Private equity is snapping up real estate assets in Asia – How significant is their influence going to be in 2014 and beyond?

Bloomberg News Online reported on December 11, 2013 that one of the world’s most prominent private equity firms, Blackstone Group LP (BX) is currently eyeing for more real estate deals following its recent announcement of its plans to put in approximately USD 1.0 billion worth of equity into Asia. Along with the planned equity injection by BX into Asia, it is expected that BX could be setting a first mover advantage in the form of getting ahead with its aggressive plans to negotiate and possibly purchase some of Asia’s most prominent skyscrapers, and shopping malls, just when its rivals have announced scale-backs due to regulatory concerns.

Blackstone has been on a prowl for Asian properties as early as 2012 when the whole financial services industry were facing the threat of regulation coming from the United States, the European Union (EU), and other nations as a result of the aftermath of the Global Recession Crisis (GFC) in 2008-2009 time periods, when liquidity was severely crimped. There is a lot of emphasis nowadays coming from law makers to ensure global financial industry compliance, and mandating financial companies such as the private equity industry players to step up regular stress test reviews to ensure systematic risks are minimised. In order to be less exposed to such rules, including real estate purchases made, private equity firms, including Blackstone are searching for alternative sources of growth, and Asia seems to be one of their top lists for investments.

However, amid the frenzy over private equity involvement in Asian real estate, there are some risks that investors might want to take into consideration, including the aggressive stance coming from regulators to stem the alarmingly high real estate prices. For instance, China, Hong Kong, and Singapore has already taken steps to implement aggressive property cooling measures to ensure stability in their own respective real estate markets. Given the eventual withdrawal of the monetary stimulus coming from the US Federal Reserve (US Fed) widely expected in 2014, there appears to be a less than expected enthusiasm coming from real estate companies seeking to increase the size of their land purchases through aggressive bidding process, and some real estate owners have also scaled back some of the property launches due to the lacklustre demand. It is a different story in China, where owning a piece of real estate almost guarantees one’s financial stability for life. The various property purchasing regulations appear quite lame, especially in China, and sometimes easy to ‘game’ for many property hunters, comprising of individual investors, seeking to continuously step up their efforts to accumulate real estate, with the goal of profiting from the sale of these real estate assets later.

Coming back to the topic’s main discussion item regarding about the private equity industry and their level of involvement in the Asia property market, London-based Preqin Ltd., a statistical research firm specialising in analysing private equity deals, was quoted by Bloomberg News as saying that the flow of deals available to the New York-based company is being supported by a decline in fundraising (possibly a fallout from the various tightening measures imposed by many Asian regulators due to the need to ensure property price stability and maintaining reasonable affordability levels among its population) in the region and sales made by other firms in order to meet redemption requests from investors. It is estimated that in 2012, private-equity firms and banks created 31 property funds in Asia, totalling approximately USD 7.8 billion, compared with 52 funds totalling USD 30.0 billion in 2008. This is huge contrast given the amount of private equity capital involved in snapping up real estate in Asia. The typical investment time horizon in the private equity industry is between eight to ten years, with an option of an extension to two to three years before firms start to ‘flip’ the assets in the form of a new listing via public markets, or market them out to other investors.

According to Bloomberg News, the lack of fundraising activities in the Asian region might have also prompted large private equity firms, with deep pockets to fill to enter into relatively new property markets in the Asian region, as they undertake moves to mount strategic real estate investments targeting at good locations with reasonable availability of amenities, high foot traffic in the case of shopping malls, and a tight supply of spaces, including homes, offices, and warehouses. The competition posed by other prominent real estate players in Asia, including Goldman Sachs (GS), and Citigroup, Inc. (C) to Blackstone appears to be quite minimal as both banks have announced pullbacks in Asian real-estate investments following the implementation of the Volcker Rule (named after the famous former US Fed Chairman, Mr. Paul Vockler and credited for reining in on the double-digit inflationary conditions through aggressive rate hikes during the early 1980s under the administration of Presidents Jimmy Carter and briefly under Ronald Reagan) in the second half of 2015. The Volcker rule is part of the current Dodd-Frank financial reform act passed by US Congress in 2010, which also restricts banks and financial firms from investing more than three percent of their capital in hedge funds, private equity, alternative investments., through which some of the real estate investments were made.

The question over the level of significance influence exerted by many big private equity players in the property markets in the Asia-Pacific region looks quite mixed, especially those coming from regimes with tight controls on the range of investments a firm can hold, thus such firms will like to seek for alternative avenues to elsewhere such as the Asia-Pacific region where some regions in the area look less regulated. However, with the tightening of fund flows available to other investment banks such as Goldman and Citigroup, there could be continued pullbacks coming from these tightly regulated banks as they try to navigate around the harsh regulations imposed. The various rounds of injections and pullbacks of capital by these major global financial firms are one of the sources regarding the risks of capital mobility which does not take a day or two to get everything, ‘lock, stock, and barrel’ out or into the region. The Asia-Pacific region central banks are increasingly concerned about such sudden and uncontrollable surge and retreat of capital flows known as ‘hot’ money, and are in the process or have taken measures to alleviate such potential threats coming from any sudden flows of capital originated from these private equity players.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc