The Covid-19 outbreak continues to ravage Europe and the US but is beginning to abate in Asia, courtesy of tough governmental measures by many countries.
However, the months-long impact of the virus has badly damaged the balance sheets of many Asian companies, and that's led real estate investors and managers to prowl for distressed opportunities with the support of asset owners.
“Because Covid happened in Asia first, there is a wave of opportunities that is mirroring the damage left behind, including in China, South Korea and Singapore,” said Stuart Mercier, head of China at Brookfield Asset Management, whose $15 billion global real estate fund BSREP 3 includes Singapore’s Cathay Life Insurance among its investors.
In the short term, investors are most likely to spot distressed-linked opportunities in public markets, such as Hong Kong and Singapore, where stock and bond prices have adjusted quicker than in private markets.
Anurag Mahesh, head of global family office coverage for Asia Pacific at UBS Global Wealth Management, said public market investments like real estate investment trusts (Reits) offer good opportunistic possibilities for family offices hunting looking to take advantage of depressed real estate prices.
“The focus is on listed property companies, often in investors’ home countries, rather than time-consuming private asset sales,” he told AsianInvestor.
According to Bloomberg the 249 Reits trading in Asia Pacific fell 25% over average in the first quarter of the year, leaving many trading at less than their respective net asset values. The Singapore Exchange noted that locally-listed Reits were the second-most heavily sold equity asset class during April, with institutional investors withdrawing a net S$184 million ($129.81 million).
That offers a potential buy opportunity for family offices, whose cash balances are at historic highs, said Mahesh. However, he noted that most investors have yet to put money to work.
They may not need to wait too long. Mercier said large shareholders in public assets often borrow money to buy shares. Many will face margin calls as banks become more cautious in the face of the Covid-downturn, which could well force them to sell their shares at a loss. “This may drag down valuations that may feed on itself”.
It’s a vicious – or virtuous – circle, depending on whether you’re a forced seller or bargain-hunting buyer.
PRIVATE ASSET OPPORTUNITIES
Looking further ahead, distressed opportunities are also likely to emerge in some private real estate markets.
Mercier pointed to China’s retail and hospitality sectors as two to watch, as well as offices held by Chinese developers already under pressure due to the government having withdrawn funding to the property sector.
Signs of this are emerging. In April, listed global property group CDL – part-owned by chairman Kwek Leng Beng, the Singapore billionaire – used the impact of the crisis to get a cut-price valuation for the 51% stake it acquired in China’s Sincere Property, for Rmb4.39 billion ($619.43 million). The valuation represented a discount of nearly 50% on Sincere’s 2019 NAV.
“The government’s restricted lending over the last year or two has made it hard for [property developers] to secure debt. Covid has exacerbated this. There is a window of opportunity [for investors] in China given that some developers are over-leveraged and unable to refinance,” said Emily Relf, director for Asia Pacific capital markets at Knight Frank Advisory in Singapore.
Asset owners in China are also big holders of listed property developer assets and private real estate. However, experts say they are less likely to be forced sellers because they tend to be better capitalised and less reliant on borrowing than property developers.
Indeed, several institutional investors are likely to take advantage of difficult market conditions to become opportunistic buyers. But until prices fully adjust to reflect the impact of the economic downturn they are most likely to invest in funds than directly into distressed assets, said a senior investment executive in Hong Kong at the investment arm of a North American asset owner.
“Pension funds, sovereign wealth funds and insurance companies primarily want income and resilience,” added the executive, who is particularly familiar with real estate investing. “They are not there to [perform] price arbitrage. They will wait until price discovery is achieved to some extent.
“Those who will set the market’s new pricing will be those who can arbitrage that stress.”
One of the largest likely participants? Oaktree Real Estate Opportunities Fund VIII, a new distressed debt fund from Oaktree Capital that can invest in Asia. It is seeking $2.5 billion in capital after having already gained $1 billion to date, including from Asian asset owners such as Korea’s National Pension Service and the Korean Teachers Credit Union.
It’s far from the only one seeking funds. Preqin data show on 6 May that a record 79 Asian real estate funds are open and collectively seeking $33.6 billion in assets.