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THE GREAT WAVE OF
FUND EXPIRATION WHAT ARE THE OPTIONS
BESIDES TERMINATION?
CBRE GLOBAL
RESEARCH AND
CONSULTING
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Contents
4 Introduction
5 Strong fund raising activity prior to the Global Financial Crisis
7 Fund life termination; fund disposition continuing
8 Will the market be able to absorb the wave of disposals?
9 A shortfall exists; what are the other external factors to consider?
12 How can fund managers move forward?
15 Conclusion
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3 © CBRE Ltd. 2014 CBRE GLOBAL RESEARCH AND CONSULTING
THE GREAT WAVE OF FUND EXPIRATION
Introduction
One Page Infographics
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4 © CBRE Ltd. 2014 CBRE GLOBAL RESEARCH AND CONSULTING
THE GREAT WAVE OF FUND EXPIRATION
Prior to the Global Financial Crisis (GFC) Asia Pacific experienced a boom in real estate fund formation
driven by a heady mix of liquidity, strong capital market fundamentals and expectation of high risk-
adjusted returns. Fund raising activity during the ‘vintage’ period between 2005 and 2008 created a
high water mark in terms of capital raised. CBRE data shows that around US$91 billion of capital was
raised by 184 private real estate funds in the region during this period.
Among these funds, 91% were close-ended funds with a fixed life span (refer to Chart 1). A fixed life
span means that the timing of an exit is crucial. As a consequence, the discipline and skill of fund
managers to administer fund formation, risk management, investment process and subsequent
divestment is the ultimate driver of performance.
Introduction
Chart 1: The typical life of a private real estate close-ended fund in Asia Pacific
Source: CBRE Research, September 2014.
Note: The above chart reflects CBRE views of the typical life of a private real estate close-ended fund in Asia Pacific and should be used for reference only.
The capital raised by funds between 2005 and 2008 was invested shortly thereafter and created a large
pool of liquidity in the Asia Pacific direct investment market. Private equity funds purchased US$32 billion
of assets in 2007 alone, a figure 53% higher than the second peak recorded in 2013 (US$21 billion)
(Chart 3).
Most funds in Asia Pacific – particularly the opportunistic and value-added funds that are so prevalent in
the region – have a lifespan of eight years on average, according to the ANREV Fund Database.
However, in China, some opportunistic funds have a shorter lifespan of six years.
Based on the typical fund life of eight years, CBRE believes that approximately 84 funds are scheduled to
terminate between 2013 and 2016. CBRE analysis of the characteristics of these funds reveals that there
will be a peak in fund termination in 2015 and 2016, when approximately 50 funds with a gross asset
value (GAV) of about US$40 billion will expire.
With reference to historical disposition levels and current investment appetite, CBRE forecasts that the
market will only be able to absorb around 75% of the liquidity created by the disposals of close-ended
funds scheduled to expire in 2015 and 2016. This scenario has critical implications for fund managers
over how they should position their funds and the options they should consider beyond termination. This
leads to two major issues which need to be addressed:
• How should fund managers position themselves in the current environment?
• Are there any alternatives to fund termination that could assist investors in securing returns?
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5 CBRE GLOBAL RESEARCH AND CONSULTING © CBRE Ltd. 2014
THE GREAT WAVE OF FUND EXPIRATION
CBRE data shows that around US$91 billion of capital was raised by private real estate funds between
2005 and 2008, a figure two times higher than the amount raised in the four years after the GFC.
Among them, 91% were close-ended funds (166 funds in total). Whilst open for debate, the influx of
capital and resulting acquisitions can be attributed to the following:
Strong fund raising activity
prior to the GFC
Chart 2: Total capital raised by private equity real estate funds in Asia Pacific
Source: CBRE Research, September 2014 .
0
10
20
30
40
50
60
70
2005 2006 2007 2008 2009 2010 2011 2012 2013
0
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35
Num
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nds
US$ billion
Total amount raised (LHS) Total number of funds (RHS)
Who was investing?
