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Investment Funds: Establishing a Platform in Asia


17 Jun 2009

Duncan OwenInvestment Funds: Establishing a Platform in Asia

Duncan Owen, CEO Invista Real Estate Investment Management, London

How have you been affected by the global financial crisis?

We have been affected of course, but we have been quite fortunate.  We have had a little bit of luck as well as a little bit of good judgement. During 2006 and 2007, a number of our funds went longer into cash and through a process of de-leveraging. This was partly due to the fact that business plans and asset management initiatives were coming to a natural conclusion, it was a time to exit and realise some of the profits that we had made for funds. So, we had some good fortune in that respect and it has meant that we have been able to weather a great deal of the storm so far. For example, Invista runs 23 real estate funds and 16 of those 23 funds have no leverage in them now, which means that whilst we have been affected by falls in capital values, a number of the funds, and their capital structures, have remained robust. None of the open-ended funds have had to either close or be suspended and equally a number of the listed and closed-ended funds are quite cash generative. As a consequence their investment returns have been relatively good.

What was the fund you recently purchased in Asia?

Invista is one of the larger listed real estate fund managers across Europe and the UK. For some time we have been developing coverage around continental Europe and the UK and we have the greatest depth and breadth of experience in those areas, with numerous assets and funds across that region. We have been looking, for some period of time, to develop and grow into Asia because we have clients that would like exposure to the Asian markets. We have been looking over the last 24 months or so to find a platform that would give us this coverage. We initially raised a fund, the Invista International Fund, which was specifically going to target mature Asian commercial property markets. This was because these markets had the type of critical mass and were the size of markets that were attractive to us. The target markets for the fund were primarily Tokyo, Hong Kong and Singapore. We had a bit of luck again as there was some distress within Babcock and Brown, who had an Asian real estate fund in operation, which was extremely unfortunate for Babcock and Brown. They had a number of real estate platforms, two of which were in Hong Kong and Singapore and these, importantly, had a very similar cultural fit to us. There was one extremely interesting fund in particular, which was a specific targeted fund that specialised in the self-storage sector. This is, in effect, industrial real estate, but quasi-retail in the way that it attracts people to the store. It is known as the Big Orange Self-Storage fund. So that was an opportunity that we benefited from having researched the market for some period of time when the opportunity came along. It is rare to get something at relatively attractive pricing but where you can also gain a good fund and a good cultural fit with the people who work within the fund. We didn’t have a strategy to look for distressed assets; it was just the right quality of portfolio and importantly the right people.

Would you consider moving into emerging markets?

We would consider emerging markets in due course. However I am a firm believer that if you try and do everything, the risk is you achieve nothing. As we went into Europe, we focused first on the French market, then the German and now we are invested across nine markets in Europe. You have got to be able to execute and implement. Markets act and behave very much from bottom up and with local practice, so you have to focus in order to crack them locally. Hong Kong, Tokyo and Singapore in themselves are each very big markets and I want to make sure that we can get superior returns for our clients and investors in these markets first before we look to develop further in the region. This is very much the business model we applied in Europe.

Which emerging markets do you think are the most interesting?

I’ll give a few tasters of what we’ve looked at in the past.  Clearly there is enormous opportunity in China and through the medium to longer run trend it will continue to be one of strong growth economies which will be attractive for real estate markets. Equally there are other markets, such as South Korea, which are pretty well developed and there are more opportunistic plays such as Vietnam. All of those have crossed our desks, but it is very much easier for us to make sure we have a properly functioning business that can deliver its objectives in the larger commercial markets first. What we can bring to them is a very disciplined and international approach, but we can also bring a degree of innovation in the way that we structure our funds. The core competence that Invista has is to be good at managing real estate, but equally you’ve got to be able to make that real estate accessible to a broad number of investors, give it transparency and remove some of the opaqueness. One of the things we have done in Europe is we’ve had transparent funds and we’ve had funds that have had good degrees of liquidity for investors, so a broad cross section of professionals, institutions as well as retail investors can access markets in a way they’ve not been able to in the past. That is very important for us because 1. It helps returns and 2. Ultimately it helps us as our business grows.

Do you focus on a particular asset class or does it depend on location?

