How Is the Covid-19 Outbreak Impacting Global Real Estate?

PERE article compendium How is the Covid-19 outbreak impacting global real estate?

» The city that became the epicenter of the country’s coronavirus outbreak » Covid-19 checklist: Five areas of fund operations to consider » Blackstone warns coronavirus is ‘material’ risk to its funds’ performance » Coronavirus impact spreads to wages » Retail and hotels first sectors hit by spreading coronavirus » How an epidemic revealed a supply gap in Chinese healthcare real estate » China real estate is in ‘wait and see’ mode over Corona Virus » How managers are fundraising for a downturn

perenews.com/asiaweek | #PEREAsia How is the Covid-19 outbreak impacting global real estate?

Sitting in the middle of the Yangtze River Economic Belt, Wuhan is the largest inland and cargo distribution center in China, with services covering a population of almost 400 million across its five neighboring provinces, according to official literature from the city. The city is also a growing industrial hub featuring collaboration between high-tech and traditional manufacturing industries, host- ing large-scale developments that include the Optical Valley of China, Dongfeng Peugeot Citroen Auto Town, Taiwan Enterprises Devel- opment Zone and Yangluo Development Zone, according the city’s literature. However, rather than for its industrial endeavors, Wuhan has emerged to the international community as the birthplace of a deadly coronavirus. Despite the government’s attempt to quarantine the city on January 23, the outbreak has infected over 120,000 people globally with around 67 percent of confirmed cases in China as of March 11. Links to Wuhan and its surrounding cities in the Hubei province are The city that became expected to be suspended indefinitely until the situation has shown the epicenter of the signs of recovery. Only then will the city’s walls be heard once again.  Timeline country’s coronavirus 1992 Selected as one of the open cities along the Yangtze River in 1992 marking the start of foreign investments outbreak coming into the city 1993 Wuhan Economic and Technological Development By Christie Ou - 12 March 2020 Zone incorporated in 1993. The zone is 200 square kilometers and sits within 30-minutes’ drive to the port and railway station If the walls of the city of Wuhan could talk, no one would be around 2000 Wuhan Export Processing Zone established in Wuhan to hear them. In January, the city was placed in a state of near-total Economic and Technology Development Zone. Approved quarantine to contain the outbreak of a dangerous coronavirus. to be the national level automobiles and parts export base This marks the first time the Chinese government has locked down by the government in 2006 an entire city in the battle against an epidemic outbreak. The shutdown 2002 The city was ranked sixth among 25 most promising is expected to have a significant economic impact on Wuhan’s and – to cities in China by UN World Urbanization Prospects report an extent – the entire country’s economy. As a major industrial city and 2004 Named major focus in the ‘Rise of Central China Plan’ transport hub, the closure of Wuhan will do considerable damage to introduced by premier Wen Jiabao to develop advanced the country’s supply chains, according to a report released by research manufacturing division Economist Intelligence Unit (EIU). 2015 The city’s GDP reaches 1.091 trillion yuan ($15.6 Although less well-known internationally than metro areas like billion, €14.2 billion) in 2015, with year-on-year increase Beijing or Shanghai, Wuhan is the capital of the central Hubei province, of 8.8 percent; GDP per capita reaches approximately 104,132 yuan and its largest city, with a population of more than 11 million. And while not in the same league as China’s tier one cities when it comes to prop- 2019 Value of imports and exports reaches 244 billion yuan, accounting for 61.9 percent of Hubei province’s erty investment, Wuhan still recorded real estate investment volumes overall foreign trade value of $1.4 billion since 2015, $900 million and $500 million from domestic and foreign investors respectively, according to real estate research 2020 On January 23, government officials announce temporary closure of Wuhan’s airport and railway stations firm Real Capital Analytics. The data also points out the only foreign to contain the spread of the coronavirus capital has come from Hong Kong and Singapore.

perenews.com/asiaweek | #PEREAsia 2 How is the Covid-19 outbreak impacting global real estate?

Covid-19 checklist: Five areas of fund operations to consider

Lawyers from Paul Weiss pinpoint the areas of a private equity firm operations that may need to be adjusted to account for the coronavirus outbreak, including fund documentation, valuation and banking relationships. By Guest Writer - 13 March 2020

The cascading impacts of the coronavirus outbreak (covid-19) on Alter the fund documents markets and businesses are creating a variety of challenges and opportunities for private funds. General partners may want to ● Offering Period: For ongoing fund offerings, GPs should expect consider a variety of proactive steps, including reviewing invest- delays in the offering process and may want to consider extend- ment objectives; altering fund documents; being more proactive in ing the offering periods of private funds beyond the customary 12 information sharing, valuations and reporting; reviewing borrowing months. GPs may also wish to build in the flexibility for the consent limitations and derivative contracts; and other protective measures. of the advisory board or the GP to extend the offering period. ● Capital Commitment Rollover: GPs may want to consider asking Broaden the investment mandate LPs in existing private funds that are in liquidation or wind down to “reallocate” unfunded commitments into new distressed or The recent market turmoil arising from covid-19 will result in some other non-traditional strategies as a more efficient way of LPs’ GPs considering distressed and other non-traditional investment underwriting “new” commitments. opportunities, including open market purchases of public equi- ● Commitment Period: For ongoing fund offerings, GPs may want ties. For existing private funds, the investment objectives set forth to consider building in commitment period extension mechan- in the fund documents should be reviewed to explore whether or ics (eg, the ability to extend by one or two years with the consent not they provide the flexibility to make these types of investments. of the advisory board). For existing private funds that have the For new private fund offerings, GPs may want to consider broad- ability to extend commitment periods, GPs may want to consider ening the fund’s strategy beyond traditional buyouts to include seeking an extension now to get ahead of opportunities and distressed investing for control, flexibility to invest in the debt of ensure flexibility to draw on unfunded commitments. portfolio companies and possibly open market purchases of public ● Term: For existing private funds nearing the end of their terms, GPs equities. GPs will also need to understand the compliance and regu- may want to consider seeking a term extension to provide addi- latory considerations (including filing requirements) pertaining to tional time to weather a potential long-term financial downturn. any such investments. ● Follow-On Investments: The expected need to provide additional capital to portfolio companies may put pressure on the perenews.com/asiaweek | #PEREAsia 3 How is the Covid-19 outbreak impacting global real estate?

