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Invesco eyeing real estate in China, Japan

Global fund firm poised to make first direct investments in Asia property

(HONG KONG) Global fund firm Invesco hopes to make its first direct investments in Asian property this year,  with Chinese housing and Japanese offices at the top of its wish list as global economic uncertainty throws up new buying opportunities.

Cheng-Soon Lau, who heads Invesco’s Asia property investment unit, said his patient approach to buying in Asia could pay off.

‘The markets have pulled back, so for those who have not invested in the last year, this year might be better,’ he said.

He declined to comment on fund raising, but Reuters reported last year that the unit of Anglo-US fund manager Amvescap was raising a US$300 million, seven-year, closed-end fund for Asian property.

Because of a stock market slide, some Western investors suddenly found that their allocations to physical property were higher than expected, Mr Lau said. But many were still keen on Asian markets that lag Western property cycles.

‘Investors who want high returns see these markets as attractive,’ Mr Lau said in an interview. ‘There’s appetite, but people are still re-evaluating at this point.’

He pointed to poorly performing Japanese real estate investment trusts (Reits) as an example of new buying opportunities.

Reits, which pay most of their rent as dividends, have been popular since they were introduced to Japan six years ago because they yielded more than bonds, while an upturn in property values and rent often produced fat share price gains.

But although the Tokyo property market remains strong, the US sub-prime crisis and global credit crunch provoked a sell-off in Japanese Reits, and many are trading below net asset value (NAV) and could be willing to offload buildings to lift investor returns.

Japan’s Reit index has dropped 15 per cent this year, compared to an 8.5 per cent fall in the broad market.

‘I think some of them will be looking to sell some assets,’ Mr Lau said of Japanese Reits. ‘Smaller ones are under pressure.’

Housing Reits such as Nippon Residential Investment and Japan Single Residence are trading at 30 per cent discounts to NAV, while some commercial trusts, such as Top Reit and Creed Office, are at discounts of 10-20 per cent.

Reits tend to trade above NAV because of favourable tax treatment and a premium for liquidity – units in trusts are easier to buy and sell than whole buildings.

With competition for top-notch Tokyo offices driving up prices and making assets scarce, Mr Lau said he liked Bgrade office blocks that could be revamped to give higher returns.

He was also upbeat about residential development in China, saying that a raft of government measures to cool markets would probably drive many developers out of business and open the field to new players such as Invesco.

‘There’s a fair bit of consolidation going on,’ Mr Lau said, adding that Invesco wanted to invest in Dalian and Tianjin, as well as in the country’s biggest cities Shanghai, Beijing and Guangzhou.

‘Notwithstanding this speed bump, over the long-term, second-tier cities will do pretty well.’ With average home prices doubling since 2002 and high-end apartment prices rising much further, Beijing has tried to cool markets with curbs on supply and demand.

China has raised interest rates regularly, imposed taxes on capital gains and land appreciation, stopped nonresidents buying apartments, told banks to curb loans to developers and employed a ‘use it or lose it’ policy to deter land speculation.

The measures hit housing market transactions in some cities at the end of last year, including Guangzhou, Shanghai and Shenzhen.

With many developers struggling to recycle money from apartment sales to finance new projects, analysts believe thousands could go bust.

 

Source: Reuters (Business Times 19 Feb 08)

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