Many of our funds, about ¾, are balanced, so they will buy industrial, office and retail properties. However, what we do have are some specialist funds which focus in sectors, for example, just in industrial or just in residential property. Asia is another good example of this, with what we are aiming to achieve with the Big Orange Self-Storage fund. It’s a very specialist sub-sector where we acquire properties, warehouses in densely populated urban centres, that are capable of conversion into self-storage and a quasi-retail use. We do also invest across the sectors, as some investors want a diverse exposure and don’t just want to have specific geography or type of property. What we have leaned towards is a very active management approach and I think it is something that categorises the majority of our funds.  One of the attractions of property is that it is a tangible asset and you can do things to it. The parallel of buying the worst property on the best street is a very good way of articulating part of our investment philosophy. You can generate very much higher and more profitable returns and income from active management, but you have got to be really focused and you’ve got to have a specific business plan to ensure that you drive the income return out of the asset.

In terms refurbishment, do you take environmental sustainability into consideration?

Yes we do, although it’s difficult because with sustainability your fear is that when you hear people talk about it, you immediately think they are just doing this for political reasons. However, you must accept that it is now economically as well as ethically important. We have just gone through a process with an office development in London where we have got the highest BREEAM rating that you can achieve. That was an extremely arduous procedure and you learn a lot going through it. I think it is something that is important – morally, ethically and I also believe it is becoming increasingly economically important and that will be the trigger. There is a risk over the next couple of years with the economic hardship that we are suffering, that sustainability will move down people’s agenda, but I think many tenants and occupiers will expect higher standards to this approach. You only have to read people’s reports and accounts to see that they really do want to be associated with this and many companies, whether it is professional or service companies, look at being totally carbon neutral. If you are going to make your building attractive to a potential occupier, sustainability is going to be one of the things people look at before they take and occupy accommodation.

Do you think there needs to be a set of unified international valuation procedures?

I do and I think that is of critical importance. We see differences across Europe and we see differences outside Europe. We see greater importance attached to valuations in the more transparent markets of the UK, Australia and the Netherlands. We need efficient performance measurement and efficientindices to measure managers on a like for like basis and also, much more importantly, to attract investors. Investors can then have confidence in some form of transparent measurement in different parts of the world. I think it is vital – the Royal Institution of Chartered Surveyors (RICS) have implemented the RICS Valuations Standard (The Red Book) and it is by far and away the most effective measure that we have seen in having commercial valuations. It is the benchmark for the majority of international investors and, most importantly of all, the capital sources are inclined to rely upon it. There are numerous methods, such as looking at replacement costs of buildings but they become less relevant with regard to the commercial value or price of an asset. Some valuation matrices are based on cost and some valuation matrices are based on anything other than a market based principle - this is going to risk a false market and is actually just confusing investors.

Do you think there will be increased in interest in REITs?

Yes, we have seen an increase although it is yet to be proven whether it is long or short term. We have seen over the last couple of months that REIT values globally have recovered quite strongly. But there is an element of fear that it  may be a false recovery. I think REITs have a really interesting opportunity because listed capital markets tend to try and predict future value and guess what’s going to happen in the next period. Capital markets can therefore provide the quickest access to capital. However, there isn’t enough equity in the world allocated to real estate to compensate for the debt and required de-leverage.  At the present time, they have been going through a process whereby REITs have been attempting to recover and so much of the capital raising has been more about rescue packages. Now it may well be that there are a large number of investors that have suffered heavy dilution as a result of putting more of their own money in to save companies they had already invested in. However there have been some notable survivors who have not needed rescue packages. I think we will therefore witness polarised performance and there will be greater differentiation. We are seeing that at asset level, we will also see it at REIT and at fund level where some are well placed and will receive new interest and others will be less well placed.

Do you think central banks can absorb distressed assets to form REITs?

In different markets yes. It is what happened in America - they did pool assets and REIT them and they had an enormous period of growth through the 80s and 90s which was just that process. There are eight or nine different REIT structures globally now, however the ability and ease to do that in some instances is quite difficult. In the UK it’s more complicated, in the US it is less so and Australia has one of the most flexible structures for raising capital and establishing REITs, as does Singapore. REITs can be part of the answer but I think going to capital markets you have to price those assets cheaply and you would have to get good management teams with property specialists. It has very clearly worked in Australia recently, so it is a possible solution but I think it is one of a number of options. There will be new opportunistic funds that will be able to act as a conduit for getting capital to take out distressed assets from banks and probably those investors who have a likelihood of getting a good return.

Would you consider forming a Sharia compliant fund?

We have looked at them, although they can be quite complex. As structures, we don’t particularly have reach into that region but I think it is a great way of meeting investors’ needs. We’ll probably see more Sharia compliant funds in the future and they are being talked about much more.



Source: Cityscape Intelligence