Thursday, March 26, 2009

Funds, banks start shopping for real estate assets

Source : Straits Times - 20 Mar 2009

Players laying groundwork to snap up regional assets on the cheap

Institutional funds and private banks are scouting for property assets in the Asia-Pacific, industry players say.

The funds and banks - armed with billions of dollars in cash - are laying the groundwork so they can snap up assets on the cheap later in the year.

Interest on the rise: SG Private Banking hopes to invest US$500m in Asian property by end-2010 while Korea’s Woori Investment plans to punp in US$300-500m. S’pore-based ARA Asia Dragon Fund has a US$1b warchest

SG Private Banking, which just set up a centre in Singapore to focus on real estate, hopes to invest another US$500 million in Asian property by end-2010.

Other firms here have similar plans. For example, Woori Investment & Securities (Woori I & S), part of Korea’s Woori Financial Group, is looking at arranging and investing about US$300-500 million in Asian property over the next two years. And Singapore-based ARA Asia Dragon Fund aims to invest another US$1 billion in Asia over the next two to three years.

Investment sales across Asia fell sharply in 2008 amid financial market turmoil, tight credit and higher funding costs. In Singapore, for example, investment sales last year were $17.8 billion - a 70 per cent drop from $54.02 billion in 2007, according to CB Richard Ellis.

But buying interest is slowly coming back as asset prices fall from their 2007 peaks. ‘The near- term weakness creates a favourable entry point,’ said John Lim, chief executive of ARA Asset Management, which manages the ARA Asia Dragon Fund.

Keiichi Hirano, SG Private Banking’s Singapore-based global real estate head, told BT that asset prices generally are already about 30-35 per cent off their peak. Others put the drop anywhere between 20-40 per cent.

Market players say there is still a difference between asking prices and what buyers are willing to pay.

But Sung Heun Do, director and head of real estate investment and finance at Woori I & S, said: ‘We believe this year will present very good opportunities to acquire key assets, though a lot will depend on other factors like the credit market.’

The amount the firm will invest will ‘depend heavily on whether we are able to secure the right assets at the right risk-adjusted returns’, Mr Sung said.

Others echo this view, saying returns are crucial as they shop around. SG Private Banking’s Mr Hirano said his team will look for physical assets and property-related paper assets that yield about 10 per cent per annum.

He wants to increase SG Private Banking’s exposure to real estate through its new Global Centre of Expertise in Real Estate in Singapore. SG Private Banking had 66.9 billion euros (S$138 billion) of assets under management at end-2008. The bank did not say how much of this was in the Asia-Pacific region, or in real estate. But right now, less than 5 per cent of SG Private Banking’s investments are in real estate. By contrast, most high net worth individuals have 18-25 per cent of their portfolios in real estate, Mr Hirano said.

ARA’s Mr Lim said that for the next six to nine months there will be a continued downward pressure on rents across most sectors and markets. But taking a medium-term view of three to five years, now is a good time to go in, he said: ‘You must be able to take the medium-term view to make serious money.’

Established markets are proving more popular, with firms looking hard at Hong Kong, Tokyo, Singapore and Australia. Woori I & S is also bullish on Korea and said it is seeing a lot of interest from non-Korean associates to partner it in acquiring prime assets in Seoul.

China, on the other hand, is proving more controversial. Some funds BT spoke to said they will stay away from China as the real estate markets there are not well-established. ARA’s Mr Lim, however, is upbeat about the country. ‘We are most confident in China. We still think that the fundamentals are strong,’ he said.

Another development is that many funds are looking at physical real estate, rather than just paper assets. In the past four or five years, clients were more interested in property-linked paper assets such as equities and funds, as these were cheaper and easier to invest in. But interest in physical assets is increasing as their prices slump in the current economic downturn. ‘We will offer our clients the opportunity to invest into any country, and any type of property,’ said SG Private Banking’s Mr Hirano.

Source : Business Times - 20 Mar 2009

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Rental vital for share profits

Posted by luxuryasiahome on March 20, 2009

REITS are the main reason why landlords are reluctant to lower rents: Their responsibility to shareholders precludes this, experts say.

Many shopping malls form part of Reit - or real estate investment trust - portfolios, and these investment vehicles have been hit hard by the slump in the stock market.

To keep earnings up, the experts said, rents have to be kept at certain levels.

Mr Mohamed Ismail, chief executive officer of real estate giant PropNex, said Reits are often ‘answerable to their shareholders, who were given projected returns at year end’.

‘The revenue of shares is purely dependent on rental because it makes up the bulk of a landlord’s profits,’ he added.

‘Lowering rents equates to lowering shareholder returns and share prices. This erodes a company’s viability and can be detrimental.’

Put simply, Reits are special investment vehicles that apportion the value of a piece of real estate into shares, which can then be bought and sold on the stock exchange.

There are 21 Reits listed on the Singapore Exchange, and their portfolios include shopping malls, hotels and even carparks.

The stock market downturn has affected them badly: A recent report by CB Richard Ellis said the market capitalisation of Singapore Reits fell 53per cent between June30 and Dec31 last year.

Barclays Capital economist Leong Wai Ho said: ‘Being in this position, Reits will be very hesitant to take further moves to lower their yields.

‘The first thing they will do is to extract a decent yield from tenants, because this directly affects their share prices and profitability.’

Apart from their responsibility to shareholders, landlords are also shying away from lowering base rents because of profitability concerns and the fear that doing so now will result in a trend that will be difficult to reverse once business picks up.

Most retail landlords, said Mr Ismail, earn up to 20per cent profit after costs - mortgage loans and interest, property tax, and expenditure on maintenance and staff - are deducted.

‘They have to be profitable, and cutting rents by 20per cent could mean operating below the profit line,’ he added.

This explains why landlords are baulking at blanket rate cuts.

When interviewed, CapitaLand, AsiaMalls and City Developments said they preferred to engage with tenants on an individual basis.

Frasers Centrepoint, Far East Organization, Paragon and Wisma Atria were unable to comment, but The Straits Times understands they are taking a similar stance, and that at least one has already started giving individual rental discounts.

CapitaLand explained that individual rebates are a more equitable way of helping tenants. Doing so allows it to single out stores with smaller or no profit margins and help them out.


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