Underpinned by relatively strong performance compared to the rest of the world prior to the GFC and
backed by the Asian growth story, Asia Pacific real estate quickly emerged as a popular asset class
amongst investors from Europe and North America. International investors wanted to take advantage of
the upswing in the property market in the region whilst at the same time diversifying their real estate
portfolios. There were marked differences in terms of investors' preferences prior to the GFC. A large
proportion of European investors preferred to invest into value added strategies whereas American
investors opted to look into opportunistic investments. As a result, most opportunistic funds raised
during the period were by US-centric global fund managers.
Where were they buying?
Funds making acquisitions between 2005 and 2008 displayed a strong preference for assets in major
markets in the region such as Australia, Japan and China. The onset of the GFC triggered capital
values of assets in the region to drop substantially and rapidly. The CBRE Asia Pacific All-sector Capital
Value Index declined by 20% between Q2 2008 and Q2 2009. Of the aforementioned destinations,
Japan and Australia were affected the most, with significant corrections in capital values recorded
during the period. Capital values in Japan fell by nearly 40% and declined by around 20% in Australia.
Capital values later rebounded but continue to remain below pre-global financial crisis levels in a
number of markets, including Japan.
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6 © CBRE Ltd. 2014 CBRE GLOBAL RESEARCH AND CONSULTING
THE GREAT WAVE OF FUND EXPIRATION
Chart 3:Total direct acquisitions by private equity real estate funds in Asia Pacific
Source: CBRE Research, September 2014.
What was the risk appetite of the market?
Funds raised between 2005 and 2008 were primarily focused on the opportunistic risk segment, accounting
for 80% of total capital raised by close-ended real estate funds. These funds invest in non-income producing
investments and utilise high leveraging as a capital management ‘tool’ to drive alpha1.
However, taking on higher risks associated with opportunistic strategies may not necessarily result in higher
returns. According to the ANREV Annual Index (Chart 4), opportunistic funds incurred a loss of 2.6% per
annum on average for the period between 2009 and 2013. This is in contrast to an average annual return
of 5.5% reported by value-added funds and the 5.7% recorded by core funds during the same period. The
weak fund performance reflects the fact that many of these pre-crisis funds have not achieved the desired
returns for investors.
In addition, about 78% of these pre-crisis funds were pan-Asia funds which invested in multi-sector multi-
country markets, which added an additional layer of complexity to running such a portfolio.
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
0
5
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35
2005 2006 2007 2008 2009 2010 2011 2012 2013 H1 2014
US$ billion
Real estate fund acquisitions (LHS) Real estate fund acquisitions as % of total (RHS)
1 According to the ANREV fund definition document published in January 2014, opportunistic funds are those with an allocation of
over 40% of their target percentage to non-income producing investments; over 25% of their target percentage to (re)development
exposure; and a maximum LTV ratio of more than 60%.
-30%
-20%
-10%
0%
10%
20%
30%
40%
2006 2007 2008 2009 2010 2011 2012 2013 2009-2013
Tota
l retu
rn
Core Value Added Opporuntistic
Chart 4: ANREV non-listed real estate fund total return index
Source: ANREV Annual Index 2013, April 2014.
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7 CBRE GLOBAL RESEARCH AND CONSULTING © CBRE Ltd. 2014
THE GREAT WAVE OF FUND EXPIRATION
Close-ended funds have a fixed life span. With funds in Asia Pacific having an average life span of
eight years, CBRE data shows that a total of 84 funds plan to terminate between 2013 and 2016.
Approximately 20 funds formed during the pre-GFC boom have already expired. With several funds
due for expiration in 2013 and 2014 already having extended their fund life, CBRE estimates the
expiration of close-ended funds will peak between 2015 and 2016, involving around 50 funds with a
GAV of about US$40 billion. The remaining funds expire beyond 2016. The GAV of these funds totals
around US$15 billion.
The GAV of funds scheduled to expire between 2015 and 2016 is significant as there are seven large
pan-Asia funds with a GAV of above US$1 billion. Most have a provision to extend their termination
date by one to two years.
The disposal process typically commences two to three years prior to the termination date. Disposal
activity has been underway in Asia Pacific since 2010. Between 2010 and 2013, disposals by real
estate funds totaled approximately US$64 billion. However, only a handful of fund managers have fully
divested their positions well ahead of the fund life. This is because they have recorded significant
returns during the investment period and do not want to dilute the returns as they will hold the assets for
longer.
Fund life termination;
fund disposition continuing
Chart 5: Projected gross asset value of close-ended real estate funds by termination year
Source: CBRE Research, September 2014.
0
5
10
15
20
25
30
0
5
10
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20
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30
2013 2014 2015 2016 2017 2018
Num
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nds
US$ billion
Planned Termination Year
Gross asset value (LHS) Number of funds (RHS)
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(You can make this smaller if heading is too long, but line spacing should)
always be 1pt more than the font size
Heading 02: Futura Md BT Bold, 16pts, line spacing 18pts, Lime Green
Heading 02: Futura Md BT Bold, 13pts, line spacing 15pts, Refreshing Green
Body Text: Futura Lt BT, 10pts, line spacing 13pts, Black
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8 © CBRE Ltd. 2014 CBRE GLOBAL RESEARCH AND CONSULTING
THE GREAT WAVE OF FUND EXPIRATION
Based on the volume of disposals recorded during 2007 and 2013, a period which covered the peak
and trough of the last cycle, the average annual disposal by property funds in Asia Pacific is US$15
billion. If we assume that the market environment will align with the historical average, the market’s
capacity to absorb the disposals by funds to be terminated in 2015 and 2016 will be about US$30
billion. However, this estimation depends on a number of factors, including:
Investment sentiment: This is expected to remain positive in the coming years although a potential
increase in interest rates will likely exert pressure on already low yields. CBRE holds the view that the
upward increment in interest rates will be mild as it will need to be aligned with the pace of global
economic recovery.
Fund raising environment: This is improving gradually after several years of contraction following the
GFC. During the first nine months of 2014, several funds raised capital in excess of their target
amount. Five Asia Pacific-focused private equity real estate funds each raised over US$500 million.
More funds are being raised with core-plus and value-added strategies. These funds could potentially
emerge as buyers for the assets held by opportunistic funds scheduled to expire, if they have
successfully turned their investments into core stocks and if the timing of the capital deployment of the
new funds and investment strategies match with the assets to be disposed.
Increased participation of institutional investors: In recent years there has been stronger activity among
international and Asian institutional investors in Asia Pacific. However, their allocation to real estate in
the region is still very low. The recent liberalisation of regulations relating to real estate investment by
Asian insurance firms will facilitate buying activity. An estimated US$75 billion is set to deployed by
Asian insurance firms into global real estate markets by 2018, according to a recent report by CBRE
Research Asia Pacific titled “Liberalisation and the Rise of Asian Insurance Investment in Real Estate”.
However, many Asian institutional investors focus on western markets and prefer trophy assets.
Successful disposals to institutional investors are therefore not so straightforward.
Chart 6: Acquisitions and disposals by private equity real estate funds in Asia Pacific
Source: CBRE Research, September 2014.
-30
-20
-10
0
10
20
30
40
2005 2006 2007 2008 2009 2010 2011 2012 2013 H1 2014
US$ billion
Gross Acquisition Gross Disposal Net Acquisition
While these factors may suggest the market has sufficient capacity to absorb the wave of disposals, it
should be noted that successful disposals will depend on the location and quality of the portfolio, which
may not be favourable. These challenges are discussed in the following section. Thus, CBRE holds the
view that the market will only be able to absorb about 75% of the liquidity pool of funds ending their life
cycle. The shortfall between the potential liquidity of funds ending their lifespan and the market’s ability to
absorb these assets is expected to be around US$10 billion. These assets could therefore face difficulty in
finding buyers or in being disposed of at desirable terms.
