July 28, 2008

Private equity real estate funds in Asia still booming

They raised more cash this year and helped stave off property slump

By Grace Ng

THE global financial turmoil has deflated the private equity boom in Asia but regional real estate buy-out funds are still going strong.

Private equity real estate funds - many holding Asian assets - raised 32 per cent more cash in the first half than in the same period a year ago.

This contrasts with Asian private equity funds, which have seen the amount of funds raised slump 21.5 per cent in the first half of this year to US$19.2 billion (S$26.1 billion), according to Asia Venture Capital Journal.

Private equity funds typically invest in private companies or take control of listed firms. Private equity real estate funds invest in property and may get involved in development through joint ventures with local players.

Recent data suggests that the funds are sufficiently cashed up to keep investing in regional markets, including Singapore, and so help stave off a severe property slump, said some analysts.

In the first five months of this year, 13 new Asia-focused private equity property funds were set up and raised a combined US$13 billion, said research firm Private Equity Intelligence (Prequin).

For the full year, Prequin said 78 funds are looking to raise US$81 billion for Asian property investments.

Property funds were particularly active in Singapore in the first half of last year, but the market has since quietened, noted Mr Nicholas Mak, Knight Frank's director of research and consultancy.

The funds helped drive up prices in high-end residential property as well as certain commercial segments. They also bought tens of units - or even whole buildings - at bulk discount prices, said a Singapore-based fund manager.

There had been some concern that the credit crunch and the slowing property market here would prompt such funds to cash in their investments, and so bring down prices further, he noted.

But these fears look unfounded as the recent fund-raising numbers suggest that private equity real estate funds are not suffering from a drastic drop in liquidity.

'Real estate private equity is still going pretty strong,' said Mr Mark Pawley, chief executive of Singapore-based private equity firm Oxley Capital. He noted that Singapore was a 'hot market last year' for private equity players, and certain funds may still allocate fresh funds here - albeit much less than last year.

For instance, two new Asia-focused entities - the US$3.9 billion fund raised by Macquarie Bank unit MGPA and Keppel Land's US$1.2 billion fund - will allocate part of their portfolios to Singapore.

Oxley Capital is still looking at some opportunities for relatively 'small deals' in residential units here.

It will also help to grow the portfolio of the Cambridge Industrial Trust (CIT), an industrial property Reit. Oxley has a stake in the manager of CIT.

However, some funds may exit their Singapore investments if they have hit their profit targets or they may shift their focus and strategy to other markets such as Australia, Japan and Vietnam, said Mr Pawley.

Funds are looking to snap up so-called 'distressed assets' - properties whose prices have plummeted as their developers may have encountered financial difficulties - in these markets, which have been affected by a housing slump.

Kim Eng analyst Wilson Liew noted that volatile markets have prompted some Singapore property players to raise funds from institutional rather than retail investors.

Fraser & Neave's unit Frasers Hospitality, for instance, has said that it is not the right time to list a real estate investment trust (Reit). Instead, it is tying up with private equity players to buy serviced residences.

This year, CapitaLand raised US$1 billion for its Raffles City fund focused on property in China cities, and a further 500 million yuan (S$100 million) for the Citic CapitaLand Business Park fund.

Other Singapore-based players involved in real estate private equity include ARA and Pacific Star.

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