US family office looks at bridge financing plays in Asia
Challenged property markets in Hong Kong, mainland China and other markets in Asia have left several institutions starved of liquidity, which is starting to throw up selective opportunities for short-term financing, according to a senior executive at a US-based single family office.
“Given that this part of the world is so real estate-oriented and now that the cheap bank money has pulled back, there is potential to get outsized alpha from doing bridge loan financing in corporate working capital and capital expenditure, as well as real estate,” John Tsui, principal at Peninsula House, told AsianInvestor.
“To the extent you have hard assets to pledge offshore, a structured bridge loan with credit enhancements can be secured,” he said during a visit to Hong Kong recently.
A bridge loan is a financing option that serves as a source of funding until the borrower gets permanent financing or pays off the debt.
“This type of lending can give you mid-teens returns in this market.”
Institutional investors, property funds and listed real estate investment trusts (REITs) that invested heavily in Hong Kong and mainland China continue to face liquidity problems amid slumping real estate markets.
With the Hong Kong five-year Treasury rate hovering around 3.4%, bridge financing can hand “a spread of 800-1,000 basis points over the risk-free rate clearly produces outsized return on a risk-adjusted basis,” said Tsui.
The outsized alpha comes from the short duration, smaller size, speed or complexity premium of the transaction, the New York-based investor said.
PROPERTY PROBLEMS
Hong Kong's home prices dropped for the fifth consecutive month in September, according to official data cited by Reuters, in a struggling property market that some experts believe could see a bottoming out after recent interest rate cuts and a relaxation in mortgage lending rules.
In mainland China, meanwhile, the collapse of large property developers such as Evergrande and Country Garden have plunged the sector into a state of continuing crisis.
Chinese authorities in response recently rolled out stimulus measures to prevent it from spiralling down further.
“With the meltdown occurring in asset values and equities market, the new paradigm involves investments in private secured debt and achieve equity [-like] returns,” said Tsui.
DIFFERENT VEHICLES
The family office does not necessarily intend to engage in lending transactions via a fund structure with typical general partner/limited partner (GP/LP) formats.
“The vehicles may entail more of a drawdown structure on a single asset lending or it could be a portfolio finance structure,” he said.
Tsui sees opportunities even as many other institutional investors have fled the mainland Chinese market.
“Real estate is still an illiquid asset. You cannot liquidate a half million square foot shopping mall in a month or so.
Investors have waited for a while for this kind of market, he added.
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“We never came in earlier because they didn’t need our money back then. Now when everybody is fleeing out the door, we like to come in because now our money is needed.”
The family office investor also sees the secondary market for real estate and corporate private equity growing.
“In fact, we are seeking such secondary direct LP purchases,” he said.
WIDE BID-ASK
Yet while the secondary markets in China and Asia are massive, the potentially actionable secondary investment is limited as private equity and real estate funds remain unwilling to offer the discount to net-asset-value (NAV) that investors want.
“Simply put, the bid-ask is still wide,” Tsui said.
That said, the US institutional LP will likely want to liquidate at a bigger discount not so much because of pricing but more due to policy "sell at any cost" to avoid the headline risk of China, he added.
“Some indicate [they want to see] a discount of at least 50%-60% from current NAV levels, especially in real estate.”
Eventually Asia will need to develop a fully functioning and deep securitisation market, Tsui added.
“Structured products that give steady yield or investment grade yield over mid- to long duration will redefine this market as the tectonic shift will occur from family-owned and government owned businesses and assets to institutional ownership much in line what occurred in the United States in the past 30-40 years,” he said.
While Asian investors have benefitted from strong tailwinds in the past, the future for private lending and real estate could be quite different.
“Going forward, especially in developed Asian markets, the risk-adjusted returns will be rather muted unless policy makers introduce new forms of capital market instruments like collateralised loan obligations, collateralised debt obligations, private placements, residential mortgage-backed securities, asset-backed securities, high yield, and securitisation.”