GIC shows Asian real estate revival

Institutional Investor, September 2010

Later this month the Government of Singapore Investment Corporation, one of Singapore’s sovereign wealth funds, will being a global roadshow for a new IPO. The listing will be for a cluster of overseas assets held by its real estate arm, and is expected to raise about US$3billion.

The float – expected to include a group of logistics property assets in Japan and China purchased from ProLogis in 2008 – is an example of how momentum has returned to Asian real estate markets in the wake of the global financial crisis. If the IPO raises as much as expected, it will be the largest in Singapore since 1993.

And GIC is not alone in being able to find opportunity post-crisis. Last year, CapitaLand, the Singapore-based developer, astounded markets by raising US$2.02 billion in the listing of its CapitaMalls Asia real estate investment trust (REIT) while most developers were still recovering. Elsewhere, movement is gathering pace: in the space of one month in August, LaSalle Investment Management announced three separate transactions worth a combined US$345 million in Japan, Singapore and Australia. Ian Mackie, who runs the LaSalle Asia Opportunity Fund Asia, caught the popular mood when he said: “After two tough years following the global financial crisis, it is really exciting to have so much good news to announce within a week. We see strong growth potential in Asia Pacific where the markets are recovering much more rapidly than other parts of the world and we continue to seek more opportunities in this region.”

Notably, in many cases the biggest and strongest players in Asian real estate appear to have come out of the crisis even bigger and stronger than they entered it. CapitaLand is a classic example: in January, as others were still refinancing or regrouping, it bought Orient Overseas Development Limited (OODL), a Chinese property business, for US$2.2 billion. It is understood that CapitaLand beat off other bidders, including impeccably connected Chinese state-owned enterprises, because it was the only one that was able to demonstrate it could finance the acquisition without relying on bank lending. It was an illustration of how financial prudence has served it well. “Before the crisis, people were complaining we were undergeared and had too much cash,” says Olivier Lim, group chief financial officer at CapitaLand. “But people don’t know how to value optionality, flexibility.” He adds: “The principle is to raise money when we don’t need it. That’s the best time to raise money: the cheapest rates.” Even after the acquisition, CapitaLand has a low gearing of just 0.28 times and cash reserves of S$4.9 billion.

Others show the same strength. Mapletree Logistics, a REIT owned by Mapletree Investment, part of the Temasek sovereign fund in Singapore, has acquired consistently since the financial crisis began to ease, most recently on August 18 when it purchased a Singapore property, National Cool Lifestyle Hub, for S$53 million, bringing its total portfolio to 87 properties across Asia worth over S$3 billion. “I need financial capability to support my product offerings,” says Richard Lai, CEO. “Without money it’s a tough ask to build anything. But our financials came through the crisis quite intact, and that has enabled us to be the first mover in the market during the recovery.”

It may be that the financial crisis has weeded out some of the less sustainable practices in listing real estate too. The development of the REIT market in Asia, while steady, has sometimes been undermined by structures that are heavy on financial engineering and light on decent assets – a charge that has particularly frequently been aimed at Hong Kong.

In launching the CapitaMalls Asia REIT so soon after the financial crisis, and in such scale, CapitaLand brought to bear the lessons it had learned in its previous five REITs, making it comfortably the most prolific issuer of the structure in the region. For a start, it did things properly: CapitaMalls Asia is one of the biggest listed mall owners, developers and managers in Asia with interests in 88 properties, 49 cities and give countries; its last stated total property value was about S$21.8 billion. There was no question of this REIT lacking critical mass.

This reflects a long-standing policy of putting high quality assets into REITs, and treating them as closely-linked businesses rather than straightforward capital-raising divestments. “When we did our first REIT, I was asked by a big Hong Kong company: why are you putting your best assets into the REIT? We said we wanted it to be able to generate returns for investors, and so we can earn fees. It’s not just a divestment model.”

It’s interesting that, as markets revive, the range of locations in which REITs are appearing is increasing. Only four new REITs were listed in Asia in the second half of 2009 (not counting a number of non-listed trust vehicles formed in South Korea), and all of them were in Thailand: Sala@Sathorn Property Fund, MFC-Strategic Storage Fund, 101 Montri Storage Property Fund and TPARK Logistics Property Fund. These were small deals, with a combined market cap barely over US$100 million between them, but the idea of Thailand as the sole source of issuance for a period of six months would have been unthinkable a few years ago.

