Private equity funds are altering the way listed real estate investment trusts (REITs) operate. Most property groups that support REITs — including CapitaLand and Ascendas — are increasingly relying on private equity funds to establish a large pipeline of future acquisitions for their REITs.
"Private funds are potential structures that we use for incubating and preparing investment assets to be offered to our listed funds," said Jonathan Yap, Executive Vice-President for Real Estate Funds at Ascendas.
Ascendas handles several private funds focusing on various geographies and sectors of the Asian property segment.
For instance, its US$400 million Ascendas China Commercial Fund, which invests in commercial real estate in China, is fully invested in a portfolio of Grade A office buildings in Shanghai's prime locations.
Similarly, CapitaLand said that REITs and real estate private equity funds are an essential part of its capital-efficient business model, which covers the entire property value chain.
John Pang, Managing Director of CapitaLand Financial, noted, "For CapitaLand, REITs and real estate private equity funds enable the group to recycle capital for new investments and to develop and incubate retail, office, residential, serviced residence and integrated developments."
"For some of the private equity funds, such as the retail-focused China funds, they provide a pipeline of good quality assets for the corresponding REIT in the portfolio — in this case, CapitaRetail China Trust."
CapitaLand has begun a portfolio of six REITs and 21 property private equity funds, of which four private equity funds have matured.
On the other hand, there are concerns that REITs might lose capital to private equity companies, due to the assumption that private equity produces better returns.
Recent reports revealed certain efforts made by the REIT industry, particularly in the United States, to convince investors to allocate more property investment dollars to the public market by investing in REITs.
Mr. Yap emphasised that the two kinds of investment vehicles pose different threats and return profiles.
"In general, listed funds tend to be the natural homes for stable income-producing assets that consistently distribute dividend. Even when they undertake some development activities, these are reasonably stable in nature and form a limited portion of the funds' total assets. For instance, the development activities could be enhancement work or development within existing properties."
"Conversely, private equity funds tend to be utilised for investments that have different risk-return profiles — for instance, providing higher returns and assuming higher risks."
Mr. Pang also believes that the two investment vehicles attract different types of investors.
"The bulk of investors in the real estate private equity funds are long-term players such as sovereign wealth funds, state pension funds and insurance companies with strong balance sheets, as well as high net worth individuals from Asia, the US, Europe and the Gulf Cooperation Council countries," he added.
Meanwhile, REITs provide retail investors access to invest in income-generating property assets that present a steady stream of tax-free distribution generated from rental income.
Data provider Preqin, which monitors the alternative assets industry, noted in its report that more Asia-concentrated funds closed in Q1 2011, compared to the last quarter of 2010.
Out of the 96 funds that hit a final close in the first quarter, 49 percent are mainly concentrated on deploying capital in North America. Such funds account for 62 percent of the entire capital raised in the opening quarter of 2011.
"Asia has attracted the highest level of private equity investment of all these regions, and continues to do so; 70 percent of emerging market-focused funds that closed between 2008 and April 2011 invest in the region," noted Preqin.
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