Will the market be able to absorb the wave of
disposals?
Average annual disposition: US$15 billion
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9 CBRE GLOBAL RESEARCH AND CONSULTING © CBRE Ltd. 2014
THE GREAT WAVE OF FUND EXPIRATION
The exit and winding down of a fund is the final step in the process of close-ended fund investment. A
number of factors must be considered when planning an appropriate exit strategy to ensure optimal
returns are delivered to investors. Key considerations include: (1) market conditions, (2) portfolio
quality and (3) the alignment of interest between Limited Partners (LPs) / investors and General Partners
(GPs) / managers.
A shortfall exists; what are the factors for a successful
exit?
Current market conditions
A review of the assets available for disposal by funds approaching the end of their fund life shows that
around 65% are in China, Japan and Australia (Chart 7). The majority of the assets were acquired
before the GFC. Office and retail properties comprise the bulk of the assets held by these funds. The
smoothness of disposals will largely depend on the investment market environment in these three
markets.
Chart 7: Country distribution of assets available for disposals by funds entering the
termination phase
Source: CBRE Research, September 2014.
Japan
26%
China
24% Australia
15%
South Korea
10%
Singapore
10%
Hong Kong
5%
India
5%
Taiwan
3%
Malaysia
2%
China: Investors are more selective; vendors face more competition for buyers
In China, the tightening of the lending environment has prompted domestic investors to turn less willing
to pay high prices. Investors are also highly aware of the over-supply situation in the office and retail
sectors. CBRE forecasts that both prime office rents and capital values will face downward pressure in
the next three years, with the rate of capital value correction (-3.3% in three years) being faster than the
rental decline (-2.3%).
Investors have therefore begun to place greater importance on asset-level analysis and real estate
fundamentals. They also require a better entry yield against the weaker future growth. The pricing gap
between buyers and sellers will result in a longer disposal process. Sellers will eventually need to adjust
their pricing expectations in order to speed up transactions, a trend that could affect their returns.
Several Chinese developers have opted to dispose of non-core assets to boost their balance sheets as
lending for development projects remains conservative and housing sales are slowing. This will intensify
competition among vendors seeking out potential buyers and make it more challenging for real estate
funds to sell their assets.
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10 © CBRE Ltd. 2014 CBRE GLOBAL RESEARCH AND CONSULTING
THE GREAT WAVE OF FUND EXPIRATION
60
80
100
120
140
160
180
200
220
240
20
05
Q1
20
05
Q2
20
05
Q3
20
05
Q4
20
06
Q1
20
06
Q2
20
06
Q3
20
06
Q4
20
07
Q1
20
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Q2
20
07
Q3
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Q4
20
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Q1
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13
Q4
20
14
Q4
20
15
Q4
20
16
Q4
Ind
ex 2
005 Q
1 =
100
Rent Capital Value
Source: CBRE Research, September 2014
Chart 8: China prime office rental and capital value indices
Japan: Capital values recovering
In Japan, many assets held by Japan-focused real estate funds scheduled to terminate in the next two
years were acquired at high prices before the onset of the GFC. Given the subsequent fall in prices, the
values of a considerable number of these assets may still be below pre-GFC levels. Some funds have
revised down their book values to reflect market changes. That said, the momentum provided by the
Abenomics policies implemented from late-2012 has injected liquidity into the real estate market and
boosted overall investment sentiment, although the market remains sceptical about the strength of the
so called ‘third arrow’.
As shown in Chart 9, capital returns in Japan reverted to positive territory in Q2 2013, a trend which is
expected to continue. CBRE expects Tokyo office capital values to record double digit growth in the
coming three years (2014-2016) on the back of strong rental growth. Values are getting closer to the
level where the fund managers can recover a large portion of their equity or even secure a profit.
