A world of two halves - Mark Cooper

The money flow from west to east has faltered since the financial crisis. That may be about to change.

The shift of economic power from West to East, accelerated by the global financial crisis, has seen Asian investors become more active on the world stage. In Asia, personal, government and corporate balance sheets are stronger than ever. Cash-rich individuals, sovereign funds, pension funds and corporations have all been strong buyers, both within Asia and without. In Europe, the UK — particularly London — has been the main location to benefit. Alistair Meadows, head of Jones Lang LaSalle’s international capital group, says the UK is familiar territory for Asian investors.

“Many wealthy Asians will have been educated in the UK, or have had their children educated there. They may have already bought residential property, so buying commercial assets is not so much of a leap.” London is Europe’s most international city, with a large and liquid property market. Singapore’s GIC Real Estate has had an office there for well over a decade, while South Korea’s National Pension Service (NPS) chose UK investment manager Rockspring to take it offshore. However, both NPS and GIC are unusual in that they have both bought more widely in continental Europe, having started by acquiring assets in London. In December, GIC — in partnership with JP Morgan Asset Management — bought the 70,000 sq m OpernTurm office building in Frankfurt for €580m. In the past five years, GIC has bought assets in Amsterdam, Stockholm, Rome and Brussels.

NPS, which began buying internationally in 2009, started with the acquisition of 40 Grosvenor Place, London SW1 — and then hit the headlines with the £772m acquisition of HSBC’s headquarters in Canary Wharf. These acquisitions were in line with the sovereign fund’s original plan to acquire assets in New York, London, Tokyo and Sydney, targeting the major cities in the Americas, Europe, Asia and Australasia.

Since becoming acclimatised to Europe’s most transparent and liquid market, NPS has bought the Sony Centre in Berlin for €600m and a 51% stake in a French shopping centre on the northern edge of Paris. NPS bought the controlling stake in the O’Parinor mall, in Aulnay-sous-Bois, from UK REIT Hammerson.

NPS has continued to develop its strategy in Europe, still working with Rockspring. In September, it announced the launch of a fund that will invest up to $1bn ($400m of equity) into real estate across the whole of Europe. The fund also marks NPS’ first use of debt and the adoption of a value-add strategy. Robert Gilchrist, chief executive of Rockspring, says: “Over the last three years, we have created a strong relationship with NPS as it has been expanding its exposure to the European commercial property sector. The fund will target higher yielding, core-plus assets with secure income streams, where we can create value through asset-management initiatives. We already have a good pipeline of deals for the fund and hope to announce our first acquisition shortly.”

NPS is unusual in the speed and scale with which it has developed its overseas investment. However, it is a model for how a larger Asian institution will invest. Key is a strong relationship with a trusted manager which, as the success of Rockspring has shown, can be developed in scope and scale. London will tend to be the starting point for investment in Europe, with continental Europe at a later stage. Debt, if used at all, will be used conservatively. New entrants into Europe from Asia include Malaysia’s Employees Provident Fund (EPF), which has awarded $500m mandates for both the UK and continental Europe. Unsurprisingly, the first deals have been sealed in central London, where EPF has been advised by ING Real Estate Investment Management. In the last quarter of 2010, EPF bought 65 Fleet Street, 40 Portman Square and 1 Sheldon Square for a total of £480m. At the beginning of the year, Hong Kong company Chinese Estates, which is listed but controlled by billionaire Joseph Lau, spent £280m on River Court, one of Goldman Sachs’ London headquarters buildings.

Stephen Down, managing partner of Gresham Down Capital Partners, which advised on the sale, says: “Large, high-profile assets continue to attract strong interest from overseas investors, who view London as their preferred investment location, and a safe haven during this period of global economic uncertainty.” While Asian investors have been active in Europe, they have not moved their attention away from their home region. In contrast, many international property groups have either taken the opportunity to sell assets to domestic buyers or been forced to sell assets in order to shore up investments elsewhere. This has been particularly true of US-based opportunistic investors. A number of European investors suffered after buying near the top of the market in 2007 and 2008. Singapore was a favourite location, due to its transparency, but investors suffered when rents more than halved in 2009.

Real Capital Analytics’ Global Capital Trends report shows two Asian buyers — GIC and NPS — involved in the top-10 largest European deals in 2010, whereas there were no European investors involved in any of the top-25 largest deals in Asian. Furthermore, while there were no European names in the list of the 20 biggest buyers in Asia last year, SEB Immoinvest and ING Group were amongst the biggest sellers of assets. However, some European investors have begun to ramp up their interest in Asia, with a number of investment management groups and pension funds starting to look East again. In the past year, AXA Real Estate Investment Managers has set up joint ventures with local players in China and Japan in order to develop new funds. Retail specialist Redevco is partnering with Hong Kong’s Shui On Land for a shopping-centre development in Wuhan, China, while UK institutions Aviva and Henderson Global Investors, which already have platforms in Asia, are looking to expand and launch new funds. Aviva has been recruiting in Asia and is set to launch a Japanese fund. ING REIM has been a major player in Asia, but has suffered a hiatus while its sale to CBRE Investors was completed. German open-ended funds have been big buyers in Asia, with funds managed by SEB, Union Investment and RREEF buying core assets in China, Japan, Singapore and Seoul over the past few years. Recently, only RREEF has been active as a buyer, acquiring Uniqlo’s flagship store in Osaka for €170m for its Grundbesitz global fund last October. However, Union Investment has up to €1.5bn to spend worldwide this year and some of that cash is likely to be spent in Asia, according to Ulrich Dischler, managing director of Union Investment Real Estate Asia Pacific.

Union Investment tends to target core assets in major cities, such as Tokyo and Singapore, although it has also invested in Kuala Lumpur, where it recently took ownership of CapSquare 2, a newly completed office building, which it agreed to acquire in 2008 for €100m. UK-based Grosvenor is unusual in that it has a long history in Asia, buying its first asset in Hong Kong 1996. It has maintained its involvement in the region throughout the crisis and is currently raising a Japanese fund, developing residential buildings in Hong Kong and Japan, and buying residential and retail property in China. Nick Loup, chief executive of Grosvenor Asia Pacific, says the firm will be investing from its own balance sheet this year, as well as raising equity for the Japanese fund. European pension funds looking for access to Asian real estate have tended to invest indirectly, via pooled funds, or funds for smaller players.

Capital-raisers report more interest in pooled funds — but capital- raising remains tough. However, the best-known and most active pension fund investor in Asia, the Netherlands’ APG, has turned away from pooled funds to target joint ventures and club deals. APG, in-house manager of the giant ABP pension fund, said last year that it plans to increase its real-estate investment in Asia by €1bn in three to five years as it seeks to benefit from the region’s economic growth. Daan van Aert, head of strategic real estate Asia at APG Investment Asia, says the company will “increase its allocation in Asia to 24% of assets from 21% in the next three to five years”. APG favours residential investment in India and China and, in developed markets, Australian logistics. APG was part of a club of investors that acquired the $1.5bn ING Industrial Fund, a listed Australian vehicle, earlier this year. Grosvenor and APG are exceptions at the moment. Strong competition from local investors and the cost of building a team in Asia mean that European groups that have not already invested in Asia will find it a long and slow road to building presence there.

This article was taken from MIPIM Daily News 1. Read more here.

Top image credit : Photobank gallery

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