follow-on provisions in fund documents (which typically cap the to the valuation provisions in their fund documents to ensure amount of follow-on investments at 15-20 percent of commit- compliance therewith. GPs are also encouraged to consider the ments after the end of the commitment period). GPs may want potential impact on any subsequent closings in process. to consider whether, and to what extent, a follow-on invest- ● Financial Statements: Many fund-level financial statements rely ment is subject to these limitations if the follow-on investment is on the delivery of information from portfolio companies (which being funded without calling additional capital contributions (or will likely be delayed given the current situation). GPs may want to through the use of leverage). If there is no follow-on investment review whether the fund documents have flexibility to go beyond capacity, or if follow-on capacity may be constrained down the the customary 90 or 120 day delivery timeframe or if the offer- road, GPs may want to consider if other means of credit support ing documents have disclosure relating to delayed reporting or are available, such as portfolio company guarantees. force majeure risk. Potential delays beyond 120 days may have ● Recycling: For ongoing private fund offerings, GPs may want to an impact on custody rule compliance as well. consider creating broader flexibility to recycle proceeds without regard to a specific timeframe (typically 12-24 months) or other A time for borrowings than solely during the commitment period. GPs may want to consider the ability to treat special purpose vehicles as portfolio ● Increased Use of Leverage: Falling valuations and distressed or companies for purposes of enhancing recycling flexibility. other non-traditional opportunities may drive increased use of ● LP Meetings: GPs may want to consider providing for alternative leverage by private funds through the use of existing subscription means of holding LP meetings, including by way of webcasts or line facilities (if capacity is available), total return swaps, margin other electronic means. loans or other alternative forms of financing. GPs may want to pay ● Warehousing: GPs may want to consider the inclusion of ware- careful attention to borrowing limitations in fund documents and housing provisions in fund documents to allow it or its affiliates any requirement to reserve unfunded capital commitments for to warehouse investments while private funds are in the offer- purposes of satisfying borrowings and other contingent liabilities. ing period or are unable to obtain financing for an acquisition. ● ISDAs/Derivative Contracts. GPs are encouraged to review Similarly, GPs may want to consider preserving flexibility to lend their funds’/portfolio companies’ derivative contracts to get to funds or portfolio companies if traditional financing sources ahead of any NAV triggers, margin calls or other contingent are not available. obligations that may arise in connection with outstanding deriv- atives transactions. Be proactive in information sharing, valuations and reporting Consider protective measures

● Information Sharing/Selective Disclosure: GPs are encouraged ● Insurance: GPs may want to consider reviewing the expansion of to be proactive as LP requests for information regarding the insurance coverage applicable at the manager, fund and port- manner in which funds and portfolio companies are dealing with folio company level or consider what, if any, claims are available issues arising out of covid-19’s impact on operations. GPs should under existing coverage (eg, costs of cancelling business travel be consistent with the types of information and responses that are for investor or portfolio company board meetings). provided to LPs to mitigate selective disclosure issues. If LPs are ● Secondaries: The market dislocation could lead to unique oppor- inquiring about impacts on product demand, supply chain, work- tunities for GP-led secondaries, particularly in respect of individ- ing capital, valuation or dealflow, GPs may want to consider creat- ual portfolio companies that now need more time than otherwise ing standard responses (consistent with how responses would be expected to maximize value and distribute proceeds (instead, presented in DDQs) or holding an investor call to disseminate the they now need an influx of new capital). In addition, investors information consistently to all LPs. GPs may want to seek feedback may be looking for liquidity with respect to illiquid LP interests. from portfolio companies in order to respond effectively and to Accordingly, GPs should be prepared for an uptick in secondary ensure a consistent message is delivered to LPs, counterparties activity, including as a result of investors’ defaults. and customers. The authors are lawyers with global firm Paul Weiss: Matthew Gold- ● Valuations: The changing valuations of portfolio companies may stein, Udi Grofman, Amran Hussein, Conrad van Loggerberg, Marco impact the calculation of management fees, distribution water- Masotti and Lindsey Wiersma.  falls and clawbacks. GPs may want to give particular attention

perenews.com/asiaweek | #PEREAsia 4 How is the Covid-19 outbreak impacting global real estate?

Blackstone warns coronavirus is ‘material’ risk to its funds’ performance

The global epidemic has wiped at least $1.5trn off global stock markets in the past week. By Adam Le - 3 March 2020

Blackstone, the world’s biggest private equity firm, has warned that ment, including managing directors, will see cuts of 5 percent to 15 coronavirus could impact the performance of its funds as the effects percent in their annual bonuses. of the epidemic continue to disrupt the global economy. On 2 March, the Organisation for Economic Co-operation and The novel coronavirus “presents material uncertainty and risk Development warned that the coronavirus presented the biggest with respect to our and our funds’ performance and financial results,” threat to the global economy since the 2008 global financial crisis, the firm noted in a regulatory filing on Friday. “The outbreak could and called on governments to act immediately to limit the spread of have a continued adverse impact on economic and market condi- the virus, protect people and businesses from its effects and shore tions and trigger a period of global economic slowdown.” up demand in the economy. Quarantines and restrictions on travel are creating disruption in “Even in the best-case scenario of limited outbreaks in countries global supply chains and adversely impacting a number of industries, outside China, a sharp slowdown in world growth is expected in such as transportation, hospitality and entertainment, it noted. The the first half of 2020 as supply chains and commodities are hit, tour- rapid development and fluidity of the situation makes any predic- ism drops and confidence falters,” the OECD noted. It forecast that tion about the ultimate impact of the coronavirus impossible, the global economic growth will fall to 2.4 percent for the whole year. firm added. In late February, Blackstone’s head of growth equity investing The impact of the coronavirus wiped around $1.5 trillion from Jon Korngold said the firm was not dissuaded from investing in China global equity markets in late February with global markets down or the Pacific Rim because of the outbreak. 10.8 percent as of 28 February. Its impact has spread as far as wages “Longer term, we still remain very bullish on the region,” Korngold and bonuses, with Singaporean state-backed investor Temasek – told Bloomberg TV. “We’re not trying to take advantage of near- which has 42 percent of its portfolio in private markets – saying in term arbitrages, we’re certainly not doing so at anyone’s expense late February it had enforced voluntary “salary restraint measures” when it comes to pandemics. This is a serious issue that affects all including a company-wide wage freeze for April. Its senior manage- of us as humans.”  perenews.com/asiaweek | #PEREAsia 5 How is the Covid-19 outbreak impacting global real estate?

