LaSalle, Gaw, CPPIB, Invesco See Asia Real Estate Repricing

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LaSalle Investment Management, Gaw Capital Partners, CPP Investments, and Invesco Real Estate see opportunities to acquire properties at attractive prices as Asian markets begin to reset, according to executives from the institutional investors who spoke at Mingtiandi’s Hong Kong Forum on Tuesday.

In a keynote panel which opened the event, Claire Tang, head of Greater China and co-chief investment officer for Asia Pacific at LaSalle agreed with Rebecca Lam, a managing director responsible for Greater China at CPPIBm that the mainland China market has surprised on the upside with falling interest rates and continued asset repricing. Tang said yields in the rental housing sector have now reached highs not seen in a decade.

“The yield spreads (in rental residential) are getting very, very attractive given that you have distress on one side in terms of asset repricing, and then also lower debt costs,” said Tang. “You’re seeing spreads that are probably at the highest in the last 10 years and then rents are relatively stable compared to other markets.”

In Hong Kong, Kenneth Gaw, president and managing principal with Gaw Capital Partners, said the real estate market has not yet reached a bottom, while pointing out that the high interest rate environment creates windows of opportunity in the private debt space, enabling investors to fill in a financing gap left as big banks pull back on real estate lending.

Resilient Domestic Capital

CPPIB’s Lam said that the US Federal Reserve keeping interest rates elevated for longer than some investors anticipated has slowed the pace of real estate transactions in Asia Pacific, although CPP Investments, which manages Canada’s largest public pension fund, still sees pockets of opportunity in some of the more resilient markets in the region.

: Kenneth Gaw, president and managing principal, Gaw Capital Partners

: Rebecca Lam, Managing Director, Real Estate, CPP Investments

: Claire Tang, Head of Greater China, Co-Chief Investment Officer, Asia Pacific, LaSalle Investment Management

: Calvin Chou, Managing Director, Head of Asia Pacific and Co-Chief Investment Officer, Invesco Real Estate

“China actually surprises us to the upside, in that interest rates keep falling, so that it’s actually now producing quite interesting yield spreads for us,” she told the forum, which was sponsored by Yardi.

As a long-term institutional investor, Lam said the Canadian pension fund remains bullish on Chinese property strategies supported by the country’s economic development trends, such as logistics, while staying optimistic about the prospects for sectors like rental residential.

“We’ve always been very thematic in our investment approach. We were a big investor in logistics so we’ll continue to be looking at opportunities in this sector where I think the country offers interesting, good, strong fundamentals,” she added. “Rental housing in certain markets like China could still be very scalable and could still be a very interesting yield play given where interest rates are and the very stable rental profile in the sector.”

The depth of domestic capital in China also presents meaningful exit opportunities for investors in rental residential, Lam said.

Tang shared a similar view, noting that domestic capital in China, including some insurers and state-backed players, have stayed active in acquiring properties during the country’s property downturn.

Commercial real estate transactions in China fell 23 percent year-on-year to RMB 44.7 billion ($6.18 billion) in the first quarter, with domestic companies and developers driving many of the deals, according to CBRE.

More Struggles For Hong Kong

Calvin Chou, managing director and head of Asia Pacific at Invesco Real Estate, said his firm sees some of the steepest price corrections happening in Hong Kong with some properties now trading at 30 to 50 percent below benchmark prices.

Calvin Chou of Invesco Real Estate

With cut-rate deals happening like the loss-making sale of a Sheung Wan commercial block by Goldman Sachs and Hong Kong’s Kailong Group in March, Chou sees property prices in Asia’s world city quickly resetting.

“Hong Kong is probably the place where we’ve seen a very large price correction. So the trades that have happened are happening at pretty large discounts that we used to see or what the asking prices were,” Chou said.

The impact of price changes may still be limited, however, by geopolitical factors which have been keeping some investors on the sidelines.

“I think Hong Kong is probably going to be the most interesting market to track to see if foreign capital will come back to Hong Kong in any kind of ratio to where it was kind of pre-geopolitical tensions,” he added.

Private Credit on the Rise

With interest rates likely to stay higher for longer, Kenneth Gaw’s team sees continuing opportunities for private credit investments, a strategy under which his team has already deployed $1 billion over the past three years, with Hong Kong playing a key role.

“When you have this situation where you have a high-interest rate and cap rates are not there yet, I think private credit is a good transition kind of investment strategy,” he said, noting that more opportunities are likely to arise as markets fall further into distress.

“I do think there’ll be more and more distress coming to Hong Kong, even for some of the local Hong Kong families that I’ve been seeing lending money in the private credit market, who are now coming out to the market borrowing. So that’s that’s a telltale sign,” he added.

Gaw Capital has identified private lending as among the key target segments for its seventh Gateway Real Estate Fund, which reached a final close on $3 billion in capital commitments in June of last year.

Up Next: Singapore, Japan

The keynote panel kicked off Mingtiandi’s Hong Kong Forum on Tuesday, which attracted over 200 industry executives to the event at the Ritz-Carlton Hotel in Kowloon.

The opening discussion was followed by a keynote interview with Link REIT chief executive George Hongchoy, who shared his vision for the trust’s Link 3.0 strategy, with the day also featuring an interview with former Grosvenor Asia head Ben Cha, who has recently launched a new retail venture Serakai.

The full-day event closed with a spotlight interview with Warburg Pincus managing director Qiqi Zhang and Craig To of rental housing platform VLinker, who shared details of how their companies have worked together to build a 40,000 room rental apartment platform in Shanghai.

Following the Hong Kong event, the Mingtiandi team will hold its third annual Singapore forum in in September, before heading to Japan for its inaugural Tokyo forum in November.