October 2011
The Role of Private Equity in Real Estate Markets in Asia Pacific
2 Advance
The Role of Private Equity in Real Estate Markets in Asia Pacific • The private equity share of real estate transactions in Asia Pacific is approximately 11% • Of the future money raised to be deployed, the bulk will head for China • The most liquid markets in Asia Pacific are Hong Kong and Singapore • Australia will continue to be a sought after destination for private equity capital with the rise of private equity funds in real estate markets. This report takes a look at their activity in Asia Pacific over the last four years to answer the following questions: • How much private equity raised will be allocated to Asia Pacific real estate? • Where will each fund spend this money? • What does this tell us about the future deployment of the capital currently being raised?
Matching capital raised to capital spent The data for capital raised and capital spent is well matched in Australia, which is not surprising because according to Jones Lang LaSalle's Global Real Estate Transparency Index 2010, Australia is the world's most transparent real estate market. For Hong Kong, more equity was raised than was spent, while the converse was true in Singapore.
This highlights the fact that, for investors, the two cities may be a substitute for each other, meaning if a fund is unable to secure assets at attractive prices in one market, then that capital is deployed in the other. The mismatch between funds raised and spent in these markets over the past few years, may be indicative of the rapid escalation in capital values seen in Hong Kong’s recovery. Japan, which has the biggest market overall, had a rough match against our estimate of USD 19.8 billion raised against USD 22.0 billion spent. As the largest market in the region, Japan attracts a considerable share of global and pan-regional funds, partly accounting for the excess in funds spent over the period analysed. The country that did not match up well in our analysis was China. It was estimated that countryspecific funds plus China’s allocation from global and regional funds would provide about USD 20.0 billion for deployment, but our records on investment by private equity players show direct transactions completed in commercial real estate was in the order of just USD 3.4 billion. To establish where the rest of the money may have gone, land and residential transactions by these 175 funds in China were examined and refined, with the assistance of our local market experts and using the data from Real Capital Analytics. USD 4.9 billion of land transactions and USD 800 million of residential transactions
Figure 1: Capital Raised and Capital Spent USD million
Raised (Estimated) 2006-2010
Spent 2007-2010
Australia
10,172
10,457
China
20,321
3,461 + 5,737 (resi & land)
Hong Kong
3,723
1,304
Japan
19,841
22,077
Singapore
2,344
5,026
South Korea
2,108
5,183
Total
58,509
47,509
The Role of Private Equity in Real Estate Markets in Asia Pacific 3
undertaken both partly and wholly, in the fundraising analysis were included. This brings the total spent in China up to USD 9.2 billion against the USD 20 billion raised. China-specific country funds raised a total of USD 13.6 billion, indicating that the allocation of global and regional funds to China by GDP weightage is over-weight given real estate market maturity. The key take away from China is that not all money raised in the country will be successfully deployed there. Investors wishing to gain exposure to China must invest with private equity funds that have a track record in originating deals.
Figure 2: Global Real Estate Universe
Institutional Public & Public Real Estate Private Real Estate USD 2.0 trillion USD 6.0 trillion
All Commercial Real Estate USD 34.4 trillion
Source: LaSalle Investment Management
Investable Stock in Asia Pacific The total global stock of institutional public and private real estate is around USD 6.0 trillion. The total value of commercial real estate in for Asia Pacific, is estimated to be around USD 8.0 trillion, of which USD 1.5 trillion is available for investment by private equity buyers. The country breakdown (Figure 4) shows that Hong Kong and Singapore's public real estate figures appear larger than the institutional figure, this is because REITS and other listed vehicles own real estate outside their borders (largely China). This appears to distort the figures, as in most countries, the public real estate universe is usually a smaller subset of the institutional public and private real estate universe.