Coronavirus impact spreads to wages

One of private markets’ biggest investors, Singaporean state fund Temasek and real estate manager CapitaLand, are implementing pay cuts to counter the economic impact of the rapidly spreading outbreak. By Arshiya Khullar - 27 February 2020

Coronavirus is causing upheaval across financial markets, with ment-owned entity as a symbolic move to help limit the potential the Dow, S&P 500 and Nasdaq all recording significant drops in economic damage to Singapore. Temasek, which has always been late February. quick to point out it is not a sovereign wealth fund, would disagree. But the financial impact of the rapidly spreading virus is moving Temasek’s portfolio has plenty of exposure to China. As of March into other areas, and wages and bonuses are the latest to be hit. 2019, 26 percent of its assets under management were in the country, On 26 February, Singapore’s Temasek announced a slew of the fund’s joint largest geographic exposure alongside its 26 percent enforced and voluntary ‘salary restraint measures’. The $231 billion exposure to assets in Singapore. government-owned investor, one of the world’s biggest institu- Naturally, there has been a ripple effect for Temasek-backed real tional investors, is to implement a company-wide wage freeze for estate companies. For example, the Singapore-listed developer and April. It added that the duration of the freeze would depend on manager CapitaLand, in which the state fund controls a 51 percent market conditions. stake, laid out similar measures this week in its own “show of togeth- Its senior management, including managing directors, will see erness and solidarity with its stakeholders”. cuts of 5-15 percent in their annual bonuses. Temasek is also asking All CapitaLand staff at the managerial level and above will have senior staff to sacrifice as much as 5 percent of their base salaries for a wage freeze for six months, starting in April. CapitaLand owns up to a year, the proceeds of which will be matched dollar-for-dollar by 258 properties across 62 Chinese cities, and 51 of them are retail Temasek and channeled to volunteer initiatives. Temasek is the world’s assets, one of the worst affected sectors. The firm intends to use a fifth largest institutional investor in private real estate, according to portion of its management’s compensation to provide rental rebates, PERE’s annual Global Investor 50 ranking, with $41.21 billion in equity marketing assistance and other relief measures to its retail partners committed. In 2019, 17 percent of the state fund’s portfolio was allo- in China and Singapore. cated to the consumer and real estate sector combined. When businesses come under financial pressure, initial cuts Temasek said the move was a “demonstration of the firm’s owner- traditionally center on operating expenses, travel and entertainment ship mindset, sharing gains and pains alongside its shareholder spending, executive bonuses, and postponements of new hiring. and supporting wider communities”. In its announcement, the firm Many firms across the world that have been affected by the coro- reminded people of how it had implemented similar measures navirus could initiate their own strategic capex cuts if the outbreak during the 2003 SARS outbreak and the global financial crisis in 2008. continues into the third quarter. By 26 February, there were nearly 82,000 confirmed cases glob- The impact on compensation might be an exclusively Asian affair ally, of which just 93 were in Singapore. As such, some people in today, but then so initially was the virus.  the private real estate sector are viewing the decision by a govern- perenews.com/asiaweek | #PEREAsia 6 How is the Covid-19 outbreak impacting global real estate?

Retail and hotels first sectors hit by spreading coronavirus

The full extent of the outbreak in China is yet to be seen, but the short-term impact has already manifested itself in Asia’s private real estate markets. By Christie Ou - 19 February 2020

The rapid spread of the virus – which had led to more than 70,000 The performance in the hotel sector has also been “significantly cases and 1,800 deaths, as of press time – has spawned worldwide worsened by the outbreak of novel coronavirus,” according to a travel restrictions in and out of the country. Hong Kong-headquar- report by data provider STR. The report notes hotel occupancy in tered airline operator Cathay Pacific Group cancelled more than half mainland China declined 75 percent between January 14 and 26. its flights amid the outbreak, while at least 14 countries, including Hotel room rates also slumped to as low as HK$70 ($9; €8.26) in Australia, the US, Vietnam and South Korea, have imposed restric- Hong Kong, normally one of the most expensive cities in the world, tions on travelers to or from China. as reported by the South China Morning Post. “The coronavirus epidemic only became a nationwide crisis in Apart from retail and hotels, the office sector in China is also the weeks leading up to Chinese New Year and does not, despite seeing negative impacts due to the outbreak. This is especially the the government’s best efforts, seem to be under control yet,” says case for occupiers from the food and beverage, retail and transpor- James Macdonald, head of Savills research, China. “The potential tation industries, according to the CBRE report. The report says that impact this will have on the economy and property market therefore leasing activities will be slow in the first quarter, but the slowdown is hard to quantify.” is anticipated to be “short-lived” and the market is “likely to recover According to a CBRE report published in February, the outbreak as early as late Q2.” is expected to peak sometime between mid-February and mid-year. The outbreak has already had a negative short-term impact Landlords offer tenant relief on the Chinese real estate market, with the country’s retail sector initially hit hardest due to the travel restrictions and temporary store Although the brunt of the coronavirus impact has been felt in China, closures. Although retailers with “omni-channel capabilities will be other Asian markets have been hit by the epidemic’s ripple effects. more resilient” in this situation, brick-and-mortar malls and stores Real estate sectors relying on tourism, again starting with retail are expected to suffer, the CBRE report stated. and hotels, are going to face challenges as travel restrictions are perenews.com/asiaweek | #PEREAsia 7 How is the Covid-19 outbreak impacting global real estate?

