Hong Kong / Tokyo: Asian property investment could dip because of rising borrowing costs and investor risk aversion stemming from the US subprime crisis, but the region still is a better bet than the struggling US and European markets.
European and US commercial property markets, which had been energized by a spate of leveraged buyouts (LBOs) by private equity (PE) companies, are now expected to suffer because of the turmoil in credit markets sparked by US mortgage
Tiding the crisis: Unlike the slump in western real estate markets, property deals in Asia, at least in the short term, are expected to keep flowing through a raft of new global funds raised in recent months.
With exposure to US mortgage-linked collateralized debt obligations (CDOs) causing havoc in financial markets, credit for property deals, including commercial mortgage-backed securities, is drying up in the West.
Asia’s property industry, where complex securitizations are an anomaly, has lesser worries—such as a narrowing gap between bond and property yields that puts pressure on returns, and a rising yen that could make Japan expensive. Convincing nervous investors to buy into thriving but notoriously volatile Asian property markets could also be tough.
Robert Lie, Asia head at ING Real Estate, said investors could no longer rely on a simple formula of cheap borrowing and rising capital values. “The job’s getting a bit more difficult,” Lie said. “It doesn’t mean you shouldn’t invest in property, but you should rely more on rental increases and less on capital markets.”
Lie suggested that PE property funds would have to change tactics, after flourishing in recent years by snapping up non-performing loans in the wake of Asia’s financial crisis and riding a wave of asset inflation.
“That period is over,” Lie said, adding that ING Real Estate was having little trouble raising two funds for Asia, totalling about $1.35 billion (Rs5,494 crore).
In the short term, deals in Asia are likely to keep flowing because a raft of new global funds raised in recent months. That money would be pumped to work in assets such as Japanese commercial buildings and housing in China and India, where investment returns can surpass 30%.
Blackstone Group, whose $39 billion (Rs1.72 trillion then) February purchase of US landlord Equity Office Property Trust was a signature deal for LBOs, is opening a real estate office in Tokyo, according to people familiar with the matter. The PE firm has been raising a $10 billion global property fund, while US investment banks Morgan Stanley and The Goldman Sachs Group Inc. have raised similar funds worth around $8 billion each, sources have said.
LaSalle Investment Management, a unit of Jones Lang LaSalle Inc., said on Tuesday it planned to funnel $15 billion of funds into Asian property over the next 3-5 years.
Because of growing risk aversion among investors, a property fund executive at a global bank said that raising equity from Western investors “was very favourable, but now it’s just favourable”.
“You haven’t seen evidence that money is harder to come by so far in Asia, although I’m not saying that won’t change,” said Matt Nacard, Asia property analyst at Macquarie Securities. “In the US it’s a totally different story.”