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Asia-Based HNW Investors Smile On Western Commercial Property

Tom Burroughes

28 January 2021

The COVID-19 pandemic has upended the world’s property markets as a result of the working-from-home switch, changes to retail shopping habits and leisure, as well as the hit to global tourism. But apart from all that, the rise of an affluent Asian middle class, changing geopolitical dynamics in the Middle East and the effects of Brexit have created opportunities – and some headaches – for bricks-and-mortar investors. Asia-based investors are well known for being real estate enthusiasts, and beyond that region, property has been and remains a significant portfolio holding for high net worth, ultra-HNW individuals and groups such as family offices. 

This news service recently interviewed , speaking to Wan Han Teh, executive director in its Malaysia-based, Kuala Lumpur office. 

Please tell us about the firm
Azimuth is a boutique real estate private equity advisory firm with offices in Kuala Lumpur, London and Dubai. We advise investors in Asian and the Middle East on real estate investments outside their home markets, connecting them with opportunities and best-in-class partners around the world.

We primarily target opportunities in developed and transparent property markets such as the UK, Europe and the US. We advise on real estate transactions across property types and structures, including joint ventures, fund placements and separate accounts. Fundamentally, our approach is to understand the investment objectives and needs of our clients in a deep way and develop bespoke investment strategies that meet those needs.

We have also developed the skillset to help our clients invest in Shariah-compliant real estate investments - opportunities that conform with and are structured in accordance with Islamic finance principles. Demand for these investments is growing strongly in countries like Malaysia, Indonesia, Brunei and in the Middle East, and there are few international real estate firms that truly understand and are able to advise in this space.

We have advised on investments of more than £2 billion ($2.74 billion) across geographies and styles in the UK, Europe, the US and Australia, and have about £500 million in AuM in the UK and Europe at the moment.

The firm has its roots in the aftermath of the Global Financial Crisis. Azimuth’s founding partners spent a good deal of time in Asia and the Middle East and saw that these countries were experiencing massive growth in wealth and savings pools fuelled by young and growing populations, fast-developing economies, and strengthening institutions. Malaysia is a great example. The country has seen tremendous economic growth, fuelled by a growing and well-educated population, a robust pension fund, sovereign wealth fund and asset management companies have been developed which have been effective stewards of capital.

These investors – both institutional investors like pension and sovereign wealth funds and HNW individuals and family offices – had significant exposure to their home markets and real estate in their home markets. But they had little exposure to international real estate.

The GFC created an attractive entry point for these investors to begin building international real estate portfolios to achieve attractive returns and diversify their investments from geographic, currency and duration points of view. 

Q, The firm exists to serve Malaysia-based clients, such as HNW individuals and family offices, who wish to tap into non-Malaysia real estate. Does the firm also serve other clients, both Malaysia-based and in other countries?
Azimuth has its headquarters in Kuala Lumpur, Malaysia and is one of the only international real estate investment firms in the world to base itself here. As a result, we have built strong and deep relationships with our Malaysian clients from HNW individuals up to the countries largest pension and sovereign wealth firms.

However, we also work with clients in other countries in Asia and the Middle East including Taiwan, Korea, Oman, and Saudi Arabia among others.

Q, How is Azimuth structured - is it a private partnership, or a listed firm, other? 
Azimuth is a private firm and is owned by its partners and employees.
Q, How does the firm invest in properties - is it mainly through listed vehicles? Any direct stakes (minority/majority), private funds, etc?
Our philosophy is to develop flexible and bespoke solutions that meet the needs of our individual clients. As a result, our investments take a wide variety of forms. To give just a few examples, we have advised on direct property acquisitions, the creation of joint ventures with best-in-class local operating partners, the establishment of separate account managements, and placement into real estate funds.

One of Azimuth’s current initiatives is to move from pure investment advisory to looking to sponsor and launch a series of Shariah-compliant funds focused on the UK market. This is an area where we are seeing strong demand from clients but there are few available opportunities as very few investment managers understand and can implement Shariah-compliant investment strategies.

Another growth area is in public real estate investments in addition to working in private real estate markets. This is another area where we are working to develop both conventional and Shariah-compliant investment strategies to work with best-in-class local specialists such as CenterSquare Investment Management.

Q, Is it investing in residential or commercial properties, or both? 
Azimuth focuses on commercial properties, which can include residential for rent such as multifamily apartment buildings, purpose-built student accommodation and build-to-rent schemes.

Q, What sort of returns does the firm target? Are there examples of performance that can be disclosed? 
We advise clients on investment across the real estate risk spectrum, which is typically described as from core and core-plus, where target returns are typically 6 per cent to 10 per cent value-add and opportunistic, where higher returns of 12 per cent to 20 per cent plus are targeted.

We are seeing strongest demand in the core and core-plus segment, where investors want to acquire high-quality operating properties that are well-leased to strong multinational and investment grade tenants and generate attractive cash yields in excess of 5 per cent. In the current environment – where there is a still a good deal of economic uncertainty due to the COVID-19 pandemic, investors are happy to accept lower – but still acceptable – returns in exchange for limited risk.

As an example, we recently advised an institutional client on the acquisition of a Central London office property for approximately £150 million. This property is fully leased to seven high-quality tenants with an average lease term of over nine years, producing a 6 per cent annual cash-on-cash yield and projecting 9 per cent IRR over a 10-year hold period.

We typically advise our clients to work with best-in-class, specialist managers focused on specific property types and/or geographies when seeking to invest in value-add and opportunistic strategies. Deep experience and knowledge of local markets is essential in order to mitigate the lease-up or development risk that these strategies entail. We also typically favour advising clients to invest through a fund structure which will diversify their investment across multiple projects, making it less of a binary outcome.

