GLOBAL PORTFOLIO DIVERSIFICATION

BASAR GLOBAL INSIGHTS ON COMMERCIAL REAL ESTATE

GLOBAL PORTFOLIO DIVERSIFICATION 2019-2024

“Elvis has left the building”——In 2018 -2021 global diversification is dominating the capital flow CRE markets and it is headed to the east. Private Equity and Sovereign Wealth Funds has already launched various capital platforms and funding vehicles targeting the Asia Pacific and emerging markets. Targeting countries with effective financial integration and foreign direct investment policies that support the growth of transitional economies. For the smart portfolio manager, this gradual capital flow gives one the opportunity to diversify and hedge his portfolio towards alpha. As always in a global perspective, the smart money is 2-3 years ahead of those who trapped by the arrested development of home bias investing. On a city by city basis, Seoul is the most liquid market so far in 2019 with $15.4 billion worth of real estate transacted in the first nine months, with Tokyo, Shanghai and Singapore not far behind. Commercial real estate transaction volumes in the region reached a new quarterly record of $42 billion in the third quarter, bringing year-to-date activity to a new high also of $128 billion. Globally, industrial real estate assets continue to be very sought after by investors of all nationalities as secular demand drivers, namely the growth of ecommerce, have helped to fuel investor appetite.

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It also predicted that the period between 2017 and 2020 is the time for domestic and foreign organizations to build a position, and $200B is estimated to enter the commercial real estate (CRE) market in China. In the context of regional property investment, we see the large mainland Chinese cities as too large to ignore, even if other Asian urban markets such as Tokyo, Singapore, Bangalore, and Hong Kong also present attractive opportunities. Given the impact of deleveraging policies and tight liquidity in China over the past few years (despite recent signs of easing), certain domestic investors have come under pressure, and so fund managers based outside China may be hoping to acquire assets at discounted prices. For global investors from the US the strategy to cut risk is to seek opportunistic assets through joint venture and debt vehicles therefore diminishing informational asymmetries.

The convergence of capital flow to transitional economies has begun. In mid-2018 New York-based Blackstone Group raised $17 billion funds with $7B focused towards Asia opportunistic real estate. Carlyle Group said the investment group had raised $6.55 billion (4.98 billion pounds) for its Asia private equity fund, its biggest ever, which will seek a buyout and strategic investment opportunities across a wide range of sectors in the region. New York-based private equity firm KKR raised $9.3 billion targeting Asia Pacific markets, the largest amount ever. However, between 2020-2025 there will be four 1 trillion dollar tranches of funds going into China paper assets into MSCI directly from global portfolio managers this process has already begun.

