Asian money today accounts for a far greater proportion of capital in global property markets than a decade ago – and the flow does not appear to be abating, particularly into prime assets in tier-one cities.
Moreover, while corporate and institutional investors account for most of the larger real estate deals globally, ultra-wealthy Asians are increasingly making their presence felt, typically through privately owned investment firms or family offices.
Thanks to more nimble decision-making and a greater access to cash, private clients are starting to win bids on large-scale trophy, $1 billion-plus deals, Alistair Meadows, director of the international capital group for Asia Pacific at real estate services firm Jones Lang LaSalle, told FinanceAsia. That was not so much the case, say, 10 years ago.
Recent investments made by Bright Ruby Resources, the Singapore-incorporated investment firm linked to Chinese steel tycoon Du Shuanghua and his family, are a good example of a larger-scale private wealth portfolio.
Bright Ruby has poured $2 billion into hotel, office and retail assets globally since December 2012. That includes a $913 million deal for the Grand Park Orchard hotel in Singapore in August 2013, $464 million paid for the Marriott Champs-Elysees in Paris in September 2014, and its $364 million investment in the Hilton Hotel in Sydney in May this year. In each case, Bright Ruby bought 100% of the property.
London’s property market in particular has become a magnet for Asia’s ultra-wealthy, attracting 17% of the $40 billion in such flows in 2014, ahead of Tokyo (9%) and Sydney (5%), according to CBRE and Real Capital Analytics.
Of the major developments being built in the English capital, 25% are Asian-backed, compared with hardly any 10 years ago, Alex Newall, managing director of London-based property consultancy Hanover Private Office, said. He was citing figures from a report commissioned by his firm.
The prospect of stable, safe-haven income is becoming increasingly attractive against a background of stubbornly low yields and high market volatility, with capital outflows out of China in particular picking up sharply in recent quarters. Huge global market equity swings recently – notably in the week of August 24-28– will have only served to reinforce the appeal of property.
Despite a protracted bull market and limited new supply, London still offers office rental yields of 3.5% to 4.5 in a very stable, transparent market with very strong rule of law. This compares to a similar spread of rental yield over borrowing costs in, for example, India. There, pre-leased commercial properties can yield between 8% and 10%, with some inflation increases built into the contracts, said Randev. The main Indian interest rate is 7.25%.
That said, central London real estate prices have risen to such a degree that it may mean some Asian investors start to look elsewhere, says Frank Marriott, Asia-Pacific head of real estate capital markets at property services firm Savills.
Australia and the US, for example, have risen in popularity recently. Close to half ($4.4 billion) of the $9.6 billion flow from China into property in the first half of 2015 went to the US, $2.2 billion to Australia and just $1.2 billion to London, according to Real Capital Analytics.
Mainland China will be attractive to some, says Marriott. Prime residential property in Beijing and Shanghai stands at around $2,000/square foot and grade-A office real estate is $1,300 to $1,500/square foot, he notes. That compares to $4,000 to $7,000/square foot for residential and $2,000 to $3,500, respectively, in London.
Other destinations that Asian private clients are considering include tier-two cities in the UK and the US. Indeed, British prime minister David Cameron accompanied a delegation to Singapore in late July and urged Southeast Asian investors to invest in cities in northern England – such as Leeds and Manchester – rather than just London.
Still, the UK capital seems unlikely to lose its appeal any time soon.
Asians backing deals
So how are deals being structured and financed for private clients in London? The typical approach of wealthy Asian investors is to back rather than front or lead development projects, said Hanover’s Newall. “If you’re the lender rather than the principal, you’re more protected.”
A typical backer will lend 50% to 75% loan-to-value, so the market would have to fall by at least 25% before the lender is affected, he said, whereas the equity holder or borrower would lose his equity first.
Some highly experienced Asian property developers are fronting deals, such as Wanda Group, Greenland, Greenwich Peninsula, and Reignwood Group. But for a private individual with less experience lending is “a clever position to be in,” Newall said.
Working with a local developer to avoid planning risk is the best approach in the UK, said Mico Chung, chairman of CSI Properties, a Hong Kong-based real estate investor and developer. “You need a local team that understands the local dynamic.”
CSI does not invest in London property but Chung speaks from personal experience, having made his own real estate investments there and in other cities. He is the major shareholder in CSI, with a stake of 45%.
Indian money too
China may be the fastest expanding source of capital for global property but Indian high-net-worth investor appetite is also growing – with London again seemingly the preferred location.
Examples of sizeable deals include two by Indian tycoons in the past couple of years. Retail magnate Yusuffali Kader bought the original Scotland Yard site in Whitehall in July this year for £110 million to develop a luxury hotel there. And Abishek Lodha’s property development firm Lodha Group paid £306 million for the Canadian embassy building in Mayfair in late 2013.
Moreover, Amit Patni, founder and chairman of Mumbai-based single-family office Raay Investments, said London is the only property market outside India where his firm has assets. Raay tends to focus on residential property, which accounts for 15% to 20% of the overall investment portfolio, although Patni declined to provide a figure for its overall size.
Raay is the family office of the Amit Patni Group; the Patni family sold their stake in Indian software company Patni Computer Systems in 2011.
Clients of Mumbai-based multi-family office Waterfield Advisors also prefer London, followed by American cities such as New York, Munish Randev, the firm’s chief investment officer, said.
Indians can send up to $250,000 per person abroad in a financial year, adding up to $1 million for a family of four. A typical approach is for a family to transfer $1 million in March and another $1 million in April and to then use the total to buy a central London two-bedroom flat as a European base, Randev said. They won’t generally borrow to do so as the Reserve Bank of India doesn’t like to see loans being taken as margin on this capital, he added.
Indeed, Asian private clients generally fund residential and commercial property purchases 100% with equity, JLL’s Meadows said. That is because competition in core, liquid markets can be fierce, with 10-15 separate bids now likely on each prime asset put on the block in London or New York.
But when they do require debt financing for development projects they are likely to leverage their relationships with those Asian banks that can lend in Europe and the US at more competitive rates, he said.
Bank of China, Hong Kong’s Bank of East Asia, and Singapore-based UOB are among the banks that are very active when it comes to lending against prime property in foreign tier-one foreign cities, according to market participants. Others too have aspirations to expand in this area, including China’s Industrial and Commercial Bank of China and Malaysia’s Maybank, which this year set up a desk in London to service wealthy Malaysian and Singaporean clients.
With similar scenarios playing out worldwide, Asian private capital is growing ever more influential in global property markets. Rival real estate investors – and those that finance them – will need to adapt to this new reality.