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Trophy Assets are more difficult to come by, according to a fund manager.

 

Korean and Chinese institutional investors who have dabbled in overseas real estate with cautious acquisitions are finding it increasingly difficult to find offers.

According to the asset manager whose firm advised on the first offshore property acquisition by a Chinese insurer, a revival in domestic investment in the West is increasing competition for the trophy buildings that Asian investors bought easily in the aftermath of the financial crisis.

"There's a lot of domestic capital in the US, so the pickings are slimmer," Gaw Capital Partners founder Goodwin Gaw told WPC News. "Either you have to go higher up the risk curve or you have to go to other cities."  doha property

"Asian funds will have to get out of their comfort zones," he said, adding that the amount of deals will slow.

Asian institutions are looking for deals in secondary markets such as Houston, Chicago, Washington, D.C., and Boston, where they can still get high-quality office buildings. Manchester, Birmingham, and Liverpool are attracting attention in the United Kingdom.
Mr. Gaw explained, "They're broadening their horizons."

Mr. Gaw's company, Gaw Capital U.S., was founded last month to handle its operations in the United States. It plans to open a US$500 million fund before the end of the year, led by Timothy Walsh, the former chief investment officer of New Jersey's pension fund.

Gaw Capital usually buys a minority stake in Grade A office buildings in the West, especially in London and the United States, and then arranges the rest of the financing through joint ventures or club deals with Asian lenders. It has found especially fertile ground in East Asia.

This summer, it advised on Ping An, China's largest insurer, purchasing the Lloyd's Building in London for £260 million (US$421 million), including a stake from Gaw Capital. At a yield of 6.1 percent, it was the first acquisition of offshore real estate by a Chinese insurer. The seller was a fund managed by Commerz Real, a subsidiary of Germany's Commerzbank.

Because of the building's historic significance, the sale caught the public's attention and made headlines. Since Richard Rogers built it with ducts and lifts on the outside to optimize internal space, the headquarters of the storied insurers Lloyds of London is often referred to as the "Inside-Out Building."

Money from Asian sovereign wealth funds and pension funds is increasingly seeking stable overseas assets.

"Asian economies have matured, especially in Korea and China, where the middle class is expanding," Gaw explained. "As Asian populations rise, pension funds will have more liquidity in their coffers, forcing them to purchase stable income-producing assets."
China's government is eager to promote foreign investment as a means of internationalizing the yuan. Since large investors like Ping An have few domestic opportunities, China recently allowed its pension funds to diversify into real estate.

"Obviously, the potential pool is really deep," Gaw said, adding that he hired Walsh in the US so he could concentrate on his Asian operations. "How quickly the Chinese government wants them to invest abroad is a factor."

So far, Korean financial institutions have taken a cautious approach to foreign investments. According to a recent survey conducted by Mercer and ANREV, the Asian group representing nonlisted real estate funds and developers, they have only invested in two or three locations.

They do, however, want to expand their holdings and geographical reach. According to three-quarters of those polled, the Korean market lacks a sufficient supply of appealing property investments.

Over the last five years, Korean institutional investors have invested a total of US$13.8 billion, an average of US$2.8 billion per year. This year is almost definitely going to be a record-breaking year.

All of the institutions polled said they already invest in real estate, and half of them said they wanted to raise their allocations by two to five percentage points, implying a US$25 billion increase. They stated that they wanted to switch into club deals and closed-end funds, diversifying away from joint ventures, which they had previously used.

Gaw Capital has also been attracting funding for Chinese transactions. It recently closed new investment in its current vehicle, the Gateway Real Estate IV fund, after raising just over $1 billion, exceeding the fund's limit. The majority of this came from outside Asia, but there was also intra-Asian institutional investment.

The company believes it will be able to put the funds to better use than it was two to three years ago, when there was so much domestic spending chasing too few opportunities. Deals were either not available or were at unreasonably high prices.

The situation has now changed, with Beijing and the People's Bank of China enforcing real-estate lending restrictions. The fund has put about 30% of its assets into Guangdong, Shanghai, and Hong Kong, which are China's largest and wealthiest cities.

"There are usually more opportunities when the economy is liquidity limited by the government enacting austerity measures," Gaw said. "Due to the liquidity situation, there are high-quality assets in Tier 1 cities that you can get your hands on during this period."

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