Q, What's the biggest deal the firm has been involved in so far? 
The largest deal that Azimuth has advised on was when we advised an Asian institutional client on their acquisition of a controlling interest in a portfolio of UK hospital properties through a sale-and-leaseback transaction in 2013. With a total transaction size of about £700 million and client equity of about £300 million, this was one of the largest real estate transactions in the UK since the GFC at the time. This has been a tremendous deal for our client, producing an annual income return in excess of 10 per cent and a projected 30 per cent plus internal rate of return.

Q, Why is now the right time to invest in real estate through the public rather than private markets? Are there issues of liquidity and return to take on board?
Currently, listed real estate prices offer due to the stability and long-term nature of their lease-based cash flows but now these are trading at a discount.

The spread between REIT implied cap rates: the property net operating income divided by their Enterprise Value, and corporate bonds is about double the historical average (150 to 200 bps compared with 75 bps). REIT dividend yields is about 300 bps spread over government bonds!

Many REITs trade at a discount to the value of their properties in the private market, creating a quasi-arbitrage opportunity. This is because listed real estate is liquid and it tends to reprice faster than private real estate in downturns. REIT prices are implying valuations for their portfolios which are 10 per cent to 20 per cent below the value of their portfolios if sold in the private market.

Historically, private real estate markets have followed listed real estate markets with a “lag”. This creates an arbitrage opportunity. Listed real estate has historically outperformed private real estate when at a NAV discount and private real estate has historically suffered after listed real estate trades at a discount.

We think REITs are primed to perform in a vaccine-driven recovery and at this point in the economic cycle. This is supported by past data where US REITs outperformed US private real estate by c. 20 per cent per annum and US equities by about 11 per cent per annum in early cycle recovery periods between 1991 and 2019.

On liquidity, listed real estate equities and REITs are far more liquid than private real estate as it can be readily traded on the stock exchange. On the other hand, private real estate typically takes months or even more than one year from marketing, due diligence, exchange of contracts to the completion of the transaction depending on the market condition and the characteristics of the real estate.

Q, Where are the most attractive opportunities in listed real estate now and for the next year or so?
Due to fears around the impact of the COVID-19 pandemic on dense urban environments, real estate in global cities is available in the listed market at a large discount to private market values. We see investing in REITs focused on the world’s leading “global cities” as one of the most attractive opportunities today. 

The current discount between REIT prices and the value of their underlying real estate is historically wide. Historically, these REITs trade at or above their private market values but now at a 10 per cent to 20 per cent discount. Lower pricing also results in attractive yields which are at 75 to 125 bps higher than private real estate and a whopping 500 bps higher than the US 10-year treasury rate.

We are a strong believer that urbanisation is an ongoing process and COVID-19 is not going to change this. Urbanisation is a decades-long megatrend that continues to shape the global economy – 55 per cent of the world’s population already lives in urban areas and that’s expected to rise to 68 per cent by 2050.

We would like to think that listed real estate is a niche in the public equity markets and working with specialists will be the key to outperformance over time. The global market capitalisation of listed real estate is about $2.1 trillion – that’s about the size of Apple and Tesla combined – and REITs are about 3 per cent of the S&P 500. As a result, generalist equity managers do not do in-depth work on real estate – it just does not make sense for them to spend the time to do so. Investors would want to work with firms that have real estate expertise as a core competency. This specialist managers can understand the nuances of real estate markets such as why do you want to own in some parts of a city and not others, make physical property visits and meet with management teams.

Our background is in private real estate so to develop a strategy in this space, we’ve chosen to work with CenterSquare Investment Management, who are one of the leading investors in listed real estate. CenterSquare has a 25-year track record of outperformance in listed real estate with an experienced global team focused exclusively on real estate securities, who have worked together for decades. Combined, we like to think that we offer: global perspective, deep real estate market knowledge, and a strong track record.

It is worth noting as well that in listed real estate, active management has historically outperformed passive strategies. According to data from eVestment Alliance, over a 10-year time-frame 76 per cent of listed real estate managers outperform their benchmark compared with 68 per cent for fixed income and 44 per cent for large-cap equity. A key factor in this is understanding the underlying real estate trends and dynamics.

Q, How in your view has the Covid crisis affected real estate and what opportunities has it created? 
One of the results of the COVID-19 pandemic and economic downturn is that interest rates are remaining lower for even longer. Low interest rates have increased the pricing of assets, lowered expected returns and as a result, investors have been gravitating to more risky investment strategies to get their returns. Bond yields are near record lows and provide very little income return – as a result, there has been a rotation out of fixed income towards higher returning but more risky investments. 

Technology and growth stock valuations have skyrocketed as investors have been more happy to pay-up for growth and hopefully profitability down the line. There’s been a boom in SPACs (special purpose acquisition companies) targeting hot sectors including fintech, electric vehicles and software as a service (SaaS) businesses and bitcoin has been on a tear – but extremely volatile!

We need to ask ourselves whether these investment strategies are sustainable? Or are we in a bubble? We are not smart enough to figure that out and fortunately, we see an attractive opportunity set in our speciality – commercial real estate.

In this environment, commercial real estate offers attractive and stable income returns, which are significantly higher than fixed income yields, while offering potential upside from capital appreciation as the impact of COVID-19 recedes along with other benefits. Historically, real estate has generated stable low double digit total returns with the majority of the return through income. Commercial real estate is also a good protection against inflation as rents have typically grown in line with inflation, providing a partial inflation hedge. Adding to that, real estate can also provide diversification benefits in a portfolio as it has relatively low correlations with fixed income and equity returns.