Cohen & Steers eyes Asian emerging-market property

Emerging property markets in Asia are seeing improvements in terms of corporate governance and regulatory certainty, and so look increasingly attractive, says US property investment manager Cohen & Steers.  

Organisations such as the Asian Public Real Estate Association (Aprea) are encouraging more sophisticated methods in areas such as real-estate investment trusts (Reits), says Luke Sullivan, Asia chief investment officer at Cohen & Steers in Hong Kong. The US and Australia may have the most well-developed Reit models, he adds, but now Reit markets are taking shape beyond those countries.

Two examples of this are the Philippines and Thailand, which are implementing Reit frameworks, while other markets, such as China and India, look set to follow suit in the near future. Aprea's move this month to set up an India chapter seems to reinforce that expectation. Moreover, Hong Kong is consulting on proposals to bring its Reit regime in line with rules governing listed companies on mergers, securities and futures.

Influence is also being felt from the foreign firms with global real-estate platforms that are continuing to expand into the region. Having said that, Cohen & Steers tends to invest in assets that generally don't fall under Reit regimes. "We're agnostic as to the corporate structure of the assets we look at," says Martin Cohen, the company's New York-based co-chairman and co-chief executive.

However, the firm has some clients that only invest in Reits, which prohibits it from purchasing assets in certain areas for those customers. Cohen notes that Reit regimes do have benefits in that they provide a certainty of structure by putting property investments on a more level playing field from country to country.

Cohen & Steers has spent the last two years building up its knowledge base on emerging markets, says Sullivan. "We are not actively investing in high-growth Asian markets -- such as India, Malaysia, the Philippines and Thailand -- but are getting our knowledge up to a level where we will be able to," he adds.

The firm is doing the same in South America, and is closely watching Eastern Europe; the Middle East is an area of interest, but it's not yet doing much there.  

"We've always been a proponent of new challenges," says Cohen. "We're very interested in these newer markets. They are places I would love to have covered as an analyst."

Asia is firmly in the company's sights. Around a fifth ($4.5 billion) of Cohen & Steers' $25 billion in global assets under management are invested in Asia. And having relocated an analyst from New York to Hong Kong in 2008 to bring its regional investment professionals up to five, the firm is likely to add another in 2010.

Property investment opportunities are certainly developing in the region, says Sullivan. "India is a great example," he says. "There was a burst of activity in the second half of 2009, with several IPOs and secondary placements; and in each round, investors were more sophisticated in underwriting the opportunities.

"Issuers' corporate governance is becoming more transparent, and their business models are getting more robust," adds Sullivan. "And that provides greater clarity on prospective opportunities."

But Cohen says direct real-estate pricing remains "somewhat arbitrary" in India due to the absence of market benchmarks and lack of timely data on real-estate fundamentals. But this may be changing, he adds, as companies like Cohen & Steers and their international peers positively influence standards and help emerging markets promote securitised property-investment opportunities.

In the meantime, there is a lot of potential for investment opportunities in Japan, says Sullivan, something other property specialists have also noted. There are a number of commercial mortgage-backed securities coming up for renewal, which coincides with Japanese Reits becoming considerably more acquisitive. In addition, sponsors are starting to provide backing for extensive growth, which has the knock-on effect of freeing up much of their capital requirements, he says.

In China, the big question is whether the government's measures to curb excessive speculation will dampen the market or help it in the long term. Real estate is integral to the country's economy, says Sullivan, so it is hoped that residential activity will continue in a stable, sustainable growth pattern, which would benefit developers as a result of government moves.

Meanwhile, he is optimistic on Hong Kong's direct-market fundamentals. "Some of this has been priced in," he says, "but we expect office landlords will still take advantage of the supply-constrained office market and secure, robust cash-flow growth."

Cohen & Steers' experience in helping property companies recapitalise should stand it in good stead, feels Cohen. "In Europe and the US, in the liquidity crisis, companies needed to raise equity capital," he says. "We helped them do that to give the market confidence that companies such as Simon Property Group, ProLogis and AMB could satisfy debt refinancing." Cohen & Steers was also heavily involved in such deals in Australia, says Sullivan.

Singapore also went through a recapitalisation phase, and Japan is now in the midst of one, which will be a much longer process than in the rest of Asia, says Sullivan, as the country is not quite as sophisticated in terms of capital-markets activity. For example, it is possible in Australia to do an overnight capital-raising of $300 million to $400 million, he says, but that rarely happens in Japan, due to current regulations.

Overall, Cohen & Steers takes an optimistic long-term view on Asia. "Three years-plus is a good time horizon," says Cohen, who points to three "tailwinds" in the region: strong economies; strong property markets in particular; and the creation of public companies involved in real-estate investing.

Another plus point is the fact that property companies have healthier debt levels now, notes Cohen: "Reduced use of leverage is a theme that gives us comfort that there aren't the same near-term risks in these global companies and securities as there were previously."