However, room for further yield compression beyond 2014 will be limited after the strong growth
witnessed this year.
Chart 9: ARES Japan all sector quarterly total returns
Source: The Association for Real Estate Securitisation, September 2014
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
20
05
Q1
20
05
Q2
20
05
Q3
20
05
Q4
20
06
Q1
20
06
Q2
20
06
Q3
20
06
Q4
20
07
Q1
20
07
Q2
20
07
Q3
20
07
Q4
20
08
Q1
20
08
Q2
20
08
Q3
20
08
Q4
20
09
Q1
20
09
Q2
20
09
Q3
20
09
Q4
20
10
Q1
20
10
Q2
20
10
Q3
20
10
Q4
20
11
Q1
20
11
Q2
20
11
Q3
20
11
Q4
20
12
Q1
20
12
Q2
20
12
Q3
20
12
Q4
20
13
Q1
20
13
Q2
20
13
Q3
20
13
Q4
20
14
Q1
20
14
Q2
Income Return Capital Return Total Return
FORECAST
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11 CBRE GLOBAL RESEARCH AND CONSULTING © CBRE Ltd. 2014
THE GREAT WAVE OF FUND EXPIRATION
Australia: Strong investment appetite for core assets
In Australia, demand from offshore investors and onshore institutional investors including superannuation
funds for core assets with long lease terms has remained firm over the course of 2014 despite increased
vacancy. Downward pressure on Grade A office net effective rents will dissipate in the coming three years
and the market will return to an upward cycle in the medium term. It is therefore dawning on fund
managers and limited partners of core funds that if they dispose of high quality core assets, they may not
be able to acquire similar assets in the market in the medium term.
The strong preference for core assets spells trouble for funds operating higher up the risk curve,
particularly opportunistic funds. Such funds could find it difficult to find buyers as their assets may be
viewed as less attractive. Overall, investors remain conservative towards secondary assets. This trend is
more evident in weaker markets such as Brisbane, where the yield spread between prime and secondary
assets has widened, and is appearing to be pricing in the risk of significant increases in vacancy.
Chart 10: Prime office yields vs secondary office yields
5%
6%
7%
8%
9%
10%
20
05
Q1
20
05
Q4
20
06
Q3
20
07
Q2
20
08
Q1
20
08
Q4
20
09
Q3
20
10
Q2
20
11
Q1
20
11
Q4
20
12
Q3
20
13
Q2
20
14
Q1
Sydney
Prime
Secondary
Source: CBRE Research, September 2014
5%
6%
7%
8%
9%
10%
20
05
Q1
20
05
Q4
20
06
Q3
20
07
Q2
20
08
Q1
20
08
Q4
20
09
Q3
20
10
Q2
20
11
Q1
20
11
Q4
20
12
Q3
20
13
Q2
20
14
Q1
Melbourne
Prime Secondary
5%
6%
7%
8%
9%
10%
20
05
Q1
20
05
Q4
20
06
Q3
20
07
Q2
20
08
Q1
20
08
Q4
20
09
Q3
20
10
Q2
20
11
Q1
20
11
Q4
20
12
Q3
20
13
Q2
20
14
Q1
Brisbane
Prime Secondary
Quality of portfolio
Since 2010, many fund managers have disposed of more ‘saleable’ assets or assets situated in liquid
markets. Hong Kong and Singapore have seen increased disposal activity of this type, given these
markets’ high liquidity and rapid growth in capital values post-GFC. It is likely, therefore, that assets
remaining in such funds are secondary in terms of location and grade. Such assets may be viewed as
less attractive to buyers and could therefore require a longer disposal process.
As portfolios have grown in size and complexity during the life of the fund, investors are spending
valuable time and resources on managing legacy issues associated with vintage fund investment.
