Ex-Morgan Stanley property guru Peter Churchouse has teamed up with Hong Kong-based LIM Advisors, one of Asia's earliest hedge funds, to launch the LIM Asia Alternative Real Estate Fund. LIM Advisors was founded by George Long, in 1996, and currently runs an Asian arbitrage hedge fund as well as a Japan fund.
"This is a fairly novel product," says Churchouse. "Globally there are only a handful of real estate-focused hedge funds and in Asia this will be the first."
The fund's investment universe will span the region, and will include investments in both real estate-related securities as well as physical property.
"The property sector is cyclical by nature. The rationale of the fund will be to capitalise on opportunities the property cycle presents," says Churchouse, who notes that the fund will be able to play the property cycle through real estate-related stocks such as construction material companies and house financing institutions.
He estimates there are $600 billion of listed real estate-related securities in Asia including Japan, and about 800 companies with a market cap greater than $100 million. The physical property aspect of the fund will take up a maximum of 20% to 25% of the portfolio.
"Of the 53 MSCI sectors, Asian real estate has been the second-most volatile over the last five or six years. Including physical property investments in the fund will therefore help to reduce the fund's overall volatility," he explains.
He says the fund will only invest in property where the exit strategy is clear and where the time frame is between one and three years.
"There are opportunities for very attractive returns on physical real estate, especially as leverage can be attained at a good rate to enhance returns," says Churchouse. "We will enter investments with an IRR greater than 20%. This compares favourably to investing in property stocks, which have traditionally returned 14% to15% in the long term and with a much higher volatility."
Churchouse expects the per annum return of the real estate fund to be in the mid teens with a volatility of about 8% to 9%.
"However, the trade-off for including physical investments in the fund is a reduction in liquidity," says Churchouse. The fund will have a quarterly redemption with a 60-day notice period.
"We've been very pleased with the response from investors. They are certainly buying into the broad Asian real estate story, particularly as the US and UK are at the top of their cycles and Asia is still at the bottom," says Churchouse. He notes that interest is particularly coming from family offices and endowments in Europe and Asia.
"Some fund of hedge fund investors have been more reluctant because they require monthly liquidity, which this fund cannot provide. But for those looking for diversification in an Asian portfolio this is certainly an interesting product, particularly if it is only a small part of the overall fund."
Churchouse estimates the fund will launch with between $20 to $30 million under management. He hopes to take the fund over the $100 million hurdle within the next nine months.
"Once we reach the $200 million mark we'll probably stop and take a breather before admitting new money," he says, although he estimates that the real estate securities part of the fund can probably grow to a capacity of up to $500 million.
Churchouse has been analysing the Asian property markets for over 20 years, and developed a reputation as one of Asia's most respected property analysts during his time at Morgan Stanley in Hong Kong.
However, Churchouse admits there is a lot to learn moving from the sell side to the buy side of industry.
"It made sense for me to partner with an established Asian hedge fund house. I've known George Long for several years. I like his style and he has proven to be a safe pair of hands and one of the longest established in the industry here. Michael Gibson previously ran Morgan Stanley's prime brokerage in Asia, and has a very clear understanding of risk management and hedging strategies. The real estate fund will be able to benefit from the experience and expertise of this team."
Joining Churchouse as a co-manager in the real estate fund is Bruce Nisker, who will play a key role in monitoring the portfolio. Nisker has fund management background and previously worked with George Long when the two were at Barclays.
Morgan Stanley has been appointed prime broker to the fund.
Churchouse points out that the fund will have the opportunity to exploit the major structural changes that are taking place in Asia's real estate sector.
"China is an accident waiting to happen, and I foresee the oversupply situation there becoming more apparent over the next 12 months. This will lead to a mighty downside rush. The fragmented and undercapitalised Chinese property industry is very vulnerable to financial pressure, and this situation will see NPLs on the rise again. This will provide an opportunity for the fund in coming years," says Churchouse.
"Structual changes are also taking place in India, where changes in the regulatory and legislative regime will encourage households to own property as an investment class."