Real Estate Capital Asia Partners (Recap) is a private equity real estate fund with offices in Singapore, Hong Kong, Tokyo, Shanghai and Bangkok. Since it was set up in 2004 it has committed about $450 million of equity across 18 different projects.
Founder Suchad Chiaranussati has a background with Temasek, the Central Bank of Thailand and J.P. Morgan’s proprietary investment and investment banking groups, where he focused on real estate and financial institutions.
Immediately before starting Recap, he spent five years with Westbrook Real Estate Partners as a managing director responsible for Asian investment activities.
What type of investor is Recap?
We are an opportunistic pan-Asian real estate fund and we focus on markets that are somewhat distressed where we can invest with a good risk-adjusted return.
Right now we probably hold one-third each in residential, office/retail and hospitality, but that’s not a target. It is just how it has worked out. We currently have two funds that are fully invested. [Note: media reports suggest Recap is currently in the process of raising up to $400 million for a third fund]. Our investment horizon is typically three to five years.
Our style of investment is to use moderate leverage, a loan-to-value ratio of no more than 50% to 55%, and we like to buy good-quality assets in areas that have some room to improve. We like value-added investments where we buy a half-finished building, improve upon it and then sell it, but we also occasionally do greenfield, like our latest project in Hong Kong, if the return is justified.
Doesn’t less leverage result in lower returns than for your peers?
Not necessarily, and we have proven this in the past. Intuitively, yes, that should be the case, but quite often the fact that we survive downturns well with an increased probability of returning capital, compensates us for the conservative capital structure.
For fund one, which made its investments in 2005 to 2007 in a period that was considered challenging, we have managed to generate an internal rate of return (IRR) in the mid-teens and an equity multiple of close to two times. We will complete our exit from that by early next year. And for fund two, which started investing in June 2009, we are set to generate north of 30% IRR and a decent equity multiple.
One-third of this has been realised, and on that portion we are showing a return of almost 60%. So we caught the market at the right time.
How do you decide when it is the right time to invest?
If you depend on aggressive growth assumptions [to reach the targeted return] and if you yourself doubt that those assumptions can be met, then you should hold back on making the investment. But if you can still generate a return in the low teens in a downturn scenario, you should invest. I have seen the cycles for 15 years and my partners have been around for even longer so we should know when to step back from the market and when to accelerate.
What attracted you to the site you have just broken ground on in Hong Kong?
We believe the valuation is quite reasonable and we like the continuing development of the neighbourhood. It has good schools within walking distance and with the extension of the subway [due for completion by 2014] this particular area is going to improve and grow.
The site came with the planning permit, but we hired a new architect and made adjustments to the plan to make it a more attractive building. When finished, it will have 28 stories with 41 residential units and retail areas on the ground floor. We are planning to launch pre-sales early next year and expect to finish the construction in the first half of 2014.
The selling price for a similar property in this neighbourhood is about HK$15,000 ($1,930), and we are probably looking at a gross margin of 40%. We think that is a risk worth taking as we don’t believe the market is going to fall by 40%.
Isn’t it unusual for a private equity fund to invest in a residential property?
Yes, but this is due to a lack of opportunity rather than a lack of interest. Usually, residential properties are developed by the major developers and some local medium- and small-sized developers. They act very fast and understand the market very well. One reason why you don’t hear of many opportunity funds investing in residential properties, is because often we have a valuation process that slows us down. But it is well-known that residential developments in Hong Kong can be highly profitable and we would like to do more. We just have to find opportunities that allow us time to review them and to understand the risks.
That said, Recap is a private partnership so we are less bureaucratic and have total discretion over our capital — how to invest it and what to invest in. We hope this will help us make quicker decisions.
Where do you see investment opportunities right now?
We currently see opportunities in Japan, Korea and China and we are very active in Thailand, purely because our relationships there are strong. In Hong Kong, we are keeping a keen eye, because the market has moved up and valuations are quite high at the moment. But we have risk appetite to invest in Hong Kong and we are hopeful that there will be some opportunities. I have a cautious but quite constructive view on Hong Kong and I believe the government will achieve a policy of moderating price expectations. We like prices to increase in an orderly manner. We don’t like it when they spike up and create unnecessary volatility.
Japan is one place where you can make an investment without having to price in a lot of growth. Interest rates are relatively low and financing is available, so you are able to buy cash flowgenerating assets that have a positive spread, i.e. the yield that you receive from your income far exceeds your borrowing cost. That is exciting. For the past 12 months we have been active in the hospitality sector in Japan, because that sector is most distressed. The availability of capital for this sector also remains restrictive.
China is more complicated to understand. In 2007 we bought a small office building in Beijing, which we have since sold at a good return. And right now we are watching the market with great interest. The tightening of financial conditions will present interesting opportunities for people who understand the risks and are willing to take risks. We are looking at places like Chongqing, Tianjin and Dalian.
In Korea, the recent set-back in real estate valuations and the tightening of the financing market for real estate, especially in the commercial sector, will present some opportunities also.
Have you changed your strategies at all in light of the financial crisis and the fact that we may be moving into another one?
Our strategies have not changed, but our view of the market may change. Six months ago, I was a little concerned about the market rising too fast. Right now, with the crisis in Europe I think there will be more investment opportunities.
We are looking at opportunities for our next fund with a lot of excitement.