Disposal processes will be lengthened as the size of the portfolio increases. Therefore, questions
surrounding the optimal time to terminate the fund and subsequent actions will become paramount to
investors’ decisions when they consider the quality and size of the portfolio.
Alignment of interest between investors and fund managers
The termination process is a collaborative discussion between fund managers and investors,
particularly when it comes to extension, secondary trading, restructuring and initial public offerings.
However, misalignment of interest can cause rifts. Whilst close-ended funds have defined terms, it is
always in the interest of both parties that the assets are divested in optimum circumstances. This can
sometimes require a balancing act. However, a fund manager should at all times be acting in the best
interest of investors. For funds where market conditions have changed dramatically during their
lifespan, for example in China, there can often be a divergence of objectives at the scheduled fund
termination. This is why alignment of interest between investors and fund managers is crucial and can
affect the available options when it comes to terminating a fund.
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12 © CBRE Ltd. 2014 CBRE GLOBAL RESEARCH AND CONSULTING
THE GREAT WAVE OF FUND EXPIRATION
AVAILABLE EXIT ROUTES
Terminate as
planned
Extension Restructuring Secondary
Trading
IPO listing
CO
NSID
ERA
TIO
N F
AC
TO
RS
Current
Market
Condition
Favourable;
target returns
achieved
Less
favourable
Less
favourable
Favourable;
high liquidity
in secondary
markets
Favourable;
but costly
and lengthy
process *
Quality of
portfolio
Good
quality,
matches
investment
demand
Quality
may not
match with
investment
demand*
Secondary
assets
Good
enough
attract
secondary
buyers
Significant
pool of
quality assets
to meet
listing
requirements
Alignment of
interests
between LP
and GP
Less of an
issue
Needs
agreement
from all LPs
LPs demand
change in the
mandates of
the funds*
Exit of
individual LP
if alignment
of interest
cannot be
achieved
among all
LPs*
LPs agree to
be the
cornerstone
investors of
the REIT
Market likely
to choose this
option
A peak in fund expirations at a time when current market conditions and portfolio quality may not be
totally favourable presents fund managers with two key questions:
• What would be the optimal time to terminate the fund while taking into account investors’
requirements?
• If a fund starts the termination process, how should it formulate exit strategies and ensure efficient
execution?
It is crucial for funds to set out a clear direction towards termination, redemption and other liquidity
events, all of which should be driven by an understanding of investors’ internal drivers. Such an
approach requires a collaborative effort, which is sometimes difficult in discordant situations.
How can fund managers
move forward?
Source: CBRE Research, September 2014
Table 1: Factors to take into account when deciding upon termination strategy
Source: CBRE Research, September 2014.
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13 CBRE GLOBAL RESEARCH AND CONSULTING © CBRE Ltd. 2014
THE GREAT WAVE OF FUND EXPIRATION
Fund managers typically have access to four strategies if termination as scheduled is not the ideal way
forward.
Fund Extension
Fund extension has been a popular strategy in Asia Pacific but requires careful consideration. Any
extension of a fund’s term often involves an element of structural change including changes to fees,
revised capital management and/or fund governance.
In this region, fund documents often include two one-year extensions (1+1) at the fund manager's
discretion. Any subsequent extension will often require 75% of investors’ consent, as it may allow
investors to exit the fund at this point if they no longer wish to participate. Investors which vote against
the extension may have the right to choose to exit.
CBRE believes that fund extension is a viable option for fund managers in Australia and Japan. In
Japan, fund managers may have to review their portfolios. Some may choose to take advantage of the
increase in liquidity and prices to dispose of their assets. Others may believe that their assets can further
increase in value if they hold onto them for a further one to two years as occupier market fundamentals
in key markets across the country continue to improve.
In Australia, extension could be a possible option for funds with core strategies or funds holding good
quality well performing assets such as those in the residential sector. Some multi-sector funds allocated
to the residential sector in Australia are likely to opt for extension.