This year, much attention has been focused on Malaysia, which has been a disappointing market for new issuance in previous years. Sunway REIT, which owns hotels and shopping malls spun off by its Sunway City parent, raised M$1.48 billion in July, the largest REIT IPO in southeast Asia this year, swiftly followed by CapitaMalls Malaysia Trust – yet another Capitaland vehicle – which raised MR786.5 million.

REITs are popular again because their defensive, yield-heavy characteristics are in vogue at a time of volatile market performance and uncertain economic prospects. One only has to look at the cornerstone investors in the two Malaysia deals to see the appeal REITs clearly hold for institutions: GIC, Malaysia’s Employee Provident Fund, Permodalan Nasional (another key Malaysian institution) and Great Eastern Life Assurance (Malaysia) took anchor positions in the Sunway float, while the EPF and Great Eastern Life were also cornerstones in the CapitaMalls Malaysia deal.

Others are likely to follow. China has talked for many years about launching REIT structures, and a pilot project is expected to be developed later this year, although market talk suggests that at first only institutional buyers will be permitted to participate. And the next hotbed of issuance is likely to be the Philippines, once some final issues around taxation and implementing rules, delayed with the change of administration, are cleared. Among the many likely issuers when those hurdles are surmounted are SM Prime, Ayala Land, Robinsons Land Corp and Metro Pacific Investments.

It will be interesting to see if the wealth of gaming and entertainment-related construction in Asia leads to new listed vehicles. Singapore and Macau have both seen transformative new developments which combine casinos with entertainment and business reach completion in the course of this year: Singapore with its Las Vegas Sands-led Marina Bay Sands development and the Resorts World development in Sentosa led by Malaysia’s Genting; and Macau with the opening of Melco’s City of Dreams development and Venetian Macao, also backed by Las Vegas Sands.

Properties like these have sought to revamp the traditional form of the casino, particularly in Macau, as being purely for gaming. The Marina Bay Sands development, for example, includes a theatre, exhibition hall, museum shopping mall and an iconic three tower hotel; Resorts World combines the casino with a Universal Studios, an oceanarium, shops and six hotels; and City of Dreams includes one of the most ambitious water-based performances ever attempted in a specially-built auditorium. The idea is to take the Vegas approach to the gaming industry, in which the actual gambling does not produce the majority of earnings.

Backers like Las Vegas Sands, Genting and Melco Crown Entertainment are all listed in their own right, but it’s possible that the resort and gaming-based high end property that comes with projects like these could find themselves into separate listed vehicles in Asia in due course.

If gaming and entertainment prove not to be the source of new assets, there will be others; there is renewed vigor to find ways to put real estate assets in publicly traded vehicles, and plenty of investor appetite to buy them.  “With concerns over the financial condition of Asian REITs largely alleviated, investors will renew their focus on portfolio expansion and growth in distributable income,” notes research group CB Richard Ellis. “Further acquisitions are likely as Asian REITs look to enhance their portfolio quality ahead of the full recovery of the real estate market.” After some tough years, activity has returned to Asian real estate.

BOX: The China bubble?

Earlier this year, word started to spread about the idea of asset bubbles in Asia. Had the stock market recovery been too much, too soon?

Closer analysis showed that at the heart of the concern about Asia was the Chinese property market. For example, in June Nomura called a 20% fall in some Chinese property over the next 18 months, with analyst Sun Mingchun pointing to housing prices 13 or 14 times higher than disposable income in Beijing and Shanghai. By then, prices in 35 major Chinese cities had more than doubled in real terms in the previous decade, with prices up an extraordinary 41% year-on-year in the first quarter of 2010.

Since then, though, China has sought to cool things down, apparently with some success. For example, it restricted third home mortgages in heated primary cities. “This announcement has immediately cooled down market sentiment, particularly in Beijing,” says Macquarie analyst Eugene Cheung. Macquarie says that average weekly sales in August were down 39% from their peak in April, and that price growth is slowing, though it is still very high – 10.3% year on year in July.

Catherine Yeung, investment director at Fidelity Investments, is not concerned. “If we look at the Chinese property market a lot of people are saying that there’s been a bubble, but the government’s been very proactive in ensuring that you’re not going to see a massive bubble in the property market itself and hence harsh policies have been implemented,” she says. “Also when you compare the loan or debt level in China versus the US it’s very different. In fact Chinese cities have one of the highest levels of home ownership at about 86% across the world.”

Nevertheless, the cooling of the property market, and then the gradual removal of tightening measures thereafter, is one of the most closely watched issues in Asian macroeconomics at the moment. A bursting of a property bubble in China would lead to major problems for the country’s banks, already heavily weighed down by their lending to projects during China’s stimulus measures last year; and if China’s banks run into trouble, that would have global consequences.