Even the Trumpy’s have made a stage left towards value and away from debt and speculation on capital flow, while defending the home team, the Chinese in partnership with Donald Trump are building a theme destination with Trump hotels and Golf courses in Jakarta Indonesia, as they play out their hands in the trade war. The 1 billion project includes Trump-branded hotels, residences and a golf course, as well as other hotel, shopping and residential developments. A subsidiary of Chinese state-owned construction firm Metallurgical Corporation of China (MCC) signed a deal with Indonesia’s MNC Land to build a theme park outside Jakarta as part of the ambitious project, the company announced in 2018. The deal is the latest to raise questions about the extent of Trump’s financial exposure to Beijing.The park is expected to be backed with up to US$500 million in Chinese government loans the loans is part of an “integrated lifestyle resort, known as MNC Lido City. However to be a successful global investors must use timing and wait until CRE values begin go thru a correction in the West which will effect values globally,but the first rule is to target value in the form of long term growth and not speculation. In a world bank study on gross capital flows such as peak speculation and risk Ghosh et. al (2014) showed that global factors determine the time of capital flow surges, however the incidence and the magnitude of these surges depends on domestic factors. Forbes and Warnock (2012) found that the determinants of gross capital flows, be it gross inflows or gross outflows, were considerably different from those of net flows, which was the main focus of earlier literature. Ahmed and Zlate (2014) found significant changes in the behavior of net capital inflows since the GFC, particularly for net portfolio inflows, given the greater sensitivity of such flows to interest rate differentials. Specifically, their argue that the threat of global decoupling is bear trap for the US dollar as reserve currency if they follow through with such an action. In essence China made an global investment shift in search of value. However, the ultimate objective of the US Trade War strategy is liberlisation of China Financial Service markets so that the large some of US dollars assets can find value in growth and avoided the bear trap of speculation. Few Americans realize that China is far ahead technologically thru open source tech culture and that China ability to develop real assets faster than any society in the history of humanity. China is not ran as communist country but an effective collective global capitalist technological machine, one of the most effective ever created. In essence portfolio managers have no other choice but to invest in China and they are sitting on tranches of trillions of over produce dollars with no place to find value. In the trade war talks the U.S. has unique a comparative advantage in provision of financial services. The most important U.S. priority is to open China’s market to US firms and investors. In the last few years, they have gained traction, with China removing barriers to foreign financial institutions and lifting caps on foreign investors. A policy which placed barriers in the path of U.S. portfolio capital flows to China would sacrifice those gains.The Chinese comparative advantage is that the US is sitting on large tranches of capital with no place to go to find value and financial integration, which will lead to the destruction of the dollar as the global reserve currency and the ability to borrow into perpetuaity.

Singapore’s sovereign wealth fund GIC Pte. is joining Ascendas Pte. to invest as much as S$600 million in commercial property in India, according to a company announcement. The venture has launched the Ascendas India Growth Programme to invest in business space in cities including Bangalore, Chennai, Delhi National Capital Region, Hyderabad, Mumbai, and Pune. Korean subsidiary, Kendall Square Asset Management/The Canada Pension Plan Investment Board (CPPIB) and ASX-listed Goodman Group have committed another $1.75 billion to their China logistics partnership and plan to double the size of their mainland portfolio, Allianz is contributing half of the equity for an initial $225 million capitalization of a joint venture with Asian warehouse development specialist ESR to acquire logistics facilities in India Salaam,Tanzania will become Africa’s biggest port, created by 10 billion dollar funding from Sultanate of Oman’s sovereign-wealth fund and China s Exim Bank. Developed by Actis, an emerging market investor responsible for the Junction Mall and Nairobi Business Park, Garden City is a $540m flagship project comprising one of the largest retail malls in East Africa, offering retail, over 400 residential units, offices and a central park. Mega-projects across Africa are up 46% percent and is worth $326 Billion.

Indian warehouse developer Indospace announced the final close of what it says is the largest-ever logistics fund targeting India, having raised $580 million in equity for fund a joint venture between Singapore’s GLP and Mumbai-base Infospace. Global Logistic Properties is teaming up with GIC to create a $2 billion value-add fund for acquiring logistics properties in mainland China. The Canada Pension Plan Investment Board (CCIP) that it is investing in a new $500 million in investment fund targeting South Korean logistics assets in cooperation with ESR. In 2019 Bahrain based asset manager Investcorp announces the start of its operations in India with the acquisition of the private equity and real estate management business IDFC Alternatives Ltd for $430M, the deal received approval from the Securities Exchange Board of India (Sebi). King Salman of Saudi placed cornerstone to begin $2.5 billion public hospital project in Riyadh. Investcorp and Aberdeen Capital launch a 1 billion dollar fund focused on the Gulf countries. The Saudi King Salman also announces to $705B infrastructure road connecting Saudi to Jordan with funding from PIF. Taubman Centers announced late last week that it has agreed to sell a 50 percent stake in the shopping center assets of its Asian division to US alternative investment giant Blackstone in a deal valued at $480 million. The transaction gives Blackstone significant holdings in three fully-leased shopping centers – one each in the Chinese cities of Xi’an and Zhengzhou, and a third in the South Korean city of Hanam – as Stephen Schwarzman’s New York-based firm continues to buy up retail properties in Asia.Manulife Asset Management Services Bhd (MAMSB) expects its Manulife Asia Total Return Bond Fund to exceed over RM100 million in sales over the next one to three months. Developed by Actis, an emerging market investor responsible for the Junction Mall and Nairobi Business Park, Garden City is a $540m flagship project comprising one of the largest retail malls in East Africa, offering retail, over 400 residential units, offices and a central park. TPG Capital Asia VII with commitments of over $4.6 billion to invest in India and Asia.

