[SINGAPORE] ARA Asset Management, the manager of listed property trusts and private equity funds, is looking to deploy some of its dry powder in development projects in Australia and raise its firepower in South Korea by creating more fund products.
This marks further diversification from the saturated Chinese market, although China remains a key market for the pan-Asian fund manager, backed by Asia's richest man Li Ka-shing.
Investing into Australia and South Korea has become feasible given ARA's physical presence in these markets through recent acquisitions, ARA Private Funds chief executive Ng Beng Tiong told The Business Times.
The private equity arm's interest in Australia follows Suntec Reit's entry last November, when the ARA-managed Reit acquired land and property in North Sydney for A$413.19 million (S$480 million) to be developed into a Grade-A commercial tower. In South Korea, ARA acquired Macquarie Real Estate Korea Limited in April, which manages two privately held Korean Reits comprising office properties worth a combined 588.4 billion won (S$708.6 million).
ARA Asia Dragon Fund (ADF) III, an opportunistic fund that hopes to raise up to US$1 billion in the fourth quarter, could put some of its money to work in South Korea - beyond the primary markets of Singapore, Hong Kong, China and Malaysia under the preceding ADF I and ADF II. These opportunistic funds target an internal rate of return of above 20 per cent over a holding period of three to five years.
Mr Ng said that ARA could buy into development assets in Australia through its Summit Development Fund (SDF), which has a committed capital of US$80 million and a mandate for projects in South-east Asia and Australia.
"We are looking at riding on development profits, which is a build-and-sell strategy," he added. Mr Ng noted that development risks in Australia are relatively lower as construction usually starts only after a certain level of pre-commitments is achieved.
The investor-cum-operator model of having local teams to run the funds and manage the properties has gained traction, going by ARA's success in attracting top US funds, including California Public Employees' Retirement System (CalPERS) and Teacher Retirement System of Texas.
Arguably, it was ARA's experience in China - where it had earlier outsourced the management of its properties to an international property manager only to end up managing the properties itself during difficult times - that expedited its move to bring property management in-house. Today, more than 80 per cent of its over 1,000-strong team are involved in managing the properties.
The 2008-2009 global financial crisis (GFC) ironically sweetened the ground for Asian fund managers, Mr Ng said. "While many Western fund managers were strong in deal origination and structuring, they would typically maintain a small team and outsource property management to third-party service providers. When times are bad and challenging, such outsourcing arrangements may not be effective and their asset strategy may not be executed as originally planned.
"After the GFC, quite a number of LPs (limited partners) saw the advantages of putting their money with Asian managers with strong local teams and track record. That gave us the chance to double our AUM (assets under management) from the GFC," said the former investment banker. As at end-March, ARA's AUM stood at S$25.4 billion.
In its key market China, ARA is still on the lookout for investment-grade offices and retail malls. It hopes to tap local Chinese capital through renminbi funds to invest either within or outside China. The fund will likely target institutional money and plough into Grade-A assets, with a possible exit through a Reit IPO.
In the future, ARA could launch an onshore Reit when the framework for Reit listing in mainland China is in place, Mr Ng said. Currently, China's first exchange-traded Reit that started trading in Shenzhen in May works more like an asset-backed security than the Reit that investors are familiar with in developed markets.
ARA had earlier sought to list Dynasty Reit in Singapore, an offshore renminbi Reit comprising Chinese commercial properties, but the plan was botched when the stock market went down in late 2012. ARA has since reverted to its original strategy of selling the assets piecemeal.
"If the opportunity arises to do an offshore RMB Reit, we will do so, but again, it is partly driven by the market demand," Mr Ng said. "The onshore RMB Reit may come along, bearing in mind there is such a pent-up demand for investment products in China."
Mr Ng opined, however, that in many Chinese cities, the local governments' predisposition towards mixed developments - which help to generate recurring tax revenues - and developers' shift towards commercial properties have contributed to an over-supply of retail properties and a fragmented retail market in China.
But investment-grade properties are still under-supplied, Mr Ng said. "A number of developers, whether they are mainland Chinese or Hong Kong developers with a large portfolio, are looking at de-risking their balance sheets and letting go of some of their properties, which previously would not have been available."
"Experiential malls" with their good locations, right tenant mix, and a strong residential and office catchment will draw in the crowds, Mr Ng added, pointing to ARA's Dalian Roosevelt Plaza, a 184,980-sq-m shopping mall that draws in close to a million footfalls a week.
ARA has so far invested in offices and malls in first and second-tier cities such as Shanghai, Nanjing and Dalian, and is slated to open another mall next month in Beijing's Tong-zhou district.