Figure 3: Asia Pacific Real Estate Universe
Institutional Public & Public Real Estate Private Real Estate USD 0.87 trillion USD 1.5 trillion
All Commercial Real Estate USD 8.0 trillion
Source: LaSalle Investment Management
Figure 4: Country Institutional Real Estate Universe Asia
Public Real Estate Universe
Commercial real estate assets owned by companies traded on stock markets around the world
Institutional Real Estate Universe
Commercial real estate assets owned through professional investment mangers, both public and private
Japan
USD 256.6
USD 581.4
China
USD 121.4
USD 310.0
Australia
USD 136.1
USD 177.0
Hong Kong
USD 178.2
USD 77.4
Singapore
USD 90.0
USD 67.7
Other Asia
USD 85.8
USD 278.4
Source: LaSalle Investment Management
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Figure 5: Ratio of Stock to Transaction Volumes 700
12
600
USD Billions
500
8
400
6
300
Percentage
10
4
200
2
100 0
Japan
China
Australia Hong Kong Singapore Other Asia Pacific
Institutional Real Estate Universe
0
Stock Turnover Ratio
Figure 6: Quarterly Transaction Volumes Across Asia Pacific 35 30 25 20 15 10 5
Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11
0
Other Australia
India Singapore
Malaysia China
South Korea Japan
Hong Kong
Which markets are the most liquid? The total value of transactions in Asia Pacific last year was USD 85 billion, with a similar figure expected this year. The ratio of investable stock to transaction turnover by country for 2010, shows Hong Kong and Singapore as being the most liquid markets in the region, and contrary to popular opinion, China more liquid than Japan.
What Share of All Transactions are Private Equity Transactions? Looking at the past three years, private equity transactions made up on average anywhere from 3% to just under 16% of all commercial real estate transactions in the principal markets of Asia Pacific namely, Australia, China, Hong Kong, Japan, Singapore and South Korea. It is interesting to note that private equity makes up a higher proportion of transactions in Australia and Singapore, two of the most transparent markets. In Hong Kong access to markets for private equity appears more difficult. This may be due to the competitive environment for deals from local or Mainland Chinese players or the strata market which accounts for a large share of transaction volumes. The following figures show the average annual transactions by private equity from 2008–1H11: • Australia 15.1% • China 6.7% • Hong Kong 2.9%
Figure 7: Private Equity Raising by Country USD million
Transaction Volumes by Country Against Investable Stock
• Japan 8.6%
Amount Closed
Target Closed
Destination % by Target Closed
AP-wide
1,000
2,000
34%
China
1,546
1,800
30%
Hong Kong
1,210
1,363
23%
Japan
113
211
4%
Singapore
27
212
4%
South Korea
207
350
6%
Total
4,103
5,963
100%
• Singapore 15.7% • South Korea 12.6%
Future Funds Allocation Looking forward to 2011, all bar two of the funds in our list are looking at allocating capital to China. In the first six months of 2011, a further USD 4.1 billion has been raised for deployment, either in whole or in part in Asia Pacific. Of this amount, just
The Role of Private Equity in Real Estate Markets in Asia Pacific 5
under half was raised by funds that have not yet reached the end of their fund raising period. While, of those which have closed, it is unlikely that much in the way of capital has already been deployed.
Given our analysis of the 2006–2010 period, what is the likely outcome for the funds raised in the first half of this year? Of the funds raised including Macquarie’s USD 1 billion core retail fund and China Real Estate Fund II, approximately USD 2.8 billion has been raised exclusively for the China market. However there is a shortage of investment grade deals in which to place private equity funds. History suggests that funds will struggle to allocate this capital, especially as all regional or subregional funds raised during 1H11 also have an allocation to China. The biggest amount of private equity deployed in a single year was in 2010 when USD 1.1 billion was spent. Japan’s recovery in commercial real estate transaction volumes is expected to continue into 2012 as investors move back into the market. What does appear to have shifted is the size of the investors looking to enter. Recent press reports suggest that the very large institutional investors may be finding it difficult to deploy significant amounts of capital, leaving the market open to smaller niche players to pursue opportunities. Hong Kong and Singapore are likely to continue to remain substitutes for each other in terms of capital deployment. One of the biggest differences between the two markets is currency. With the Hong Kong dollar tied to the US dollar and the Singapore dollar appreciating against a range of western currencies, the Singapore government has more policy levers available to implement monetary policy and control inflation via currency appreciation. The extent to which currency becomes a competitive advantage for Singapore over Hong Kong will be an interesting feature to watch over the next year or two. In the long run, the tables may turn and Hong Kong’s links as an
offshore trading centre for the Chinese yuan may tip the advantage back in the other direction. Australia has been one of the most popular countries for foreign investors in 2010. Their 20% share of private equity transactions in the market is the highest of all the countries studied. Given the strength and transparency of the real estate markets, the good economic growth prospects and the trade links to China, we can expect to see continued interest from private equity groups in the country. Private equity players are likely to remain a significant force in commercial real estate in Asia Pacific. From our study, the key will be finding sufficient stock to invest in at the target returns required. We used two sets of data to provide a reasonably accurate picture - 175 funds to represent money raised and 1,700 real estate transactions to represent money spent. The part that matched less well was China with more money raised than spent. Given the volume of money being raised for China this year, some of that money may struggle to find a home in built commercial real estate. We need the physical market to catch up, with more developments to match with the funds ready to be deployed.
