that it is possible to manage risk in residential but less so in commercial.
The second reason is urbanisation. On the back of an expanding residential market, an improvement in domestic consumption will increase the need for retail properties.
With continued interest in Chinese residential, investors are exploring what they see as the next big sub-markets: office and retail. "Residential is still 90% of the market. But for the first time there's choice in the market about what investors can invest in," according to Treasury China Trust CEO Richard David.
According to Eddie Wong, CEO of Winnington Capital, newspaper accounts of an office surplus have skewed investor interest away from commercial.
"It isn't sexy to say you want to occupy the office space sector," Wong said after the session. "Everyone is scared of it. Yet it's very obvious that office is going to be sought after in the time to come. China has the second largest economy in the world and 2% of the global stock of grade A office. You don't have to be a rocket scientist to figure that one out."
Even with current oversupply, within 12 months there will be a shortage, he believes. "You'll soon see many offices in tier 1 cities that no-one wants to rent because they're no good. As multinationals become established and domestic businesses become more sophisticated, it's only natural that they'll want better-quality offices. Demand for grade A office will go through the roof."
During the session, Wong also threw logistics into the sector mix. "Logistics scarcely gets a mention, yet it's a very important sector. I guess it's boring. It's not sexy to invest in logistics compared with a spanking new hotel. If you're interested in five-star hotels, going around the corner to ports and truckstops doesn't really do the trick, does it?"
One of the panellists, who asked not to be identified, pointed out that some sectors are bypassed because they're hard work - despite the potential returns. "Often, investors will go with a good story, take the money, and do as little work as possible. To make a profit in some sectors, you have to know what you're doing. Those who know the sector don't screw around. The first question to allocators is: ‘What value do you add?' If the answer is: ‘Um... ah,' they'll ask: ‘Why are you still here?'"
Given supposedly intact fundamentals, a straw poll at a session on distressed opportunities in Asia split down the middle as to whether there were, in fact, any. Without economic distress, the logic went, there would be few distressed opportunities.
Yet moderator Bob Zulkoski, managing director of Asian real estate investment at Oaktree Capital Management, cited actions taken by the banks on lending. A nascent credit crunch means that investors will be asked to seek finance elsewhere. "That creates opportunities," he told the session audience.
"You also see the unwinding of structured financial transactions. Financial engineering played a key role in the crisis; post-crisis, many transactions, including private REITs and CMBS structures, remain inefficient or their investors will have to see finance elsewhere.
"Who will tap these opportunities? Anyone with capital and the technical capacity to execute them."
Even given opportunities, there was a panel consensus that some markets remain nationalistic, with a preference for local investment. "If you are a global investor, you'll find that most markets have some partisan preference," according to Zulkoski. Examples raised included Japan, where the banks generally treat foreign investors differently than they would domestic investors - and, of course, China.
"People are reluctant to call it an obstacle. In fact, they're reluctant to speak about it openly at all."
The protectionist tendency might partly explain why many international investors are opting for listed property. At a session on that topic, Pietro Doran, principal partner at Doran Capital Partners, argued that REITs offer a more liquid position without the risk associated with direct investment - especially for investors new to the region, although even experienced investors might hold a mixed portfolio that includes pan-Asian REITs, combining positions within the region with direct investment in specific countries.
For investors unfamiliar with Asia but wanting exposure, he told the session, these liquid vehicles enable them to manage risk via liquid positions and give them an opportunity to learn about Asian markets. "They can see how their shares do, understand the sponsor, and take advantage of the upside."
But he sounded a note of caution in an interview with IP Real Estate. Markets react quickly. Equities are volatile. The timing, including the appropriate timing of the exit, is difficult to gauge without expertise.
"Investors need to be careful that REIT doesn't turn into LMIV - lazy man investment vehicle," he told his audience. "If you hear the Asia story and buy into a REIT, you can be lulled into believing you don't have to do the work or that you don't have exposure to China. Investors need to be aware that there is a company behind the REIT, to know what the strategy is - and the portfolio spread."