US$40 billion of property funds expiring in next two years

Singapore

AMONG the 84 Asia-Pacific real estate funds expiring between 2013 and 2016 is a clutch of 50 funds worth US$40 billion in gross asset value and expected to terminate in 2015 and 2016.

CBRE, which referred to this in a report on Monday titled The Great Wave of Fund Expiration, said a typical fund has a life of eight years and that 2013 marked eight years from the pre-financial-crisis boom in real-estate fund activity, at the time driven by a heady mix of liquidity, capital market fundamentals and expectation of high risk-adjusted returns.

The problem with having so many funds terminating in 2015 and 2016 is that the market will be able to absorb only around 75 per cent of the liquidity created by the disposals of closed-end funds, it said.

It based this estimation on historical disposition levels and the current investment appetite.

Of course, this estimation also depends on factors such as the fund-raising environment, the participation of institutional investors and the quality of the assets in the portfolios. But what it means is that, in the coming two years, there will be a shortfall of around US$10 billion between the potential liquidity of the terminating funds and the market's ability to absorb these assets.

Nick Crockett, CBRE's executive director of capital advisors for the Asia-Pacific, said: "These assets could therefore face difficulties in finding buyers or in being disposed of at desirable terms."

While this will not shock the regional real-estate market significantly, it has implications for fund managers, who will have to consider how they should position their funds and what options they have when their funds have terminated, CBRE said.

A review of the assets available for disposal by real-estate funds ending their life span shows around 65 per cent located in China, Japan and Australia.

Each geograhy comes with its challenges, said Mr Crockett.

In China, amid an over-supply of office and retail properties and a tightened lending environment, funds will have to contend with investors who are less willing to pay high prices, as well as competition from Chinese developers which are also disposing their own assets to boost their balance sheets.

In Japan, funds may have to make do with disposals at prices below cost in some cases, as well as wrestle with the question of whether extending their life span will improve returns as property prices return to an upward cycle.

In Australia, opportunistic funds will have to deal with a mismatch between the quality of assets they are holding and the current strong investment appetite for high-quality core products in Australia.

Liquidation may therefore not be the best option for funds scheduled to expire in 2015-2016, CBRE said.

Besides delaying their termination, they can also evaluate alternatives such as a secondary trading or a restructuring, for example, by replacing a key individual or fund manager or by changing the mandate or style of the fund - going from being close-ended to being open-ended, for instance; an initial public offering (IPO) is also a possible alternative.

Of these, an IPO exit route would be unusual for funds as the listing process is time-consuming and the transaction fees would be higher than directly selling the product.

IPO exits are also only viable in markets with well-developed Reit structures, such as in Singapore, Hong Kong, Japan and Australia. Reit markets are either underdeveloped or non-existent in most emerging Asian markets, although a recent clarification on tax liaibility for Indian Reits might change things there, CBRE said.