Asia’s largest investors are becoming increasingly selective when it comes to acquisitions in Europe and the United States and are looking more to their home markets. That was the view of one of Asia’s leading investment managers and other experts speaking at the ULI U.K. Annual Conference 2017.
Christina Gaw, managing partner and head of capital markets at investment firm Gaw Capital Partners, said that the relative value of European property has diminished.
“In the past 18 months, our investors have become more selective,” she said, speaking on a panel called “Capital Markets . . . Where Is the Smart Money Going?”
“For core—prime assets with good cash flows that can be held for a long time—they have started to look back in Asia. These kinds of assets trade at 4 to 4.5 percent yields in Asia, and they have started to trade at or below those levels in some markets in Europe and the U.S. So Asia looks more interesting again because you have the growth there,” said Gaw. Her clients tend to be Asian insurance companies, pension funds, and sovereign funds.
“There is still interest in value-add deals, and there is also the opportunity to play different sectors,” she added. “There are sectors like student accommodation where there is still value, and we are trying to get more Asian investors familiar with these sectors.
“The education sector is still strong for the U.K. If you are a Chinese family and you are well off but not sure you have got the money to send your child to the U.K. to study, it has suddenly gotten 20 percent cheaper [due to the exchange rate] and you can afford to do it.
“Our investors like Europe, but still need to work out how the euro works. There will always be a preference for London because they know there is an exit.”
She added that recent regulations from the Chinese government restricting outbound investment in the country had the effect of diminishing overseas investment, and would also make investment in China by foreign investors more difficult.
“It has been difficult to get approval to invest overseas,” she said. “The government wanted to stabilize the renminbi, and it has been successful in that. And it has captured liquidity from insurance companies. Insurance companies have started to look at domestic assets, particularly those that have been stabilized over the last few years, and some of these types of assets are now trading at 4 percent yields. It makes China a very difficult place for overseas investors looking to buy prime assets.”
Among U.K. and European investors, there was the expectation that nonprime values—in particular in London and elsewhere in the United Kingdom—will drop, and a sense of astonishment that values in Europe in general had maintained high levels for so long.
“There is a lot of capital still chasing real estate, and not many sellers out there,” said Jos Short, chairman of Internos Global Investors. “In London, assets with long-dated income to good covenants are still trading at keen yields. But we are seeing a valuation shift with shorter leased properties that need refurbishment where aggressive rents were being underwritten. Secondary is under pressure.”
Michael Cochrane, senior managing director at Eastdil Secured, agreed up to a point. “With developments, pro formas are being scaled back and leasing plans are being delayed as people wait and see how Theresa May does in June and how the E.U. responds to her proposals. But since there will be a reduction in values across the board, we don’t see that. There is so much capital still looking to come into the U.K., we think it will fill a lot of the gaps. We think there is an arbitrage between where pricing is continuing to rise in the Continent and the U.K.”
Cochrane described values to this effect as “stubbornly high” and while Short said that “fund managers are wrestling with the fact that values should have reverted to their long-term averages, but haven’t,” Cochrane argued that the amount of capital chasing real estate in a low-bond-yield environment meant there had been a “paradigm shift” to permanently lower yields for prime assets.
Dale Lattanzio, managing partner at debt fund manager DRC Capital, added that there had been a reduction in interest in financing shorter-lease assets by banks, which would lead to a reduction in values. “Debt follows equity in these situations,” he said. “Banks have pulled back from those kinds of situations in the last 12 months. It is just generally more difficult for them to do, meaning that there is an opportunity for alternative lenders, but their cost of capital is more expensive. Political uncertainty more generally has created a bigger opportunity for debt funds as banks reduce risk appetite.”
He gave a fascinating insight into how his firm looks to manage external risks such as political risk.
“We have become much more adept at analyzing how political risk will affect debt availability,” he said. “We have had lots of examples of political risk over the past five to six years, and we can look back at that and see how the debt markets reacted.”
Gaw added to this: “We have been going for 25 years, during which time we’ve seen the savings-and-loan crisis, the Asian financial crisis, the dot-com crash, and the Western financial crash. And if you can hold on to your assets and not be forced to sell, you always make money. At no point even during the Asian financial crisis did prime values fall more than 30 percent. So if you take on maximum leverage of 50 percent, you can sit it out and you will always make money.”
