PE funds to invest $14b in local realty

China will probably receive $14 billion of capital within the next three years, being the top recipient of real estate private equity capital in Asia Pacific, research from international real estate service provider CBRE showed.

With an improved fundraising environment and investors being lured back to real estate in Asia Pacific, an estimated $53 billion of real estate private equity capital will be deployed into this asset class by 2020, according to CBRE.

CBRE Research data show that $42 billion in capital was raised by Asia Pacific-focused closed-end real estate funds between 2014 and the third quarter of 2017, which translates to around $116 billion (post-leverage) of purchasing power.

A total of $63 billion, or 54 percent, of capital has been deployed since then, with Australia, Japan and China accounting for nearly three-quarters of this total investment. The remaining capital of $53 billion would need to be deployed within the next three years since real estate private equity funds typically have an investment period of three to four years. Fund managers are unlikely to wait much longer for deployment, meaning that this year is likely to see significant purchasing activity.

Since there are clear signs of economic stabilization in China, more funds will go to the country's first-tier cities due to the expectation for improved investment return and more opportunities.

"Asset management and enhancement are set to take on a significant role in propelling rental growth and unlocking hidden value. Gaining a thorough understanding of occupier behavior and requirements will be critical for real estate funds to formulate a successful investment strategy," said Henry Chin, head of research of CBRE in Asia Pacific.

By 2020, investment strategies, such as value add strategy, opportunistic strategy and core-plus strategy, are likely to be implemented. Potential options include repositioning a project to enhance its value, selecting investment opportunities in China's non-performing loans and exploring opportunities in niche sectors.

"The whole investment market in China will remain active in 2018. Investors will continue to show strong interest in decentralized areas and emerging submarkets in tier-1 cities with solid fundamentals. Prime assets in core area of tier-2 cities such as Chengdu, Hangzhou, Nanjing and Wuhan are expected to attract greater attention," said Alan Li, managing director of capital markets of CBRE in Greater China.

"Office will still be the top choice concerning asset type for most investors. Commercial assets such as shopping centers and logistics facilities, where operational expertise is key to success, will continue to be considered favorably," Li said.

Niu Yilin contributed to the story.