Why BPEA is selling über-luxury HK homes during downturn

Investors want their money back as fears of a property correction spreads. BPEA’s tactics showcase a readiness among real estate fund managers to meet this threat.

The sale is an invite-only event. The Who’s Who of Asian tycoons are viewing the trophy homes in Hong Kong, the world’s most luxurious housing market. Some multi-billionaires were even refused entry to preserve the ultra-exclusiveness of the sale.

The seven new builds on the 32,390 sq ft site are being marketed as family compounds – one for mum and dad, one each for the children. There are only 23 such family compounds in Hong Kong, the largest has 10 houses for just one extended family, according to the analytics of the seller, BPE Asia Real Estate (BPEA).

Such a scarce commodity in crowded Hong Kong has attracted interest from about 70 billionaires, even as the US-China trade war rages and the Chinese mainland’s economic growth splutters.

The timing of that sale hardly looks auspicious given that cracks have started to appear in Hong Kong’s sky-high residential real estate prices. Private home prices across Hong Kong started to dip in August last year for the first time in nearly two-and-a-half years.

But executives at BPEA, the real estate arm of Baring Private Equity Asia, appear determined to reap a profit now rather than hold out for better times. Illustrating its speed to market, the fund bought the site in late 2015 and only finished furnishing the properties in November; typically developments in the city-state take three to seven years, depending on scale, according to broker Jones Lang LaSalle.

Big institutional investors in real estate funds, such as insurance companies and pension funds (also known as limited partners or LPs) want to encourage a faster pace of investments from other property fund managers.

LPs are suspicious that many managers are holding onto struggling properties in the hopes of a rebound that might not materialise. Funds tend to mark-to-market assets relatively infrequently, a practice which smooths out performance but also masks early signs of a downturn.

The danger is that if managers do not act quickly they will be trapped: it could become infinitely harder to sell assets, especially if they are located in particularly illiquid markets and countries, they are large or at a very early stage of development.

As a result, LPs are increasingly focused on distribution to paid-in (DPI) capital, the ratio of money distributed by a fund against the total amount of money paid into the fund. The ratio for Asia-focused funds has gradually fallen from a healthy 1.38x in 2010 to zero last year, according to data from Preqin. 

“[Our thinking is] very much in the same vein as the LPs, to give the capital back as quickly as possible once we have hit our target returns on a transaction,” said Mark Fogle, managing director at BPEA Real Estate in an interview with FinanceAsia.

BPEA Real Estate declined to make its DPI public but Fogle said: “it's pretty high”.

Some LPs said they are even willing to take a hit for the sake of transparency and a speedier turnaround on investments.

“They [fund managers in general] need to be disciplined for that Fund I to generate exits, even if they are leaving money on the table,” said Liam Coppinger, the Hong Kong-based head of Asia private equity at Canadian-headquartered Manulife Capital.


BPEA Real Estate is in the midst of exiting investments made by its $365 million debut fund (including the luxury homes in Hong Kong) and mulling where to invest the $1 billion it raised from global investors for its second fund last year.


BPEA Real Estate’s debut fund invested in nine property assets starting in 2013, four of which it has sold before the fund’s investment period technically ends in April. While its first fund was relatively small, the managers invested across the capital structure and from development projects to renovation.

Not all of the developments in the portfolio are ready for sale. BPEA Real Estate bought a parking lot in Tokyo’s chic Omotesando on which it is building 14 luxury units. Close to Ralph Lauren and Chanel boutiques, the apartment blocks are expected to be five stories high but have only just broken ground. It could, of course, pre-sell some of the flats. 

So far the exits have been very successful, resulting in a net internal rate of return (IRR) offshore, after in-country taxes and currency gains or losses of 21% as of June 30.

A particular hit was an exit in Japan. BPEA Real Estate joint-ventured with the Home Depot of Japan, Ibaraki Prefecture-headquartered Joyful Honda. The fund invested in about 15 of its stores for a short period of time before selling in 2017.

BPEA Real Estate's Mark Fogle

It sold Global Gateway Logistics City in 2015, making a 24% IRR in US dollar terms and net of taxes on a $150 million loan to finance the construction of Grade A office space within the 177-hectare Global Gateway Logistics City in the Clark Freeport Zone north of Metro Manila. BPEA Real Estate also sold Accralaw Tower in Manila for around $75 million at a 31% IRR also net of tax and currency hedging in 2016. 

From a mezzanine deal in backing Korea’s MDT, BPEA Real Estate netted a 21% IRR. 

But these investments were exited during less volatile markets. Property funds putting capital to work now may struggle to replicate such returns if markets deteriorate.

What that means for BPEA Real Estate’s luxury homes in Tai Tam is unclear.

Hong Kong was the world’s most expensive major luxury private residential market in 2017, far ahead of New York, according to a report by auction house Christie's. One giga-mansion, sold for an eye-watering $360 million in 2017 in the Island’s exclusive Peak district, was at the time the most expensive residential transaction on record. The technology manufacturing tycoon, Yeung Kin-man, was the buyer.

In the last three years, Hong Kong has seen 98 über-luxury homes sold for more than $40 million, or an average of $81.3 million, according to BPEA Real Estate’s data, despite years of stamp duties to manage the limited supply of real estate.

“They don't panic. They don't have to sell,” said Fogle, who has been in Asia now f or 27 years, through five property investment cycles and has rarely seen one of these large luxury family homes trading at a discount.  

Billionaires need somewhere to live. 




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