Concrete AnalysisPrivate capital to continue to play a big role this year
With share values not attractive and returns for property owners falling, private market is likely to remain key source of financing
The private real estate capital markets experienced stronger momentum than their public counterparts last year, owing to the limited windows of opportunity for equity issuance and relatively low pricing offered by the public markets.
The trend is expected to continue this year, with the private real estate capital markets expected to maintain strong growth, logistics players to outperform and large, well-pedigreed fund managers to improve performance.
Last year, public stock traded at relatively unattractive pricing compared to historical forward price-to-earnings (P/E) ratios. This made issuing new stock expensive for developers.
In contrast to this booming demand, supply remains extremely limited
Small and medium-sized small developers, which trade at discounts to their larger peers, have been especially cautious about issuing relatively expensive equity.
Meanwhile, record capital inflows have pushed up real estate prices, reducing the return investors can expect from direct ownership of property. This has pushed private real estate investors up the risk curve into the private capital markets in search of sufficient investment returns.
In the fourth quarter alone, real estate investment activity in China surged to a record US$8.5 billion. For the full year, volumes were also the highest on record, at US$25.1 billion, up 71 per cent from 2012.
The decline in yields in recent years triggered by these inflows is demonstrated by the tight office market in Shanghai. According to estimates from Jones Lang LaSalle, yields fell from 6 per cent per year in 2012 to 5.9 per cent by the end of last year.
Investors have also favoured the private markets, particularly joint ventures, as private transactions offer more customised terms as well as more direct access to assets in comparison with the public markets.