The closure of fundraising for a key Barings real estate fund has highlighted the mixed fortunes being experienced by property investors in Asia.
While the relatively large size of the fund shows desire to move capital to the region, its lengthy fundraising process demonstrates caution among investors.
Frothy property valuations across parts of Asia are leading to purchases being delayed as investors claim that asset pricing has become too high.
Baring Private Equity Asia’s real estate arm – BPE Asia Real Estate – announced the final close of its first fund yesterday, eighteen months after fundraising began. The fund has raised $365 million.
It is the latest in a series of real estate funds which have experienced a lengthy fundraising process amid a mixed outlook for Asia’s real estate market.
Still, more and more capital is being allocated to the region.
“More global sovereign wealth funds are coming to Asia,” said Ada Choi, a senior research director with property services firm CBRE. “Most don’t have a portfolio in this region yet,” she added.
More investors coming to the region add to the huge – and growing – surplus of capital seeking investment opportunities in Asian real estate.
CBRE sees Hong Kong’s Future Fund – the planned sovereign wealth fund – doubling the amount of money it invests in real estate in coming years, for example. A more balanced portfolio will “probably” include investments in Asia, said Choi.
Already, Asia's savings glut has seen frothy valuations across a growing number of Asia’s real estate markets, said Mark Fogle, Baring Private Equity Asia’s Singapore-based head of real estate, who is yet to make an investment as part of a core mandate that he has from a large investor. “Asset pricing is too high,” he said.
More opportunities may be available for the BPE Asia Real Estate Fund, which is focused on value added and opportunistic (rather than core) investments and has an 8-year fund life.
“We haven’t wanted to invest in Australia or Japan over the past two years,” said Fogle, who added that high asset prices in Hong Kong and Singapore have “made us gun shy”. Instead of investing in the region’s core markets, the fund has already made two investments in Korea and the Philippines prior to final closing.
Fogle explained that the Korea investment had been made to provide mezzanine debt financing to one of its operating partners in that country, which had bought four distressed or foreclosed properties from foreign funds 40% below replacement cost.
“Most investors I’ve spoken to are so concerned that they are willing to risk not catching a falling knife,” said Fogle, referring to investors’ willingness to pass on investment opportunities to avoid the risk of asset bubbles popping or an inability to exit investments in Asia’s less liquid real estate markets.
“Unfortunately, a lot of GPs lost a lot of money for LPs” said Fogle, referring to general and limited partners. “Most LPs blacklisted Asia for the last four years” but are now cautiously starting to come back, he said.
Korea, Malaysia, the Philippines and Thailand are among the markets which Fogle sees as having enough domestic liquidity to facilitate sales to domestic buyers in cases when foreign interest is lacking. This is not the case for Indonesia and Vietnam, which Fogle said lacked a big enough pool of domestic liquidity to “give comfort about liquidity levels”.
Fogle expects the fund’s focus will be on Korea, the Philippines, Singapore and Malaysia and “potentially Japan and Australia” if asset prices correct there following interest rate rises in the US. He anticipates doing 2-4 deals this year and the portfolio reaching 10-12 investments.
The BPE Asia Real Estate Fund has one sovereign LP, said Fogle. US pension funds and insurance companies represent the bulk of investors.