Secondary fund transactions in Asia Pacific real estate are expected to build on a record 2018, reflecting an increasingly sophisticated investment market.
In March, Singapore’s Frasers Group used secondary trades to increase its investment in PGIM’s retail real estate fund by S$635 million.
Frasers Property Ltd and Frasers Centrepoint Trust, a REIT managed by the developer, acquired 67 percent of the units in the PGIM Asia Retail Fund, which owns suburban shopping centres in Singapore. The units were bought from investors in the vehicle in three separate transactions, with the stakes acquired at close to book value.
The move towards secondaries is part of a wider trend, according to Tim Graham, Executive Director Head of Capital Strategies, JLL Asia Pacific.
“We are seeing an increased trend towards strategic transactions such as secondaries, re-capitalisations and GP stake sales. Last year, secondary fund activity reached a record high and we expect this growth to continue in the future.”
In secondary market transactions investors buy positions in non-listed property vehicles from other investors in the fund. Such transactions are often at a discount to the net asset value of the underlying assets, in part to reflect the value of liquidity, but do not necessarily represent a failure on behalf of the original investor, which might wish to sell following a change in strategy – a preference for direct investments for example.
Investors in secondary transactions may secure a discount to NAV and are also gaining exposure to more mature portfolios, thus avoiding the “J-curve” of real estate fund investing, where returns in the early years of a fund’s life are impacted by the costs of initial investments.
The secondaries market is more developed in the U.S. and Europe, due to the longer history of non-listed real estate funds in these regions.
However, real estate secondary strategies are gaining popularity with investors across the world. Partners Group, a specialist in this area, raised US$2.9 billion for a global real estate secondaries fund in 2017 and is in the process of raising a US$3 billion fund which will target both secondary and direct opportunities.
“The increasing sophistication of Asia Pacific real estate capital markets business means there is an increasing range of options for investors: direct, indirect debt, secondary funds, secondary trades, so naturally we expect more complex transactions as investors move between different strategies,” says Graham.
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