imposed on Chinese tourists, the largest group of foreign tourists Lau expects the Chinese government to launch relief meas- in Hong Kong, Malaysia, the Philippines, Singapore and Thailand, ures, such as a supportive monetary policy and interest rate cuts, according to a report by JLL. The decline in Chinese tourists has to support the country’s property pricing once the epidemic has already impacted hotels in Singapore and could also hurt prime been contained. With Hong Kong, however, “it will take much longer retail in Japan, the Singapore Tourism Board and the report noted. for the city’s economy to recover from the damage with the more Overall, Asia-Pacific investment volumes in the first half of 2020 isolated and depressed sentiment in the city,” Lau explains. are expected to drop significantly as investors re-assess investment The CBRE report supports Lau’s assertion, indicating the pipelines, but are expected to normalize in the second half after the epidemic will impede an economic rebound in Hong Kong, which outbreak has been contained, according to the report. “entered a technical recession in Q3 2019” on the back of protests that Although investors are still taking a “wait-and-see” attitude when have been ongoing since June last year. Even before the outbreak, it comes to making new investments, landlords and asset manag- the city recorded commercial real estate investment volumes of ers are taking proactive measures with existing holdings affected HK$4.83 billion ($621 million; €558 million) in the last quarter of 2019 by the epidemic. Many major retail landlords in the country have – the lowest since 2017, according to CBRE research. offered rental cuts to ease the pressure on tenants, according to “Not surprisingly, we have seen institutional real estate transac- the CBRE report. tion volumes in Hong Kong drop sharply since the protest movement “The virus has taken us by surprise,” says David Kim, chief exec- began last summer,” real estate capital advisory firm Hodes Weill utive of the private funds group at Singapore-based ARA, which wrote in a report published in February. “The coronavirus outbreak owns assets across Asia. “We’re trying to stay ahead of the curve adds a new level of concern and anxiety over the market.” and tell our investors we’re doing everything we can.” The firm is also offering a rent-free period to retail tenants in order to offset Long-term implications lower footfall, which has dropped by 70-80 percent alongside other malls in the country. Hodes Weill, however, remains optimistic on Hong Kong over Meanwhile, Singaporean developer and fund manager Capita- the longer term: “We believe that most investors have concluded Land has closed all four of its malls in Wuhan and both of its malls in that in spite of the protest movement, Hong Kong’s relevance as a Xi’an as required by the local governments. At its hotel properties, gateway city and an important global capital market is not going the firm is waiving cancellation fees and offering other assistance to away any time soon. guests impacted by coronavirus-related travel restrictions. A shift in sentiment could therefore occur quickly if the corona- Both CapitaLand and ARA are also projecting increased capital virus is contained in the upcoming months and buyers sense the expenditures in some of their properties. These have arisen from economic and political environments have stabilized enough.” the need to conduct temperature checks, intensify disinfecting and Asia has a history of rebounding from setbacks. The SARS cleaning operations, and supply hand sanitizers and face masks to outbreak in 2003 saw transaction volumes in Hong Kong, mainland the buildings’ users. China and Singapore drop sharply in the first half of the year to then recover in the second half. Double-negative for Hong Kong “Past crises have typically moved the market downward sharply, but it has come back fairly quickly,” says one Hong Kong-based Collin Lau, founder of Hong Kong-based alternative real estate senior executive at an international real estate investment firm. investment firm Bei Capital, tells PERE that although coronavirus will “Obviously, we’re hoping for the best.”  have short-term impacts on China, it will inflict a double-whammy and extended damage to the already weakening investment sentiment in Hong Kong.

perenews.com/asiaweek | #PEREAsia 8 How is the Covid-19 outbreak impacting global real estate?

How an epidemic revealed a supply gap in Chinese healthcare real estate

The rapid spread of coronavirus has thrown a spotlight on the country’s growing need for healthcare facilities, a sector of the local real estate market that remains undercapitalized. By Christie Ou - 24 February 2020

The coronavirus epidemic has wreaked havoc on the retail and hotel necessary go for because the asset is not as liquid as something like sectors in China, with more than 75,000 cases in the country alone an office building,” Ellis explained. “Particularly when you are talk- as at time of publication. However, the crisis has highlighted another ing about hospitals, investors have big barriers in terms of investing challenge in the nation’s real estate market: the current undersupply in China because it is highly regulated as to whom could own the of healthcare facilities. business.” As of February 2019, there had been a total of 33,000 hospitals in China has seen minimal foreign investment into the healthcare real China, an increase of 1,866, or 6 percent, from the same period in estate sector to date. Since 2015, $2.3 billion has been invested in 2018, according to one industry report. Although the increased Chinese healthcare properties, with just $0.1 billion coming from demand for healthcare real estate in the wake of coronavirus has outside mainland China, according to real estate transactions been difficult to quantify, news reports have depicted the supply/ provider Real Capital Analytics. The transactions recorded by Real demand imbalance for facilities. A report from the New York Times Capital Analytics were for development sites for hospitals and clin- described “long lines” as “a standard feature of hospital visits in ics, not existing assets. China” as people prefer to visit the top hospitals – these hospitals are Ellis told PERE that foreign investors face restrictions in owning and concentrated in the developed and wealthier cities in the country. operating medical facilities, with the maximum equity they can own David Ellis, partner at international law firm Mayer Brown, said health- capped at around 70 percent. Most overseas investors will therefore care remains a small sector in Chinese real estate. “Healthcare real need to work with a local partner when deploying capital in China’s estate is not something that a private equity real estate fund would healthcare sector. perenews.com/asiaweek | #PEREAsia 9 How is the Covid-19 outbreak impacting global real estate?