Methodology Using the Preqin database combined with the Jones Lang LaSalle transactions reports, we analysed approximately 175 funds and 1,700 real estate deals from 2006 to 2010. We reviewed the capital raised to be allocated to the Asia Pacific real estate market and noted funds raised and closed. Some of these funds are country-specific and sector-specific. For example, an Australian industrial fund is clearly to be included in the figures for private equity to Australia. Others are less clear cut such as global funds, Asia Pacificwide funds or funds targeting a group of countries (for example, China, Japan and South Korea). For global, regional and sub-regional funds, we tested the attribution of money raised using two methods: weighting by GDP and by investable stock. For example, the Alpha Asia Macro Trends Fund, a value-add fund that raised USD 1.2 billion in 2008, had a mandate to deploy capital in China, Hong Kong, India, Japan, South Korea, Singapore, Taiwan, Vietnam, Asia and Greater China, according to Preqin’s database. Based on the weighting of GDP and another by the size of the investable stock from LaSalle Investment Management, we allocated the capital raised to an amount per country. We repeated this step for each of the 175 funds that were not country-specific. The two different weightings were interesting for comparison’s sake; however, intuitively, the weighting by size of investable stock is a better measure. It compares the capital allocated to the
potential market for those funds, namely the real estate that can actually be purchased. In contrast, using the weighting by GDP would compare those monies to the economic power of that country— interesting, but not necessarily as accurate on its own. The LaSalle Investment Management investable universe stock is initially based on GDP but is then adjusted for a number of factors to take account of the stage of market development in each of these countries. On that basis, we decided to use the weightings by investable stock for our purposes. The total allocation to real estate from the 175 funds to each country is in Figure 1. The next step was to look at direct real estate transactions in the Jones Lang LaSalle database from 2007 to end-1H11. The reason for a different timescale (remember, for funds raised, we looked at 2006–2010 data) is to account for the delay in capital deployment. Using Jones Lang LaSalle’s proprietary Global Capital Flows database, we assessed all transactions made by buyers we attributed as ‘unlisted funds’ during that period as well as all other purchases of over USD 50 million. We refined the data to exclude acquisitions not strictly made by private equity funds. In total, we looked at just under 1,700 individual direct real estate transactions. The real estate transaction database is countryspecific and records who the buyers are. On an aggregate level, the capital spent by private equity buyers in each country were totalled and shown in Figure 1 matching the capital spent.
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COPYRIGHT © JONES LANG LASALLE 2011 All rights reserved. No part of this publication may be published without prior written permission from Jones Lang LaSalle. The information in this publication should be regarded solely as a general guide. Whilst care has been taken in its preparation no representation is made or responsibility accepted for the accuracy of the whole or any part. We stress that forecasting is a problematical exercise which at best should be regarded as an indicative assessment of possibilities rather than absolute certainties. The process of making forward projections involves assumptions regarding numerous variables which are acutely sensitive to changing conditions, variations in any one of which may significantly affect the outcome, and we draw your attention to this factor.
