Prime Asian buildings in prime locations are rarely traded, so are difficult for investors to access directly. But publicly listed real estate securities offer a way for investors of all type and size to gain exposure to such property.
Prime real estate markets around the globe are limited in number and are characterized by vibrant demand from tenants, owners, and consumers. High land costs coupled with difficult permitting and planning regimes mean supply in these markets is constrained. Prime assets in prime markets are also consistently in high demand for a number of reasons, including locational advantage, prestige, attractive leases to credit tenants, stable income, and stable or increasing value over long periods.
In addition, research indicates that capitalisation rates for prime properties are less volatile than secondary assets. With all these positive attributes, it’s no wonder that they attract investor capital from all over the world.
Prime global real estate markets and prime assets within them have traditionally been accessed through direct investment in individual properties or through participation in a private, commingled fund. To date, however, no one has accumulated a truly diversified, high-quality portfolio of such holdings in the Asia-Pacific region, 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 prime markets and all the benefits of owning prime assets in Asia? In our experience, it can be accomplished by using publicly listed real estate securities.
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, in some cases, owned the land for generations. Needless to say, they have no motive to sell.
Of the top ten assets in Singapore (those with the highest rents), 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 get the opportunity to acquire any of the top office buildings in either of these markets. However, by buying securities, an investor could acquire a portfolio of the public property companies at scale in a matter of days with minimal transaction costs.
Turning to another market in the region as well as a different property type, if someone went to Australia and asked retail property investors what the top regional malls were — the most productive shopping locations in the country — they 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.
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$3.6bn ($2.6bn). 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.
In Hong Kong, the pool of potential buyers is even smaller when we look at The Wharf’s Harbour City, where just the retail portion of the large complex is valued at more than $12bn.
Accumulation of stakes
Meanwhile, the large size of the public market allows the accumulation of stakes in any size, allowing access 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 threefold:
- 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 acheiving 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 investors seeking exposure to prime property around the globe, and especially in the Asia-Pacific region.