Opportunistic returns in distressed assets
With abundant liquidity from monetary easing and ultra-low interest rates, sizzling real estate prices have almost become a part of life in the Asia-Pacific in recent years. Real estate investor sentiment in the region’s property sector remains relatively positive and buyers often are willing to pay up for assets at rates foreigners find prohibitive, according to the Emerging Trends in Real Estate 2013 report by the Urban Land Institute and PricewaterhouseCoopers. As such, opportunistic investors are having a hard time finding assets that will provide returns that Western-based investment committees expect from this type of play.
However, such opportunities do exist in some parts of Asia, says Colin Galloway, a ULI consultant and the report’s principal author. “The owner for whatever reasons has economic problems or financial problems and needs to get out of this business, and these are funds set up to help him pay debts.”
The type of distress available differs widely from market to market, both in type and volume. There are four main areas in Asia where “you see distressed” - Japan, Australia, India and China. And there has been an uptake in the amount of distress or the perception of the availability of distress in the market, he adds.
Japan – Commercial-backed securities investments are being picked out by the market as opportunities but it remains to be seen if Japanese banks will allow this to happen as the institutions appear to have their own interests in keeping a lid on distress activities. Moreover, most of these assets have been cornered by well-positioned Western and local funds, and the complexities involved in negotiating their purchase means the chances of this becoming a play open to all investors is remote.
Australia – European banks and financial institutions have made significant investments in the past few years. Most have not been profitable and the institutions are looking to exit, usually at a substantial loss.
India – On paper, the country is a prime candidate for opportunistic investors. Public markets are “more or less stagnant,” and developers have faced problems getting funding from banks and are looking for investors to bail them out. Borrowing costs are high. Still, existing regulatory structures may hinder such opportunistic investments.
China – Developers have also faced problems getting funding with the government crack-down on lending, especially for the purchase of land. Transaction volumes in China have also fallen and prices have been coming down. Galloway adds international funds have been trying to strike deals in China at favourable rates. Still, after regulators eased some bank lending in China, local developers have been able “to keep the wolf at the door” and such real estate opportunities are becoming less lucrative. “If the Chinese government proceeds at the same rate in the sense that they keep developers borrowing ahead of the game, then they don’t need to look for excess funding from other investors.”
In addition to distressed assets, opportunistic funds are also flowing into residential assets, with some Malaysian funds particularly active in Europe and the Chinese funds in the US. “It depends on the asset classes,” says K.K. So, the Asia-Pacific Real Estate Tax Leader at PwC Hong Kong. “The Middle East investors have also been very active.”
So adds that wealthy families and some corporate groups have also entered this asset space, along with the pension and sovereign wealth funds.
The difficulty in sourcing good returns has meant investors have become more adventurous in seeking out yield. In addition to opportunities in distressed assets, the report also found markets outside core cities are increasingly attractive for investment and development, with Jakarta the top choice for both investment and development prospects this year. While some are looking at Indonesia, others are revisiting often overlooked capitals such as Kuala Lumpur and Bangkok. Secondary markets such as Kowloon in Hong Kong and second-tier Chinese cities are also experiencing increased interest from international buyers.
So says the overall dearth of investible options across Asian markets has led some opportunity players to migrate towards more focused strategies in niche sectors, areas that require an element of expertise that domestic players lack. The logistics sector in Japan and China is one such opportunity. “These alternative asset classes provide not only a measure of protection against cheaper local money, but they also are relatively sheltered from economic volatility.”
Another sector attracting increasing interest is housing for seniors. Although efforts to develop this niche in other countries have not gained much success, this may be an opportunity in Asia with its fast-aging populations in countries such as Japan and China. The related field of healthcare also has huge potential, the report found.
Still, investments in these emerging asset classes have issues of their own due partly to yield and to availability. The logistics sector, for example, has now received mainstream acceptance and is increasingly regarded as more of an institutional than an opportunistic play. As a result, returns are being squeezed.