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Navigate the opportunities and challenges of private equity real estate in Asia-Pacific

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By Paddy Kirwan, Head of APAC

A flurry of real estate projects across the Asia-Pacific region has sparked a surge in interest from a variety of investors for private equity real estate funds.

Frustrated by years of low volatility in equities markets and barrel-scraping yields in many fixed-income assets across Europe and North America, traditional asset managers, pension funds and sovereign wealth funds, among other institutions, have been exploring the Asia-Pacific region (APAC) for opportunities to boost returns.

Investors have been increasing allocations to closed-end private equity real estate funds that target properties in Japan and Australia, Ho Chi Minh City, Singapore and China. Investors in the region have mostly favoured the office sector, but also expect investments in industrial and logistics spaces to perform well.

After they settle on a market and a sector, though, investment managers are increasingly looking for fund administrators that can provide end-to-end services for the region, ranging from accounting to financing. Leveraging the right investment strategy and fund service provider, such as an administrator, can help enhance investment opportunities in the most promising market segments of a burgeoning region.

A region of different cycles

Industry watchers have been heralding the coming peak of real estate market cycles across the globe for several years. But real estate in the APAC region continues to generate solid returns roughly a decade after the Global Financial Crisis, according to a PwC and Urban Land Institute (ULI) study. Across markets and sectors, total returns in APAC were expected to reach 8.7 per cent last year, according to M&G Investment Management.

Investors are monitoring closely how the region’s diversity plays into their calculus for investing in markets and sectors that are crossing different points in their respective cycles. Broadly, the region’s economies continue to grow. Investors disagree, though, as to how much longer that will be the case and how APAC’s significant endogenous and exogenous risks will affect real estate.

Among risks, the coronavirus leads most conversations today. Although Covid-19 infections continue to spread, hampering growth across the region and spooking investors, particularly in equities, many economists predict the virus will have a limited impact on investments with longer time-horizons. The coronavirus doesn’t present a direct threat to Asian real estate markets, but its full impact on real estate investments is more difficult to predict at this early stage.

Investors are also watching real estate values closely to determine whether prices are cresting in specific markets or sectors. They’re concerned about the mixed levels of regulatory and legal protections throughout APAC countries, as well as how much US-China trade tensions are slowing economic growth and capital flows, more generally. Their most germane fears, though, concern market overcrowding, which makes deals more expensive and harder to source.

Finding the deals

Despite the litany of risks across Asia-Pacific, private equity firms that raise capital in a fund to buy and develop, improve or operate properties and then sell them to generate higher returns mostly remain determined to put capital to work in the region. Still, private equity real estate fundraising and deal flow fell in 2019, according to the latest McKinsey report on private markets.

But last year’s declines haven’t erased the recent growth the region has seen. Private market fundraising in Asia – of which private equity real estate represents a significant portion – grew at an average of 7 per cent annually between 2013 and 2018.

In particular, pension fund allocations to private markets – which include real estate, private equity, venture capital, private debt and infrastructure have leapt to 23 per cent from 6 per cent since 1999, according to a Willis Towers Watson Thinking Ahead Institute study.

Private equity real estate investors in closed-end funds have attracted large asset managers, such as BlackRock and Aberdeen Asset Management, as well as Malaysian sovereign wealth funds. They’ve been looking at logistics space in Japan; office and logistics in Australia; luxury housing and office in Singapore; and affordable and mid-market housing in Ho Chi Minh City. These investors also are calculating that U.S.-China trade war-induced slumps in Chinese markets could present buying opportunities, according to PwC and ULI.

The right products and services

The largest investment funds with APAC operations also benefit from administrators who offer general and limited partners a multitude of services and financing options, and who know the landscape, to help boost returns. Funds are looking for administrators in the region who can provide subscription lines of credit, as well as fund, bridge, deal and acquisition financing.

Many funds also benefit from administrators who offer comprehensive technology solutions and end-to-end services. These can include such GP management services as quarterly, cash flow and regulatory reporting; statutory record and upkeep; fee calculations; as well as banking and custody. LP services include Common Reporting Standard/Foreign Account Tax Compliance Act reporting; depositary services; investor AML/KYC, reporting and communications; carried interest calculations; call and distribution processing; performance monitoring; and consolidations.

Closed-end funds want administrators to provide private equity-focused accounting/general ledger software and look-through reporting for real estate. They’re also looking to use fee calculation and modelling tools that reduce manual work and computation.

Longtime APAC-based administrators can also help funds by understanding local regulations, regional fund structures and offshore fund service requirements, among other relevant region-specific information. They can place new information in the right context more rapidly and integrate it into investing strategies more efficiently.

Despite late-cycle uncertainties, opportunities abound for private equity real estate funds in APAC for those willing to research the region’s idiosyncratic risks and unearth its shifting market and sector gems. The right fund administrator, bringing expertise in the region and wide-ranging capabilities for servicing closed-end funds locally, can also boost these investors’ APAC strategies.

Article featured in Private Equity Wire 2020