CHINESE HOSPITAL OWNERSHIP REGULATIONS

The government re-tightened restrictions for foreign ownership of healthcare facilities after 2015

Pre-2010 restrictive measures From April 1997 to November 2010, foreign investors could not establish any wholly foreign-owned enterprise medical institution in China. 2010-2015 liberalization measures From November 2010 to April 2015, foreign investors could establish WFOE hospitals in the China (Shanghai) Pilot Free Trade Zone (Shanghai FTZ) and in certain pilot cities, and qualified Hong Kong, Macau and Taiwan service providers could establish WFOE hospitals in cities at or above the prefectural level. Post-2015 retightened measures Since April 2015, foreign investors are generally not allowed to establish any WFOE medical institution in China but qualified Hong Kong, Macau and Taiwan service providers still can establish WFOE hospitals in cities at or above the prefectural level.

Source: Han Kun Law Offices

In most cases, when land for a hospital is put up for tender, the hospitals rather than specialized hospitals. Unlike specialized hospi- government will require an operator to buy the land alongside the tals, general hospitals do not generate enough profits to afford developer, according to Ellis, describing the typical investment rents that could meet the return requirements of most institutional process for hospitals in China. As a result, the developer and the investors, he added. operator will usually create a joint venture vehicle to acquire the Although specialized hospitals are more profitable, they are land, so both the asset and its operation tend to be under the same relatively small and do not require significant capital, says Guan. The entity, he said. ticket size of these investments would therefore be too small for most It is not easy to find a reputable operator in China, however, institutional investors, he added. noted Collin Lau, founder of Bei Capital and founding shareholder Deals do happen, however. Laboratory facilities are a growing of Hong Kong-based medical group Virtus. Most of the hospital subsector in the healthcare real estate sector in China, according operators are government owned and the number of foreign oper- to Liu. Starcrest, for example, paid $110 million for Starcrest Life ators in the country is limited. Even if a developer could bring in a Sciences Parc, an asset being used for laboratory facilities, in 2018. good operator, the firm would need to be well-versed on the licens- Some landlords are also endeavoring to form clusters of clinics ing issues, he said. within some of their office buildings, according to Ellis. He is seeing Land supply for medical properties is another obstacle, accord- more investors looking to incorporate healthcare elements into new ing to Jeff Liu, managing partner at China-focused manager Starcrest or existing real estate properties. Capital Partners. “There isn’t a lot of land that has prerequisite envi- Medical clusters are not uncommon in Hong Kong, a city which ronmental approvals in place to build medical facilities, especially is famous for its medical tourism industry among Chinese visitors, in infill locations of big cities like Shanghai that already benefits from according to a CBRE report. For example, a commercial building in the cluster effect of a well-established pharmaceutical industry.” Central, the central business district of Hong Kong, was fully leased A recent example would be the 2017 closure of Shanghai Redleaf to Virtus in Hong Kong. The report points out that medical tenants International Women’s and Children’s Hospital, which was forced to typically are willing to sign a longer lease up to 15 to 20 years and shutter, reported the Hong Kong Free Press, by the local government pay a 10 to 20 percent rental premium compared to the traditional because it was “illegally built on land owned by the armed forces,” office occupiers in the city. However, Lau points out that licensing according to an official announcement. issues for both healthcare operators and landlords in China are more Barriers to entry aside, there are other reasons healthcare real complicated than in Hong Kong. estate investments in China do not make sense to most institutional Despite the regulatory hurdles in the sector, healthcare spend- real estate investors, according to Paul Guan, partner at international ing in China has climbed from less than 500 billion yuan ($71.6 billion; law firm Paul Hastings. €65.8 billion) in 2000 to more than 5 trillion yuan in 2017, according “Firstly, these investments require a long operational time to to a JLL report. The upshot in demand will bring a “renewed focus” become profitable, while most private real estate funds can only on the sector, the report stated. That focus stands to only sharpen hold the assets for up to five to six years,” Guan explained. Besides, as coronavirus continues to ravage the country and its economy.  most sizable healthcare properties can only be leased to general

perenews.com/asiaweek | #PEREAsia 10 How is the Covid-19 outbreak impacting global real estate?

Institutional managers with sizeable China holdings are already in contingency mode. CapitaLand, which became Asia’s biggest real estate investment manager last year, has now temporarily shuttered six of its malls – four in Wuhan and two in Xian. The Singapore-based manager has also waived the cancelation fees of The Ascott, its wholly owned lodg- ing unit, and hired support services to facilitate the disrupted travel plans of its customers. Others, including fellow Singapore-headquartered manager ARA Asset Management, are yet to reach for their locks, opting rather to slash rents or provide other incentives to tenants. The firm says it is too early to offer a forward-looking performance outlook, but downward it will no doubt be. ARA, which has no direct Wuhan exposure, has taken this measure in the face of footfall in its China malls plummeting 70-80 percent, the firm told PERE. Given retail leases often are contingent on sales the firm has little choice. China landlords experiencing similar predicaments including Wanda Group, Poly Real Estate, Powerlong Real Estate, China Resources and Seazen Holdings are resorting to similar measures, broker CBRE reported earlier this week. Meanwhile, international retailers like Ikea and Starbucks have closed operations in China, the former shutting around half of its 30 stores, it announced. Travel bans proliferating from the country are also hitting the overall Asia hospitality sector with stays and event bookings down. Close to home, PERE’s own Asia Summit conference, already relo- cated to Singapore from Hong Kong following the latter city’s recent protests, was postponed to June after delegates and speakers alike Plaza Singapura: the CapitaLand mall is among those benefiting were prohibited from travelling. The 700-plus delegate event, to be from extra cap-ex held in Singapore’s Grand Hyatt, is one of Asia’s biggest real estate conferences. Elsewhere, a BBC report this week described international hotels offering guest refunds. China real estate is in Rightly, institutional landlords are getting their first public responses to the crisis out quickly and these point to both perfor- ‘wait and see’ mode mance hits on reduced revenues but also unscheduled outlays. Indeed, both CapitaLand and ARA have forecast an expected over coronavirus upswing in capital expenditures in affected properties, including temperature checks, more intensified disinfecting and cleaning The spreading virus is already thumping the country’s retail and hotel operations and providing hand sanitizers and face masks to the sectors, but its wider impact in the country and further afield cannot buildings’ users. Those measures are an obvious start. be fully assessed yet. And while these opening ground-level measures are taken, the By Jonathan Brasse - 6 February 2020 1,000-foot view is darkening with analysts slashing China’s already slowing GDP forecast, from last year’s 6.1 percent to as low as 4.9 One week after the deadly coronavirus broke out in China, the first percent, as offered by the Economist Intelligence Unit. This malaise impacts on the country’s real estate markets are now plainly visible. will no doubt be relevant to other Asia markets. As the saying goes: Predictably, retail and hospitality, sectors subject to high levels when China catches a cold, its neighbors get sick. of footfall and rental income contingent on use, are the heaviest hit. As CapitaLand and ARA told PERE early February, Asia’s biggest And with the city of Wuhan in the Hubei province at the epicenter, managers are essentially taking a ‘wait and see’ approach to the the affected radius for commercial properties widens with the infec- epidemic. They with meaningful interests in Chinese real estate tion count – more than 28,000 people globally as of 5 February, currently have little other choice.  according to the China National Health Commission.

