InfraRed NF looks to China’s self-storage market, opportunities in Southeast Asia

InfraRed NF Investment Advisors, a Hong Kong-based private equity real estate fund, entered its 10th anniversary of business this year with investment totaling US$1.4 billion in mainland China.

As a joint venture founded by InfraRed Capital Partners, a spin-off of HSBC and property developer Nan Fung Group in 2007, the group has focused on value-added investment, which includes upgrades or renovations of old office buildings, shopping malls and hotels in China’s first-tier cities.

It has also established a presence as a mezzanine lender for property developers.

The group has realised gross internal rates of return of 18 per cent and a gross cash multiple of 1.7 times for investors.

Noteworthy deals include the sale of Beijing shopping mall EC Mall to Hong Kong’s Link REIT for 2.5 billion yuan (US$364.6 million) in March 2015.

Most recently, it has set its sights on the self-storage market, injecting US$28 million into China Mini Storage, one of the storage market leaders in China.

Stuart Jackson, chief executive officer of InfraRed NF, said the group’s biggest achievement in the past 10 years has been the solid track record they have delivered for investors. Going forward, he says the group will look beyond China to opportunities in Southeast Asian countries.

How many projects do you have currently?

We have made 18 investments since 2007, realised 12 and the remaining six are still in place. We’re still investing our second China Real Estate Fund. In the second fund we made seven investments, five are mezzanine loans and two are value-add. We bought a hotel in Xintiandi in Shanghai in January 2016 and converted it into a mix-use office and serviced apartment. We sold the asset within a year and doubled our money.

We are in advanced talks to buy another hotel in Shanghai’s Jinan district which we plan to turn into a serviced apartment. We are also looking at office building upgrading opportunities in Shanghai and Beijing.

For self-storage spaces, we’re in advanced discussions to buy four in Beijing and Shanghai.

Is it hard to find locations for self storage given the high propery prices in China’s first-tier cities?

That’s why China Mini Storage need us. We have a lot of real estate experience, capital and converting skills to help them grow. We can find under-utilised assets, which normally have a discount to the market. A lot of such [discounted assets] are basements, often they have been used for retail, or food and beverage, but the rental income that has been generated is quite low. The typical size we will buy ranges from 800 to 2,000 square metres. We’re upbeat on the ability to achieve double-digit yields. But bear in mind that Grade-A office returns are only 4 per cent, so double digit returns in first-tier cities is not easy.

Will you shift focus to smaller cities given the recent policy tightening in first-tier cities?

We still prefer first-tier cities rather than second or third. We think the market in first-tier cities is more mature, more established and there is a decent demand for all sectors. Another concern for us is the exit. In first-tier cities, there is sufficient liquidity. If we make a significant investment to stabilise the asset and want to sell it, we tend to feel more confident in a first-tier city. In lower tier cities what we have done very successful is mezzanine lending, financing residential developers in those markets. We gain fixed returns in the mid-teens, and share part of their profit.

How can you prevent default risk of mezzanine loans?

We have had no default issues so far. You must be very selective and properly understand the market. We send people on secondment to go work in the project company, control the bank accounts and company chops, so that we know anything wrong ahead of time. I expect as the Chinese government tightens the property policy, opportunities will continue for mezzanine lending.

Besides mainland China, what other markets are you watching?

On the back of China’s Belt and Road initiative, we are planning to do mezzanine lending in Southeast Asia. We will focus on local, comparatively top developers in Indonesia, Vietnam and Philippines. We think a lot of development in Southeast Asian countries will replicate what has happened in China. There is a lot of investment in infrastructure, rising consumption and urbanisation. We are going to use our mezzanine strategy to expand platforms to those market. We expect to secure our first opportunity by the end of the year.