For the first time in 2018 foreign direct investment has fallen mainly in richer nations, including Ireland (down $81 billion) and Switzerland (down $77 billion), developing economies saw FDI flows declining “only slightly” in the first half of the year by four percent, to $310 billion, compared with 2017. This includes developing Asia – down four percent – to $220 billion – in the same period, driven mostly by a 16 percent decline in investment in East Asia. China, the notable exception, was, in fact, the largest recipient of foreign direct investment in the first half of 2018, attracting more than $70 billion.

Occasionally international equities can signal trends in global capital flow and geography. Here is the type of global equities funds that investor bought and sold based on growth in 2018. (1) China up 35%, (2) Diversified Emerging up 4.9% (3) Latin America up 4.3%(4)Foreign/World up 3.9% what investors sold Diversified Asia/Pacific down -5.6% Pacific/Asia (ex-Japan)Japan down -9% India down -11.3% Europe down -23.4%

When considering global portfolio diversification in commercial real estate( CRE) one must know the knowable fundamentals of investment, one must understand the value and what price one is willing to pay, one must understand the environment and psychological behavior of where one has invested and fine-tuned one portfolio for performance and exit. But most of all remember that the knower, the known, and the knowledge is one.

Idea/ concept is the major influence for global development projects and is even more pronounced for real estate investment. The perception or recognition of the opportunity is the key investment driver of value. Global fund managers must remember when considering home bias investing and global financial allocation- that there is no apparent distinction between those factors that create value and those that destroy value, although there are variations in the magnitude of impact.

The numerous frictions which affect commercial real estate portfolio diversification and foreign investment should be corrected by embedding capital allocation into broader social and economic policies as well as an environment that promises stability. On that basis, one can ensure that foreign investment is productive, creates value, contributes to sustainable growth and benefits broad segments of the population.

The reduction of frictions that impede international diversification, such as home bias investing by mature economies, exchange rate– other capital controls, but perhaps even more importantly informational asymmetries. There is a strong connection between financial market development— financial integration and real estate asset valuations. Diversification and a reduction in frictions would imply a large increase in gross flow and effective portfolio management.

Basar Group has mapped the global pattern of gross capital flows under two scenarios, assuming different speeds of convergence for developing countries in terms of economic growth, financial market development, and integration.Under both scenarios gradual and fast convergence we project that, by 2030, developing countries will account for a significantly greater share of global gross capital inflows and by implication, outflows.

Disclaimer: Neither Basar Group nor its affiliated companies make any warranties or claims on the implied accuracy of the information contained herein. The views expressed in this commentary are the personal views of the authors researchers, or speakers and do not necessarily reflect the views of The Basar International Group Inc. (together with its affiliates, “Basar Group”). The views expressed reflect the current views of the speaker as of the date hereof and Basar International Group undertakes no responsibility to advise you of any changes in the views expressed herein.
Neither this research, post, nor the podcast nor any of the information contained herein or therein constitutes an offer to sell, or a solicitation of an offer to buy, any security or instrument in or to participate in any trading strategy with any Basar Group funds or other investment vehicle.
Past performance is not indicative of future results and there is no assurance that any Basar International Group fund will achieve its objectives or avoid significant losses. This report, blog or podcast may contain forward-looking statements; such statements are subject to various risks and uncertainties.
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Bilal Mansoor
Director Global RE
Basar International Group
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Arthur Morton
Basar Global Group
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BASAR GLOBAL INSIGHTS ON COMMERCIAL REAL ESTATE

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