Investors should focus on real estate in Asia, says Townsend chief Terry Ahern
Terry Ahern, the head of property investment adviser Townsend Group, says strong demand for real estate infrastructure offers long-term positive prospects for the industry in the region
Thirty-two years after it was formed, Townsend Group, co-founded by Terry Ahern, has become one of the largest real estate consulting firms in the world. It provides global investment management and advisory services focused exclusively on real estate and real assets.
The company has more than 100 institutions as clients, manages about US$13 billion of real estate and other real assets and advises on US$170 billion of client assets.
While investment opportunities in the United States and Britain are positive on the back of stable economies, chief executive Ahern recommends investors focus on Asia and China in the long run due to strong demand for real estate infrastructure.
How does the unexpected devaluation of China's currency affect the global and mainland Chinese economies?
China's weaker currency will impact demand for commodity imports, which, coupled with excess supply, will lead to prolonged softness in commodity prices.
The global impact is likely to be uneven. Commodity importers like India might benefit, while Canada and Brazil might face headwinds.
Further, this will complicate the fiscal policies of countries with already low interest rates where the good growth was leading to expectations of higher interest rates, for example the US and Britain.
A higher interest rate environment can exacerbate currency movements, hurting their own growth.
We have maintained that fiscal policies of key economies will be heavily influenced by the global growth scenarios and are therefore likely to remain lower than expected going forward, which will support the current asset valuations.
What is your view on China's real estate market?
China has pockets of oversupply in real estate, a situation complicated by a slowing growth rate. This oversupply exists in a few office markets in tier-1 and tier-2 cities. There is also some excess supply in the retail sector.
However, cost pressures require better logistics and warehousing facilities.
Additionally, the rapid rise of e-commerce in the country requires efficient warehouses closer to the densely populated regions.
Urbanisation will require more housing units and apartments. This sector has been very volatile. Therefore, we seek to invest in this sector on a project-specific basis and in preferred equity or mezzanine structures to limit our downside risk and reduce the volatility of our returns.
We expect the above macro and real estate scenarios to create intermediate-term distress in a region that is otherwise expected to do well on a long-term basis.
How do you see the future of the US and European economies? Against this backdrop, where do you see opportunities?
The US continues to be in a gradual and drawn-out recovery. In the real estate markets, the above macroeconomic scenario will likely lead a healthy leasing environment for the next three to five years with rising rents and gradually falling vacancies. This leasing environment will provide support to the property values, even through a gradual increase in interest rates.
We believe property yields are still attractive, offering downside protection, while levered into the recovering market.
Core-plus property returns (gross) are closer to 8.5 per cent per year for long-term hold. We consider this to be very attractive return given the high-quality portfolio and low leverage.
We see capital dislocation persisting in value-add risk strategies. The investors' preference for yield from stable assets has come somewhat at the neglect of opportunities that require renovation, retenanting and repositioning. The office sector presents some compelling opportunities of this nature. We are more tolerant for risk given the gradually improving employment situation and still low supply in the pipeline.
The industrial sector is also well placed, given the improving economy, rising imports driven by a strong dollar, and high demand from the e-commerce industry. In many markets, we are able to lock in good income yields, and underwrite healthy rent-driven growth.
Europe is a collection of many countries with diverging fundamentals.
In the real estate markets, the opportunities in Britain are likely to be similar to those in the US. While the trophy assets in central London appear expensive, there are new office markets being defined by Crossrail. These markets that are considered to be "fringe" are likely to become more core in the coming years.
We are also seeing very good fundamentals in the industrial markets. London industrial assets have very low yields, but we prefer those regions with growth, albeit at a lower level, but with higher entry income yields.
On the European continent, the core assets in major markets are priced at similar levels to equivalent quality standards in the US. However, core-plus and value-add opportunities are priced at a much deeper discount.
What advice would you give foreign investors who plan to invest in Asia and China?
Asia and China will continue to see a very significant demand for new real estate infrastructure across all property types over the next couple of decades.
Townsend estimates Asia accounts for 46 per cent of nearly US$7.7 trillion in investable commercial real estate in all emerging markets, a number that will double by 2023. As such, despite short-term hiccups, we recommend that our clients continue to focus on the region.
Townsend has been active in Japan, and has made sizeable investments in China and India. We are expanding our focus to emerging markets which are increasing; we are discovering a very select group of compelling investment opportunities.
Since these regions have elevated risk, we recommend investing enough time to identify the right investment partners and arrive at the most appropriate deal structure.