perenews.com/asiaweek | #PEREAsia 11 How is the Covid-19 outbreak impacting global real estate?

How managers are fundraising for a downturn

Many firms are seeking ways to secure dry powder in the event of an economic slowdown, but these tactics do not always benefit investors. By Evelyn Lee - 4 November 2019

It is a longstanding predicament in the private real estate industry: billion, according to PERE data. Contributing to this high capital the optimal time to raise capital and the optimal time to deploy capi- raising volume were mega-funds, including two which surpassed tal are often at odds with each other. $5 billion, as well as an additional 17 funds that exceeded $1 billion. As James Jacobs, head of real estate in the private capital advisory But while real estate fundraising levels have reached new highs, group at investment bank Lazard, puts it: “The easiest time to raise investment activity has dipped by 9 percent year-over-year during H1 capital is often the most difficult time to invest it, whereas the hard- 2019 to $341 billion – the lowest level since H1 2016, when volumes est time to raise capital is often the best time to invest in real estate.” dipped to $317 billion, according to commercial real estate services firm JLL. “Risk-free rates continue to plummet, lowering financing “THE EASIEST TIME TO RAISE CAPITAL IS OFTEN THE costs and widening spreads to property at a time when investors are MOST DIFFICULT TIME TO INVEST IT, WHEREAS THE HARDEST TIME TO RAISE CAPITAL IS OFTEN THE BEST hungrier than ever for yield,” an August JLL report stated. TIME TO INVEST IN REAL ESTATE.” But with the economic recovery now entering its 11th year, the JAMES JACOBS, LAZARD possibility of a downturn looms larger than ever, even though the actual timing of a correction continues to be difficult to predict. Current private real estate market conditions point to the former Nonetheless, many real estate managers have factored a potential scenario. H1 2019 was the most active six-month fundraising period downturn into their recent fundraises, as reflected by changes with since 2015 and most active H1 since the global financial crisis for real the funds’ terms, structures or investment periods. From interviews estate funds reaching a final close, amassing an aggregate $75.5 with more than a dozen sources in the industry, including placement perenews.com/asiaweek | #PEREAsia 12 How is the Covid-19 outbreak impacting global real estate?

agents, investors, consultants and managers, PERE has compiled the firm also has delayed the investment periods for some of its real seven ways firms are fundraising for a downturn. estate funds. “The idea of delaying the onset of the investment period for fee Bringing forward fundraising purposes is a pretty new thing,” said Oaktree co-chairman and co-founder Howard Marks, during the firm’s Q4 2018 earnings call Lone Star Funds launched its sixth real estate fund, Lone Star in February. “It happened for the first time sometime within our last Real Estate Fund VI, in late 2018, even though it still had uncalled few funds. As you know, the purpose is to avoid heavy fees on a fund capital in the predecessor vehicle, LSREF V. The Dallas-based private in the early years when it is only fractionally invested.” equity real estate firm targeted $3 billion for the fund and ultimately According to Matt Posthuma, a partner at law firm Ropes & Gray, held a final close of $4.7 billion, which includes third-party commit- longer investment periods offer managers more flexibility to make ments and anticipated co-investments. PERE understands approxi- investments at lower prices should a downturn occur. Conversely, mately $1.5 billion of the fund’s equity was rolled over from LSREF V. however, this potentially creates more risk for the investor. “From Investors that rolled over capital were reportedly given a reduced the investors’ perspective, if there’s a longer investment period, they management fee. have to keep that capital ready to go for a longer period of time,” he For one Lone Star investor, LSREF VI was the first rolling-over says. “That money needs to be accessible for a longer period of time, of fund capital the investor had seen. “I believe the dealflow in the so maybe that means they’re putting more money in cash than they global markets has not made the cut for the targeted returns for the otherwise would in anticipation of the calls.” previous fund; hence not deploying the full capital raised a few years Taylor Mammen, senior managing director at Los Angeles-based ago,” the investor says. consulting firm RCLCO, agrees: “It basically extends the amount Managers that start raising new funds even when the prede- of time for when a manager has a call on fund capital. It’s capital cessor vehicles still have significant levels of undeployed capital committed that the investor has to take into account, that it can’t remaining are “bringing forward fundraising of new fund series or necessarily use for other investments. Sometimes that’s advanta- new fund strategies” in anticipation of changing economic condi- geous if the investor itself is worried that it won’t have the ability, or tions, says Priya Nair, global head of product management for stomach, to make investments in a down market—when it might be private capital services at RBC Investor & Treasury Services. To date, the best time to do so. For the most part, though, it’s pretty uncom- only a handful of managers have adopted this tactic, she says: “It’s fortable for investors to have too much uncalled capital sitting at the uncharted territory.” discretion of managers.” Rolling over the capital effectively gives the manager more time to deploy the capital amid market uncertainty. “By rolling over the “IT’S PRETTY UNCOMFORTABLE FOR INVESTORS TO HAVE TOO MUCH UNCALLED CAPITAL SITTING AT THE old, unfunded capital and adding new, Lone Star reset the invest- DISCRETION OF MANAGERS” ment period and now has another few years to deploy the capital,” TAYLOR MAMMEN, RCLCO the investor explains. “Considering the late stage of the cycle, even if nobody truly knows when that may end or how, this gives them Lower management fees continued dry powder to continue sourcing deals or capitalize on any distress that could occur over the next few years.” With Lone Star and Oaktree, resetting or delaying the start of a fund’s investment period has led to reduced or waived management fees Longer investment periods on committed capital. “We think that is good alignment because if you do believe that Meanwhile, managers have been raising funds with longer invest- the market is very competitive and we are late cycle, especially with ment periods than prior funds. Lone Star, for example, set its invest- the closed-ended vehicles on the value-add side, it certainly makes ment period for LSREF VI at four years instead of the three years sense for investors to be paying lower fees on commitments with that were typical of earlier funds, while Blackstone increased its no guarantees of capital being fully deployed,” says Riaz Kermally, investment period for its latest fund, the $20.5 billion Blackstone portfolio manager of global real estate at the UK-based Pension Real Estate Partners IX, to 5.5 years, up from 3.75-4.5 years for the Protection Fund. previous three vehicles. Whereas a standard management fee on a value-add fund would Another manager, Oaktree Capital Management, has taken a be 1-1.5 percent on committed capital and 1.75 percent on invested variation on this approach by delaying the official start of a fund’s capital, managers are now charging 0.75-0.9 percent on committed investment period but not charging investors fees in the interim. In capital, which rises to 1.5 percent on invested capital once they begin its second-quarter earnings results, the firm revealed that as of June deployment. “So effectively, the J-curve is not as steep and it also 30 it had deployed 35 percent of its $8.9 billion Oaktree Opportun- shows if investors’ capital is not deployed, managers are aligned,” istic Fund Xb, a closed-ended opportunistic distressed debt fund, says Kermally, whose organization’s panel of approved managers but had yet to activate the investment period. PERE understands includes CBRE Global Investors and LaSalle Investment Management. perenews.com/asiaweek | #PEREAsia 13 How is the Covid-19 outbreak impacting global real estate?

