Forum Partners’ roller coaster ride in Asia

December 15, 2014 1:45 PM SGT

SINGAPORE: The vestiges of the global financial crisis continue to linger in some funds holding on to legacy assets.

For example, global property investment firm Forum Partners’ US$642 million ($828.2 million) Forum Asian Real Income II fund is not closed yet, and holds investments in China, India and Singapore, says Gregory Wells, Forum Partners’ managing director and head of Asia.

One of its legacy investments in Singapore is the luxury condo The Laurels located on Cairnhill Road.

It is a joint-venture development project between Sing Holdings and Forum Asian Realty Income II, with each holding a 70% and 30% stake respectively.

The partners had purchased the site for The Laurels, which is a redevelopment of the former Hillcourt Apartments, for $361 million in 2007.

The price, which translated to $1,542 psf per plot ratio, raised a few eyebrows as it was 40% higher than what CapitaLand had paid for the Silver Tower site next door in September 2006, which has since been redeveloped into the luxury condo Urban Resort.

“That [got] caught in the crisis,” admits Wells.

“My recollection was that they bought the land, and held it for a little while because the crisis hit.”

Construction was delayed, but after the crisis, the project “took off” when the property market began to recover in 2010.

Sing Holdings also took the opportunity to go back to the drawing board to carve out some one-bedroom units, and size down the two-, threeand four-bedroom units to make them more affordable.

The Laurels was launched in March 2010 at prices ranging from $2,800 to $3,200 psf.

The last of the 229 units at The Laurels was sold in July.

It was a 1,281 sq ft, three-bedroom unit on the 14th floor, which fetched $3.6 million ($2,800 psf).

Besides The Laurels, another investment in Singapore by the Forum Asian Real Income II fund was also in a joint venture with Sing Holdings — the 51-unit boutique condo development Bellerive on Keng Chin Road, off Bukit Timah Road.

The 15-storey condo block was launched in 2009, and more than 90% of the units were sold within the first month at prices ranging from $1,325 to $1,464 psf.

The remaining units were sold at higher prices, hitting an all-time-high of $1,894 psf for a 1,679 sq ft unit on the fourth floor, which was sold in July 2011.

The project was also completed in 2011.

“Our deal with Sing Holdings is closed but not completed yet,” clarifies Wells.

“By the time I saw [the projects], one was just completed, and the other was completed three years ago.” Wells joined Forum Partners 18 months ago from Deutsche Bank, where he established and managed the firm’s commercial real estate business in Asia-Pacific.

No stranger to Asia, Wells spent the last 25 years in the real estate industry, with a particular focus on China and Japan.

China bet Forum Partners has US$5 billion under management, and focuses on real estate around the globe.

The private equity business in Asia, headed by Wells, employs 25 people around the region, with offices in Hong Kong, Mumbai, Seoul, Singapore, Sydney and Tokyo.

The firm has US$750 million under management in Asia, which includes a mix of investments in the current fund as well as legacy assets in the previous fund.

Forum Partners’ roller coaster ride in Asia SAMUEL ISAAC CHUA/THE EDGE SINGAPORE Wells: We don’t want the property market to crash, but we want to look at opportunities.

It’s a fine line.

The private equity firm’s third and current fund in Asia is the post-crisis Forum Asian Realty Income III, which focuses on five countries — Australia, China, India, Japan and South Korea.

It has invested more than US$360 million to date, with another US$125 million to spend, according to Wells.

And Forum Partners has been betting heavily in China, having invested close to US$600 million in 11 deals in the country over the past five years.

In the past 12 months alone, it has pumped about US$120 million into two deals, one involving a stake in an industrial property developer at the pre-IPO stage, while another was a residential property developer.

While the China housing market looks bleak, Wells still sees the country’s residential sector as one that remains “undersupplied”.

“The fundamentals haven’t changed,” he says.

“Wages have kept [pace] with housing prices.” Hence, Forum Partners is looking “selectively” at regional developers who are focused in the first- and second-tier cities in China.

“Big, listed developers tend not to need our expensive capital, but we certainly look at the smaller listed developers,” explains Wells.

“We look at developers who build quality product focused on more mass market, targeting middle income households, [and] generally not the guys who do the high-end stuff.”

Admittedly, there is “overcapacity” in some third-tier cities, but Wells still sees a shortage of homes relative to household formation in the firsttier cities, while the picture for the second-tier cities is “mixed”.

Wells explains: “You have to keep in mind that 2013 was a good year, with a significant pickup in sales volume and prices.

So, if you look at the y-o-y figures in 2014, you’re comparing it with 2013, which was a very good year, we’re definitely seeing some fall-off in prices.

But if anything, as a result of that, it will make homes more affordable”.

In China, traditionally, September home sales are better than October’s.

But the first three weeks of this October saw a divergence from that trend, with sales surpassing the level recorded over the same period in September, according to Barclays Bank Hong Kong in a report on Oct 21, which tracked more than 30 major cities.

A better October should translate into the first y-o-y increase in national property sales this year.

September saw China’s national property prices fall by 9% y-o-y, which marked a slower pace of decline from the months of July and August, says Barclays.

Improving sales, and narrower price falls are the result of a more “preferential mortgage environment”, which includes lower down payment for upgrader demand, cheaper lending rate for first mortgages and more supportive housing provident fund loan policies.

“We believe this should bode well for the continued improvement in the sales momentum in 4Q2014,” says Alvin Wong, Barclays Bank Hong Kong’s analyst in the report.

Besides loan restrictions, most cities in China have also removed the home purchase restrictions.

‘Opportunistic returns’ According to Wells, it is harder to target opportunistic returns if the market is flushed with cash.

“We don’t want the property market to crash, but we want to look at opportunities,” he says.

“It is a fine line.” China’s economy is seeing its slowest pace of growth since 1990.

However, Xi Jinping, China’s president, assured the other world economies that China’s economic slowdown, despite its risks, is “not so scary” in a speech at the Asia Pacific Economic Cooperation CEO summit on Nov 9.

Even if China’s economy were to grow at 7% in 2014, it would still rank “among the best in the world”, Xi says.

Wells says he’s “comfortable” that China will continue on its growth model for the next few years.

Wells is also bullish about the commercial market in China, where he sees more opportunities in the office sector.

One of the investments made by Forum Asian Realty Income Fund III was a subscription of $59.7 million in senior convertible bonds in Forterra Trust.

A business trust listed on the Singapore Exchange, Forterra Trust owns, develops and manages commercial real estate in China, primarily in Beijing and Shanghai, as well as in the second-tier city of Qingdao.

In July last year, Hong Kong property developer Nan Fung announced that it was acquiring a 100% stake in Forterra Real Estate, the trustee-manager of Forterra Trust for $23 million and 29.98% of the shares in Forterra Trust for $226.7 million.

Following the change in ownership of the trustee manager, Forum Asian Realty Income III duly informed Forterra Real Estate that it will not exercise its right to redeem the $59.7 million convertible bonds, according to its announcement.

Forterra Trust therefore paid out Forum Asian Realty Income Fund III at maturity in September last year, says Wells.

In Singapore, even though the luxury residential market has seen a correction in pricing in recent years, with some funds looking to offload their assets at steep discounts, Wells is in no hurry to rush in.

“The correction in pricing may lead to an opportunity,” he says.

“However, as long as ample liquidity remains in the market, it will be difficult.”

This article appeared in the City & Country of Issue 652 (Nov 17) of The Edge Singapore.

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