Secondary trading
Private equity fund investments by their nature are illiquid. In the traditional structure, investors have
limited redemption or withdrawal facilities during the life of a fund. However, appetite for secondary
trading is increasing. Since the online platform PropertyMatch ©2 launched in September 2009, it has
recorded US$3.0 billion worth of global transactions in over 486 secondary trades. Secondary trading
is becoming a common strategy to rebalance and reposition allocations.
Secondary trading provides an exit mechanism for investors in unlisted real estate funds. Investors
would consider such an approach for a variety of reasons. These include situations when an investor
may have a relatively small exposure to a fund and requires too much management time dealing with
legacy issues. In another scenario, when market conditions are not optimal and fund managers cannot
act swiftly, investors would consider a secondary trading platform as an exit option, as it would reduce
their downside risk. In both examples, the position is divested and monies redeployed for optimal
returns elsewhere.
This seems to be an increasingly viable option for investors in Asia Pacific to exit their position,
particularly for China-focused funds.
2 PropertyMatch is a live portal for trading units in unlisted real estate funds, established in 2009 by CBRE and wholesale broker
and trading platform technology firm GFI.
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14 © CBRE Ltd. 2014 CBRE GLOBAL RESEARCH AND CONSULTING
THE GREAT WAVE OF FUND EXPIRATION
Initial Public Offering (IPO)
It is unusual for a fund to use an IPO as an exit route as the listing process is time consuming and
transaction fees would be higher than directly selling the asset. Whilst an IPO can offer improved
valuation metrics and increased liquidity, it does not suit all markets. In developed stock markets such
as Singapore, Hong Kong and Japan, IPO exits are more feasible. However, in these markets, the IPO
pipeline is lengthy and competition for equity fund raising is intense. In Australia, an IPO exit may also
be considered as the A-REIT sector is currently in far better shape than in recent years.
In emerging Asian markets, an IPO exit is a less desirable option as REIT markets in such locations
either do not exist or are underdeveloped. Funds with assets in such markets will have to consider listing
in Singapore and Hong Kong, which allow cross-border REIT listings. However, it remains challenging
to structure an offshore REIT and ensure the timely remittance of dividend payments.
That said, IPO REIT listings may emerge as a viable option in India in the coming years. The newly
elected government recently clarified the tax liability for Indian REITs, a move which has been hailed as
a crucial step towards establishing a successful domestic REIT market.
In general, IPO exits are only a viable option in markets with a well-developed REIT structure. Whilst
CBRE does not consider this strategy to be a popular exit mechanism for terminations during 2015-
2016, opportunities may present themselves.
Restructuring
Restructuring usually happens when there is a lack of availability of debt and a fund requires
refinancing. However, it can also occur when investors request that a key individual or fund manager
be replaced. Such a scenario took place within one Asia Pacific focused fund in 2013 and resulted in a
process of restructuring. This situation usually requires a discount to NAV but ensures the fund does not
wind-up with a loss. Nowadays, many investors request that no-fault divorce clauses be inserted in the
governance section of fund documents. This allows investors to terminate their investment or appoint a
new manager at any time when a stated majority of investors elect to make such changes. The clause is
an important tool for investors to ensure a high level of fund governance.
Another type of restructuring involves changing the mandate or style of a fund. This occurs when
investors agree with the fund manager to alter the investment style of the fund such as changing it from
close-ended to open-ended. However, any such structural change requires approval from all investors
and can therefore be a lengthy process. Only a few instances of restructuring have been recorded in
Asia Pacific since 2012.
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15 CBRE GLOBAL RESEARCH AND CONSULTING © CBRE Ltd. 2014
THE GREAT WAVE OF FUND EXPIRATION
The next two years will see a peak in the termination of close-ended funds in Asia Pacific. Some US$40
billion of real estate assets – primarily in China, Japan and Australia – is scheduled to be disposed. The
active Asia Pacific direct real estate investment market; positive fund raising environment and higher
allocation to real estate by Asian institutional investors will help absorb most of the liquidity set to be
released by the expiry of close-ended funds. Nevertheless, CBRE expects to see the fund disposal
process encounter a number of challenges.
