Prime real estate markets around the globe are limited in number and are characterized by vibrant demand from tenants, owners, and consumers. They tend to be supply-constrained due to high land costs coupled with difficult permitting and planning regimes. Prime assets in prime markets are also consistently in high demand for a number of reasons, such as locational advantage, prestige, attractive leases to credit tenants, stable income, and stable or increasing value over long periods. Consequently, they attract worldwide investor capital. In addition, research indicates that capitalization rates for prime properties are less volatile than secondary assets. With all those positive attributes, it’s no wonder prime assets in prime markets are in high demand from investors.
Access to prime global real estate markets and prime assets within them has traditionally been targeted through direct investment in individual properties or through participation in a private commingled fund. To date, however, it is our belief that no one has accumulated a truly diversified, high-quality portfolio of such holdings in the Asia-Pacific region. Why? Primarily because prime properties in prime markets in Asia are thinly traded, if they are traded at all. So how does an investor gain access to all the benefits of owning prime assets in Asia? We believe access to prime markets and prime assets can be accomplished utilizing publicly listed real estate securities. Let’s look at some examples as to how such a strategy could be implemented and why listed property companies need to be used.
Looking at the Hong Kong, Tokyo, and Singapore office markets as an example, the highest-quality buildings are controlled by listed entities or private families that have owned the land for generations in some cases. Needless to say, they have no motive to sell. In the accompanying charts you can see the dominance of listed entities in the most expensive buildings in Singapore and Hong Kong.
Of the top ten assets in Singapore, eight are owned by property companies. In Hong Kong, nine of the top ten are owned in whole or in part by listed property companies. A private direct investor could wait a lifetime and never have the opportunity to acquire any of the top office buildings in either of these markets. However, an investor could acquire a portfolio of the public property companies at scale in a matter of days with minimal transaction costs.
Now let’s take a look another market in the region as well as a different property type. If someone went down to Australia and asked retail property investors which are the top regional malls, the most productive shopping locations in the country, you would likely hear some combination of Westfield Sydney, Westfield Bondi Junction (Sydney), and Chadstone (Melbourne). As with Hong Kong and Singapore, a private investor would have to wait a long time to own these assets directly as the Westfield assets are owned by listed entity Scentre Group while Chadstone is owned by Federation Centres, another listed property company. Neither has an incentive to sell, since public entities are designed to last in perpetuity.
Singapore’s Grade-A Buildings
Hong Kong’s Grade-A Buildings
Another impediment to owning prime assets directly is that they tend to be large and lumpy. In fact, the sheer size of the value in some of the trophy assets can be astounding. For example, Chadstone was last valued at the end of 2014 at more than A$3.6 billion. While there are some large direct investment vehicles that can afford to buy an asset of that size, the pool of eligible buyers is small. Heading back to Hong Kong, the pool of potential buyers is even smaller when we look at Wharf’s Harbour City, where just the retail portion of the large complex is valued at more than $12 billion. Meantime, the large size of the public market allows investors to accumulate stakes in any range of potential size, from individual investors all the way up to large institutional investors.
Tying this all together, the main benefits of a strategy that uses public real estate securities to target prime markets and prime assets are three-fold:
- Exposure to world-class property assets in prime markets that are unavailable or difficult to access in the private direct market
- Diversification over a large pool of markets, property types, and management teams
- Potential for attractive risk-adjusted returns in a liquid format
Instead of trying to accumulate a portfolio directly, using listed securities provides a useful array of possibilities for real estate exposure seeking global prime property exposure, especially in the Asia-Pacific region.