The lower fees are also a reflection of investing in the late cycle, one of the reasons that’s often given is in the event of significant he adds. “We are aware, going forward, performance could be lower. buying opportunities thanks to an economic slowdown.” Managers are generally adjusting their targeted returns for the next For Paul Jayasingha, global head of real assets at Arlington, few years because of the continued competitive environment we Virginia-based advisory firm Willis Towers Watson “the concept of have currently,” says Kermally. a rainy-day fund is a nice way for a business to secure fund commit- Managers that were historically targeting 15 percent returns in ments in a time where things could get much harder in the fundrais- 2013-15 have now lowered those targets. “If you don’t think you can ing world.” generate 15 percent for investors, fund terms should be adjusted But he views such a vehicle as different from typical co-invest- to ensure better alignment between investors and managers.” He ment capital: “One of the big advantages of a co-investment is you’ve adds that while he expects returns for more recent vintages will got a lot of clarity on what you’re investing in and the price at which increase if distressed opportunities do arise, there are not many of you’re investing in. That’s not how I would interpret a rainy-day fund, these opportunities in the market currently. where the whole point is that you’re going to take advantage of some distress and there’s going to be opportunities that you can’t Higher reserves foresee now.”

Meanwhile, managers have become more focused on increasing the Pre-specified deals amount of reserves in their funds. “They are reserving more capital in their funds for the ‘what if?’,” says Doug Weill, founding partner at The investor focus on clarity on investments at this point in the cycle New York-based real estate advisory firm Hodes Weill & Associates. has led many managers to pre-seed their funds with assets. One “As much as 10 percent of a fund might get reserved to protect the notable example of this is Goldman Sachs’ next private equity real portfolio, and managers are more inclined to do that today than estate fund, expected to materialize before the end of the year. The they were three or four years ago. Managers are more cautious at $2.5 billion-plus fund is expected to be pre-seeded up to 40 percent this point in the cycle and they are positioning their portfolios to of total assets from the bank’s balance sheet. weather a potential downturn.” “There’s some very compelling investment opportunities that are In establishing reserves, a manager would invest or commit up available today through offerings with meaningful pre-specification, to 90 percent of the fund to transactions, and reserve 10 percent wherein the de-risking in such portfolios has been material,” says for potential follow-on investments or to protect the portfolio in Matt Casper, a partner at advisory and placement firm PJT Park Hill. a downturn. Park Hill currently is working on multiple capital raises with “A challenge in the last cycle was that many managers fully managers that are contributing large $1 billion-plus portfolios into committed their funds and had no ability to call capital to protect new funds and investment vehicles. The assets have been held on their portfolios,” Weill explains. While PERE has been told of funds balance sheet, in certain cases for multiple years, and are being adopting 3 percent to 5 percent reserve policies in recent years, contributed to the vehicle at cost, or at an attractive basis relative to Weill believes a higher amount makes better sense for weatherproof- market, allowing investors to acquire the properties at a discount, ing a fund. “With 10 percent, they would be in a much better posi- Casper says. tion and avoid the need to go back to LPs to ask for another round “Many investors would rather take that bet versus a blind-pool of capital or preferred equity or some additional capital infusion.” commitment. They say, ‘I have certainty in deploying capital into A downside for investors is that they are typically paying manage- this now, I have managed down risk at a high point in the cycle, and ment fees on that 10 percent during the fund’s investment period, I have less exposure to the J-curve’,” he notes. although fees are not charged on the reserved capital after the Posthuma, however, says pre-specification carries its own risks: investment period ends, he says. “While that does provide more certainty as to the existing portfolio, it also increases your exposure in the event of a downturn that might Rainy-day funds affect assets generally. In some ways, you can argue that it’s better not to buy a lot of assets upfront or at least in the first year or so of Another approach some managers have taken to amass more dry the fund, but rather give the manager more time to decide what’s powder for a potential downturn is to raise additional sidecar capital the right time to be buying new investments.” alongside a main fund, in what are sometimes called ‘rainy-day funds.’ “We’re seeing managers just identify other capital buckets, includ- Slower deployment pace ing sidecar investors to invest alongside the funds, kind of like an accordion feature that allows them to raise more capital if they need Indeed, in Asia, Gaw Capital Partners is taking a more measured it, but not have any obligation to deploy that capital,” says Mammen. investment pace with its latest real estate opportunistic fund, the “It comes up in many conversations with managers that they are $2.2 billion Gaw Capital Real Estate Fund VI, for which it is expected interested in having a large pool of sidecar capital to call upon, and to hold a final close imminently.