This scenario will affect the exit route for funds in key markets within the region.
• Funds will have to contend with a slower sales market and strong competition from property
companies disposing of assets in China.
• Opportunistic funds will have to cope with a mismatch between the quality of assets they are holding
and the current strong investment appetite for high quality core product in Australia.
• Acceptance of disposals at prices below cost in some cases in Japan.
Liquidation may therefore not be the best option for funds scheduled to expire in 2015-2016. Investors
are advised to evaluate alternative options including extension, secondary trading, restructuring and
IPO. CBRE expects that extensions will be adopted by a number of core or value-added funds whose
investors are looking for longer term exposure to a particular real estate sector. Additional options
beyond termination include secondary trading, exit via IPO and restructuring, all of which can be
utilised to prolong a fund's life beyond its agreed exit date.
CBRE believes that the wave of potential disposals by funds will not exert a significant shock upon the
regional real estate market. However, because of the reasons listed above, CBRE recommends that
fund managers embark upon the careful planning and evaluation of the alternative exit options
discussed in this report.
The coming wave of fund expiries also points to a need for the improved strategic planning of funds
currently being formed. It is also expected to result in:
• A surge of regional capital and investors – Traditionally, Asia Pacific is a net receiver of global real
estate investment. However, since the GFC there has been a significant increase in investment
activity from regional investors such as high-net-worth individuals, sovereign wealth funds and
pension funds. Whilst there is still strong interest from western investors, Asian institutional investors
have recognised that they are under-allocated to real estate and are therefore actively looking into
cross-border investment.
• Growth of regional fund managers - Traditionally, pan-regional funds are the mainstream.
However, with the rise of experienced Asian fund managers, there could be a stronger preference
for a country or sector specific focus.
• Less interest in opportunistic funds: More institutional investors are seeking stable returns and will
therefore prefer lower risk funds with little debt exposure over opportunistic funds.
• More challenging to deliver returns: As prime yields have been compressed to 10-year lows in many
parts of Asia, core assets may not be able to offer desirable returns. Funds will therefore need to
look for core-plus and value-added investment opportunities so as to enhance their returns by
leveraging on their professional experience.
• Higher scrutiny of track records: Cross-border investment continues to grow and international
investors are more aware of the complexity of legal and tax treatments. They will therefore place a
stronger emphasis on track records upon execution.
CBRE believes these trends will characterise the next wave of real estate funds in Asia Pacific. New
funds will be better placed to manage risks as they will be operated by more experienced managers
and will contain more capital sourced from within the region.
Conclusion
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CBRE GLOBAL RESEARCH AND CONSULTING
This report was prepared by Asia Pacific Research, which forms part of CBRE Global Research and Consulting—a network of preeminent researchers and consultants who collaborate to
provide real estate market research, econometric forecasting and consulting solutions to real estate investors and occupiers around the globe.
All materials presented in this report, unless specifically indicated otherwise, is under copyright and proprietary to CBRE. Information contained herein, including projections, has been
obtained from materials and sources believed to be reliable at the date of publication. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or
representation about it. Readers are responsible for independently assessing the relevance, accuracy, completeness and currency of the information of this publication. This report is presented
for information purposes only exclusively for CBRE clients and professionals, and is not to be used or considered as an offer or the solicitation of an offer to sell or buy or subscribe for
securities or other financial instruments. All rights to the material are reserved and none of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or
distributed to any other party without prior express written permission of CBRE. Any unauthorized publication or redistribution of CBRE research reports is prohibited. CBRE will not be liable for
any loss, damage, cost or expense incurred or arising by reason of any person using or relying on information in this publication.
© CBRE Ltd. 2014
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