Hang tight: BPEA intends to ride out stormy Asian property markets

Private equity property managers are facing fierce competition for assets and economic uncertainty. BPEA plans to remain on the sidelines, for now, buying debt rather than equity in countries such as Malaysia. Other property managers should take note.

Private equity real estate funds have money burning a hole in their pockets after amassing a record $18.6 billion last year for Asian deals. It was the only region in the world to show an uptick in fundraising.

BPE Asia Real Estate was one of six funds to raise over $1 billion last year, but rather than rushing to put capital to work, counter-intuitively it is holding fire. 

The US-China trade war, higher interest rates and China’s economic slowdown are clouding the outlook for property prices across the Asia Pacific region.

“Could it be a perfect storm? That’s one of the reasons we're very conservative right now on our underwriting assumptions and overall capital deployment,” said Mark Fogle, managing director at BPEA Real Estate in an interview with FinanceAsia.

On a day-to-day basis, private equity real estate fund managers are facing a combination of sharp increases in pricing, historically low yields, a lack of investible stock and tighter bank lending.

Prices are likely to become more volatile and valuations within markets and sectors could widen, based on the underlying quality of assets. Investors will need to be nimble regarding how long they hold assets, on floor plans and on financing.

“Most people would believe that it's not a question of if there will be another correction, it's when and how bad,” Fogle said.

Property analysts agree that hanging tight is the best tactic right now.

Elysia Tse, head of Asia Pacific research and strategy at broker LaSalle Investment Management, offers this advice to investors: “Most importantly, preserve some capital when possible. Be ready to take advantage of dislocation should it occur in the real estate sector.”

Lending against assets makes more sense at this late stage in the property cycle, rather than taking equity positions, advise researchers at property broker CBRE.

Where it can, BPEA Real Estate enters the capital stack at a lower level. In the hundred plus deals the team has inked in the region starting in 1996, half have been debt deals.  


Despite the uncertain outlook, competition for assets among funds remains fierce: one more reason to stay on the sidelines. 

Funds that have corralled large pools of capital include Blackstone, Gaw Capital and Warburg Pincus. Ten other funds are still in the market looking to raise over $1 billion, including PAG Real Estate Partners II and GLP China Value-Add Venture II according to data provider PERE

CBRE estimates that around $62 billion of private equity capital after leveraging will be deployed by Asia Pacific-focused real estate funds between 2019 and 2023.

“There’s virtually hyper fundraising going on right now. At the same time there is significant dry power as well as portfolios with a lot of unrealised assets,” Fogle said.

LaSalle Investment Management’s Tse believes that investors will reap lower internal rates of return (IRR) in 2019 than in recent years. That means LPs, which have poured capital into alternative investments looking for high yields in recent years, may face disappointment.

BPEA Real Estate, the property arm of Baring Private Equity Asia (BPEA), managed to raise $1 billion speedily last year from the likes of the Employees Retirement System of Texas, Texas County & District Retirement System, the State of Maine Public Employees Retirement System and the Arizona Public Safety Personnel Retirement System.

The team, largely comprised of US insurer AIG’s former Asian real estate managers, is emphasising its conservative policy through investment cycles. It aims for a solid 1.8 to 2.2 return on invested capital. It doesn’t swing for the fences on deals using lashings of leverage but at the same time, none of its team has only lost money once in their roughly 110 transactions during their careers. BPEA Real Estate has capped leverage at 60% on a portfolio basis; even in Japan where debt is plentiful, it hasn’t crossed this line.



BPEA Real Estate’s Fund II is targeting between 14 and 20 assets but does not expect to put more than 10% to 20% of the $1 billion in any one country in order to diversify risk.

“We're very cautious on investing right now, and are very selective in the countries we pursue, depending on where they are in the cycle,” said Fogle.

When pushed, Fogle said that if he had to deploy right now, the Japanese hospitality and residential sectors look attractive, as do segments of the Australian, Thai and South Korean property markets.

In Australia, for example, the fact that banks are pulling back from lending, especially to overseas developers, has created opportunities for funds to buy either the debt or equity of stalled development projects. If BPEA Real Estate were to go into Malaysia right now, it would probably buy debt, he said.

Mainland Chinese real estate investors overseas are keen to invest more in Australia but have cited extremely tough local competition and a hostile lending climate as challenges, according to a survey by US property broker Cushman & Wakefield. Australia ties with the UK globally as its preferred market globally in 2019.


So far, BPEA Real Estate has only invested in a handful of deals in the region’s largest property market, mainland China. This is partly because it has been waiting for policy guidelines to reveal which areas Beijing is prioritising for development.

In that respect, China only released its blueprint for the development of the Greater Bay Area on February 18, revealing plans to link 11 cities led by Hong Kong, Guangzhou, Macau and Shenzhen into an integrated economic and business hub. Now, BPEA Real Estate says it has greater visibility into where prices are likely to rise due to government support and upgraded infrastructure.

“The connectivity that's happening is similar to in the Bay Area of California … it's quite exciting. Shenzen is becoming the tech capital of China,” Fogle said. BPEA, headquartered in Hong Kong, already has a counter placed in the Greater Bay Area: a property in central Shenzhen, right across from the Four Seasons Hotel.

The blueprint has underscored a potentially lucrative arbitrage opportunity between sky-high prices in Hong Kong and its cheaper hinterland. “Over time … that disparity will shrink,” Fogle said.
Of the property sectors in mainland China, BPEA Real Estate believes that areas such as logistics, office parks, and retirement homes offer good value. 

BPEA’s Fund II has already backed a platform called Forest Logistics with about $300 million. The Forest Logistics’ team spun out of China’s Ping An Insurance and has lined up five sites so far for development.

“We invest in the operating platform and also in the propco – buy land and build it together,” said Charles Lam, who oversees Greater China investments for BPEA.

Like many of its peers, BPEA Real Estate has spotted that fast-growing e-commerce companies such as Alibaba and JD.com need more logistics facilities to deliver goods quickly to buyers.

BPEA Real Estate is also investing in office parks across China’s major cities. Chinese businesses are looking for cheaper, less polluted, more spacious zones, probably close to a transport hub, Lam explained.

“In the old days, companies were all about work, work, work. Now they want a little bit more life balance. That is why you see more office parks – quality work environment for the employees, with less cost to the employer,” he said.

In December, BPEA Real Estate closed an investment in two unoccupied offices for renovation within a park of 14 buildings close to Shanghai.

HONG KONG WILTS                                                                                                                            

In Hong Kong, home prices have tripled since December 2008 and in terms of affordability, the city-state tops investment bank UBS’s global property bubble index.

Fogle and Lam are, however, both sanguine on the prospects for Hong Kong’s ultra-high-net-worth property market.

Lam has observed that property investors in Hong Kong are becoming wise to the ups and downs of the property cycle and tend not to panic. Investment managers and brokers broadly agree: LaSalle expects residential prices in Hong Kong to adjust, but only moderately – and much less savagely than between 1997 and 1998.

Then, of course, there is all the private equity funds' dry powder looking for a home. Gaw Capital, Goldman Sachs and Blackstone teamed up to buy a retail portfolio from Link Real Estate Investment Trust in December for HK$12.01 billion ($1.5 billion), according to a person familiar with the deal.  

BPEA Real Estate has just launched the sale of an über-luxury development in Hong Kong's Tai Tam district. Sometimes, moving against the crowd pays off. 


¬ Haymarket Media Limited. All rights reserved.
Share our publication on social media
Share our publication on social media