perenews.com/asiaweek | #PEREAsia 14 How is the Covid-19 outbreak impacting global real estate?

“When distress actually comes, people don’t necessarily give Mammen adds that downturn-related fundraising practices have out capital. They sit on it,” Christina Gaw, managing partner and not all been well-received by investors: “It is fair to say that at least head of capital markets at the Hong Kong-based private equity real some institutional investors are finding policies and practices like estate firm explains, recalling the difficult fundraising environment those to be part of a large set of reasons for why they find commin- the firm faced in 2009. gled funds to be unattractive.” With Fund VI, “we want to make sure that we deploy it at the right PERE data bears this out. The California State Teachers’ Retire- pace, such that if distress does come, we would still have a good ment System, for example, was a repeat investor in Lone Star Real amount of dry powder to deploy, rather than have to raise fresh Estate Fund III, IV and V, but did not re-up with LSREF VI. Arizona capital during times of distress,” she says. State Retirement System, meanwhile, had committed to Oaktree Gaw Capital previously had deployed its funds in approximately Real Estate Opportunities Fund V and VI, but did not back REOF VII. two-and-a-half to three years, ahead of their designated four-year Some managers consequently have had more difficulty securing investment periods. With Fund VI, the firm may “maximize” the large commitments from large investors. “It’s keeping fundraising investment time to three-and-a-half years, she says: “If you see uncer- challenging,” says Mammen. “It requires managers of particularly tainty, you’re going to slow down a bit. You still have to invest, but large commingled funds to go to more and more investors in order you’re not going to try to invest in two-and-a-half years. So if within to expand their investor universe or accumulate smaller checks. They that four years, the downturn does come, you still have sizable capi- can’t rely on the same mega-investors, whether domestic or inter- tal to take part in that.” national, to commit a few hundred million dollars to the fund. So it’s To do so, Gaw Capital will be more selective to build a more taking more work.”  diversified portfolio for Fund VI, says Gaw: “During a time when we would want to slow down deployment, that’s what we would think Is the downturn-related opportunity overblown? more about: do we have it in the portfolio? Do we have the expo- While some managers are fundraising for a downturn, sure already? If we want to slow down deployment, then we should others are skeptical that significant opportunities could arise from a correction. look at things that are more diversified for the portfolio to avoid concentration risk.” “From my perspective, I’m somewhat wary about it. I do fear that a lot of investors and managers are preparing to wage the last war, preparing to wage the Great Recession when Impact on fundraising the next downturn might be materially different, particularly for real estate. The chances that real estate causes the next For investors such as Tony Breault, senior real estate investment economic downturn are very low,” says Mammen. officer at Oregon State Treasury, fundraising tactics such as longer “The opportunity fund business in real estate was largely investment periods or establishing reserves are viewed as posi- built on significant downturns that enabled managers to tives: “We have been supportive of both, as I’d rather see prudent acquire assets really cheaply, turn them around in a short amount of time, take advantage of significant valuation investment discipline apply through a longer investment hori- increases and then get out and get their promotes. I would zon, and we’ve seen what can happen when a fund does not have say there’s a good chance that isn’t going to happen next adequate capital reserves available to recap a project, or refinance time. I worry about investors relying on opportunity fund at a lower valuation, or simply needed to finish a business plan over managers to find quick hits. I think the opportunity set is going to be limited.” an extended hold period.” In fact, the pension would likely not invest in a fund that had an investment period of less than three years or He concedes that more capital is being raised for opportunistic strategies than there are potential to earn did not have a reserve. opportunistic returns. In fact, returns may be muted even Raising capital around a potential downturn, however, is not relative to the reduced return targets in the mid-teens, always an easy sell. “An LP will wait for the distress to happen and Mammen says. that’s the challenge for the managers,” says Weill. “They like the capital “We’re not going to see a significant downturn,” agrees one ready and standing to commit to deals for when that distress occurs.” manager that invests in distressed opportunities. “Could He notes that with Hodes Weill’s opportunistic and distressed-fo- prices correct? They could. But with interest rates so low, cused mandates, investors frequently ask why they need to commit we don’t see a ton of distress and we don’t see a massive distress cycle coming. I don’t think we’ll get a repeat of now. “It’s not easy to have money committed to something that sits 2007.” there as a dry commitment and they don’t know how quickly it’s going to get drawn,” he says.

perenews.com/asiaweek | #PEREAsia 15 SingaporeAsia Week 2020

16-18 June | Grand Hyatt Singapore Global real estate’s most influential community

Meet our featured speakers

Jinglei Chen Amal Del Monaco Jiroo Eoh AXA Investment BEI Capital Partners ABL Life Insurance Managers

Natalie Hong Chung Keun Kim Bill Schwab Formerly from Abu United Nations Joint Samsung SRA Asset Dhabi Investment Staff Pension Fund Management Authority

Bill Shaw Richard Spencer Yingpei Wang Zurich Insurance Goldman Sachs D&J China

SECURE YOUR PLACE TODAY – THREE EASY WAYS TO REGISTER:  perenews.com/asiaweek |  +852 2153 3844 |  [email protected]

Breakfast briefing sponsor Grand opening cocktail sponsor

Lead sponsors