- Risk is real when investing in Asian real estate.
- Pricing was wrong when too much capital was chasing too few properties, while opportunities abound today for those with an appetite for risk.
- Boots on the ground are needed in assessing opportunity in Asia.
- Evaluate countries in Asia like you would a company’s balance sheet, but a bottom-up analysis is also needed.
Risk, other than literally, is not a four-letter word when investing in Asia real estate.
Risk is a fact-of-life that needs to be constantly assessed on the ground by a staff that is taking the pulse of market conditions, whether during the boom of a few years ago, or more recently, as a pullback in emerging markets is taking place, a trio of experts told a session on Asia real estate capital markets on Thursday, Oct. 18, at the Urban Land Institute’s fall meeting in Denver.
The first question asked by moderator Brandon Sedloff, the managing director for the Asia Pacific region for ULI, regarded risk. The theme seldom wandered from risk during the 75-minute session.
Richard Price, Chief Executive Officer for CBRE’s Global Investor’s Asia investment management business, said that “risk pricing” was wrong when too much institutional capital was chasing too few properties in Asia a few years ago, and “risk pricing is wrong again,” now that bubble conditions are being feared.
In general, he said institutional investors are very risk-adverse. “But for those who have an appetite for risk, there are real opportunities” in Asian real estate, he said.
“It’s a challenging environment today,” Price continued, but added that Asia is in much better shape to weather shocks to the system than it did in 1997 and 1998, when it also suffered from a pullback when the market became overheated.
“There is a real risk. And investors have to understand they are taking a real risk,” said panel member Paige Mueller, Director of Institutional Real Estate Advisory Services at RCLCO, who is based in Los Angeles. She is also a former senior vice president with GIC Real Estate.
Getting a handle on risk before institutional money is invested in real estate involves looking at an Asian country in the same way you would look at a company’s balance sheet, she said.
Questions that need to be asked include:
- Where does a country get its revenues?
- How much of that is coming from the black market?
- How stable is the government?
- What are the country’s policies and practices regarding things such as property rights and contracts?
Once a comfort level is reached with investing, “you look at the underlying real estate risk, just like you would in the U.S. and were investing in an office building in Dallas.”
At the same time, a bottom-up approach is needed in evaluating specific properties and opportunities in Asia, she said. “That is a quandary,” for institutional investors that do not have staffs in Asia, she said.
Price agreed, who has a staff of more than 100 people throughout Asia. Local knowledge is key when putting together deals with local partners, he said. Years ago, he noted that he put together a joint venture deal where his group controlled 95 percent of it, and thought his group was in control. He found that not to be the case, as the local investors with a very small minority percentage actually called the shots.
“Sometimes you think you are in control when you are not,” he said. Today, he said he realizes how important it is to pick the right partners in Asia, something that can only be done if you have knowledgeable staff on the ground.
Another panel member, Chetan K. Dave, is managing partner and CEO of the Real Estate Group at Infrastructure Development Finance. Chetan is based in Singapore, but focuses on India.
He noted that while he looks Indian, he found himself at a disadvantage when India first opened up its market to foreign investments, because virtually his entire work history had been in the U.S.
India had prohibited outside investments in nuclear power, agriculture and real estate, he said. “Why real estate was in the same company with nuclear energy, I do not know,” he said.
Still, because it is such a young market as far as allowing outside capital investments, it is a tiny fraction of the size of real estate investment markets in Asia, Europe or the U.S., he said.
Despite the huge number of people in India and its giant land mass, “India is much smaller than other markets,” Dave said. “That is relevant because a small market can become over-heated very quickly.”
That is what happened when India opened its real estate market in the mid-2000s, he said.
Indeed, investors paid such premiums for agricultural land that it made many farmers millionaires, he said.
“That is a permanent shift,” Dave said, noting that land prices may have softened from the peak, they will never return to previous lows.
While the red tape in India is legendary, he said it is also important to put it in perspective. “It takes a lot of time to get approval for zoning in and around Napa Valley in California,” Dave said. “It can take four years to get a zoning change in Napa Valley and it will cost you a fortune. It’s not just in Mumbai.”
Risk is not going to go away in Asia, but it also can’t be assessed from thousands of miles away, Price of CBRE said.
“Assessing risk is much more of an art than a science,” he said. “You need to get down to it a very granular level. My final point on risk is that is being mispriced. For capital willing to take on risk, there are some real opportunities.”
