The Asian market is a small but increasingly important component of the world’s private real estate fund industry. Last year, 177 unlisted property funds worldwide raised $63bn, of which 26 Asia-focused vehicles secured $7.8bn in commitments. As Asia shows its resilience in the wake of global economic challenges, investors and fund managers are sitting up and taking note of the attractive investment opportunities the region offers. So how has the Asia-focused private real estate fund market changed over the past decade? In this two-part article, we take a look at how fund size, strategy, manager location and sector preference have evolved.
Preqin’s data shows that the number of private funds targeting the Asian property market, and aggregate capital raised, have increased steadily year-on-year from 14 vehicles and $3.1bn in 2004 to a peak of 48 funds and $30bn in 2008. However, fundraising slowed considerably in 2009 following the onset of the global financial crisis, with the number of funds which held a final close dropping to 19, raising only $5.1bn. Since then, the fundraising market for Asia-focused private real estate funds has been in recovery mode; the annual number of funds closed and total capital raised for the past three years have been lower than the historical high in 2008. In addition, the average fund size ($295mn) that managers have been able to raise over the last three years is approximately half ($580mn) of those closed in 2006-2008.
The opportunistic strategy has been the most favoured fund type for managers raising Asia-focused private real estate vehicles. Opportunistic funds have consistently made up at least 62% of all vehicles closed from 2004 to 2012, even rising to 89% in 2009. A burgeoning middle class and increasing rural-to-urban migration across much of Asia generate demand for new housing, retail and office spaces, which opportunistic funds are well placed to meet. Core real estate funds have been resurgent in the last three years; 17% of all Asia-focused funds that closed in 2010 were core vehicles, and the number grew to 27% in 2012. Interestingly, private real estate funds employing the core strategy did not find favour with investors in 2006-2009; these funds made up 5% or less of all vehicles that closed in each of those years. In the last three years, debt funds have increased in prominence. On average, debt funds made up 21% of all Asia-focused private real estate vehicles closed in 2010-2012, compared to less than 10% in 2004-2009. The real estate market’s traditional source of loans, banks, dried up following greater scrutiny of their credit exposure after the global economic crisis. Fund managers stepped in to fill the financing gap left behind by banks, which led to the rise of debt funds.
In the next article, we examine the changing face of the Asian real estate market in terms of manager location as well as asset type.