PE investments in Asia’s real estate touch 5-year high at $27b in 2017

A woman stands on an overhead bridge near the construction site of "Kaisa Plaza", then named "Changan No. 8" (L), on a hazy day in Beijing's central business district in this July 28, 2012 file picture. REUTERS/Jason Lee/Files

Private equity deals in Asia’s real estate sector touched a five-year high in 2017 at $27 billion across 79 deals, led by deal activity in China and Hong Kong.

The jump in deal value last year was helped by the $8.1-billion acquisition of a portfolio of 16 land development sites by Vanke from Guangdong International Trust and Investment in June last year.

PE real estate deal value last year was double that of 2016’s $13.6 billion, per a recent Preqin report.

In comparison, the sector recorded 74 deals worth $6.3 billion in 2013. While the global real estate deal value has increased 1.2x since 2013, in Asia, deal value has seen a larger increase of 3.3x in the same period.

PERE Deals Completed in Asia, 2013 – 2018 YTD (As at March 2018)

Region-wise Spread

Within the region, Greater China (China and Hong Kong) accounted for more than two-thirds of deal value in 2017 and continues to do so in 2018 YTD. Assets in Northeast Asia, on the other hand, ceded share within the region. Deals in this part of Asia represented 55 per cent of overall deal value in 2013 but came down to just 18 per cent in 2017.

Oliver Senchal, Head of Real Estate Products at Preqin said, “The private equity real estate deal market has traditionally been dominated by activity in the established financial markets of North America and Europe. However, as Asian economies develop rapidly into global powerhouses, increasing amounts of capital is being dedicated to real estate investments there. China and Hong Kong, in particular, have been a focus, in part driven by a rapidly expanding need for office and commercial spaces to serve a burgeoning middle class and a diversifying economy.”

Within Asia, six nations — China, Hong Kong, Japan, South Korea, Singapore, and India — constituted 98 per cent of total private equity real estate deal value in 2013. Southeast Asian countries represented a mere 5 per cent of total deal value in that year.

Last year, Southeast Asia improved its share to one-fifth of the total deal value and already accounts for one-third of it as at March 2018.

Aggregate Value of PERE Deals Completed in Asia by Location, 2013 – 2018 YTD (As at March 2018)

Meanwhile, the overall deal activity in the sector was dominated by domestic buyers, who accounted for as much as 90 per cent of aggregate deal value in 2017, which is an indication of an increasingly active fund management and investment industry, Senchal said.

Deals involving domestic buyers have also been larger averaging at $445 million in 2017, compared with $230 million for international transactions.

The trend looks set to continue as the number of Asia-based real estate investors has almost doubled since 2015, and now exceeds 600, Senchal added.

Property Type

Transactions for office and retail assets accounted for roughly half of Asian private equity real estate deal flow, in terms of both number and value. Mixed-use assets represented a greater proportion of deal value than of the number of deals, driven by the typically higher prices of Asian mixed-use property given the larger size and applications of these assets.

Number of PERE Deals Completed in Asia by Property Type, 2013 – 2018 YTD (As at March 2018)

Exit Scenario

Greater deal-making activity was accompanied by record levels of exits in the region. Both 2016 and 2017 saw more than $14 billion in exits in Asia, almost double the level seen in any previous year.

While 2016 marked a record year for exits in Asia with 58 assets divested by fund managers, the number of exits decreased in 2017. The average exit, however, increased in a seller-friendly market, in line with global trends and highlighting the impact of higher valuations in the market. There were three assets exited for over $1 billion in 2017.

PERE Exits in Asia by Location, 2013 – 2018 YTD (As at March 2018)

Investor Appetite

With Asian economies expanding at a faster rate than their North American or European counterparts, alongside increasing urbanization and positive demographic trends, there are significant opportunities for further private investment, Preqin said.

At the same time, it remains a challenge to convince institutions that the risks are worth the reward, particularly when concerns arising from high pricing are rearing their head in the Asian market, the report said.

Preqin interviewed over 240 investors to understand their appetite for real estate investment. When asked which regions they felt presented the best opportunities in the market, Asia was only third on this list (cited by 19 per cent), behind North America (63 per cent) and Europe (49 per cent).

Regions that Investors View as Presenting the Best Opportunities