As investors hunt new types of assets in their search for yield, diversification and – increasingly – stable income, Asian property debt is catching the eye of more institutions.
Private equity firm Warburg Pincus is the latest example of this trend, with its launch this week of a new real estate credit team based in Hong Kong. This follows New York-based asset manager TH Real Estate’s move into Australian property financing late last year.
Moreover, German insurer Allianz is eyeing a similar plan amid a big investment push into Asia and after the launch of its first global real estate debt fund in September, which will open to third-party investors next year.
“There is an increase in the number of investors who are now lending against Asia Pacific real estate assets rather than taking equity positions,” said property services firm CBRE in a statement yesterday.
This trend has been influenced by several factors, including price rises, historically low yields and a shortage in investible stock, it added. What’s more, with the US Federal Reserve expected to raise interest rates further, some lenders in Asia Pacific have adopted a more cautious approach to real estate, according to CBRE.
“Tighter lending conditions in some markets have created opportunities for less traditional lenders [in Asian property markets], and a number of investors feel there are more attractive risk-adjusted returns in debt versus equity,” Tom Moffat, executive managing director of capital markets for Asia at CBRE, said in the statement.
Australia is typically viewed by global asset owners as the most accessible market for property debt, but Warburg Pincus’s hire of Gregory Wells in Hong Kong to build its real estate credit practice suggests the geographic focus may be widening.
Wells, formerly Asia-Pacific head of London-based real estate investment firm Forum Partners, has experience of the property sector in China and Japan, having worked in both Shanghai and Tokyo, according to a Warburg Pincus statement.
He helped develop the Asian property finance business of Deutsche Bank, worked with Morgan Stanley Real Estate and built law firm Paul Hastings’ real estate practice in China.
Indeed, more institutions are looking to increase exposure to the Chinese real estate market given the tightening of traditional domestic lenders, according to CBRE.
The company said: “The nationwide deleveraging campaign and the slowdown in residential sales means global investors are gravitating towards development loans, junior and mezzanine debt and non-performing loans [NPLs].”
Medium-sized Chinese developers can offer attractive returns of 15-20%, added CBRE, but only 40% of such developers in China are operating with positive cashflows.
In addition, opportunities are emerging as national asset management companies and commercial banks accelerate the sale of NPLs. CBRE estimates the size of the China real estate NPL pool to be worth around $15 billion to $20 billion.
More generally, investor interest in property debt is also being supported by a changing composition in the real estate capital stack from the traditional bank loan-plus-equity format to one where mezzanine finance and preferred equity are rising in prominence, noted CBRE.
These strategies boost loan-to-value (LTV) ratios or bridge short-term cash requirements for development projects. In Asia Pacific, activity in this category is being propelled by private equity real estate funds and debt funds, the company added.
Sitting at the bottom of the capital stack, senior lending is associated with the lowest risk level. While traditionally offered by commercial banks, added the property services firm, more non-bank financiers such as insurance companies and pension funds are entering this space – especially in Australia.
NO EASY TASK
Of course, investors face various challenges in buying real estate debt in Asia Pacific, including that most opportunities in the space are still in mezzanine debt and development loans, said Henry Chin, CBRE’s Asia-Pacific head of research.
Other issues include the difficulty in sourcing appropriate property debt opportunities and the need for investors to keep an eye on currency volatility.
As the Asia-Pacific head of real estate at a big US asset manager told AsianInvestor back in March: “Real estate debt hasn’t been a big focus for us [because of the lack of opportunities in the space in Asia].”
This situation appears to be gradually changing.
Asia’s real estate markets have matured a great deal in the past decade or so, to the extent that property investors increasingly view the region as a core part of a global portfolio rather than merely an opportunistic play. It’s only a matter of time before global institutions get more comfortable with financing real estate assets.