Around two years after kicking off its first dedicated vehicle for investing in Asian real estate, US private equity firm KKR has exceeded its original goals for the opportunistic venture.
The New York-based fund manager has completed fund raising for KKR Asia Real Estate Partners (AREP) after having received $1.7 billion in commitments for the fund, according to an announcement today. By mid-2020, the strategy had reached a first close of $698 million on its way to what was then a $1.5 billion target.
“AREP’s close marks the next chapter of growth for KKR in Asia Pacific as we continue to expand our position as a proven alternative capital provider across asset classes,” KKR’s head of Asia Pacific, Ming Lu, said in a statement.
Lu, whose firm has invested in property projects in Shanghai, Seoul and Hong Kong since reports of the fund first emerged in March 2019, added that, “Asia Pacific’s real estate sector needs sophisticated investment and innovative operational solutions to meet the high demand for modernized properties and developments that are required to stay ahead of the region’s rapid growth.
Backing Logistics Startups
While KKR takes a pan-Asian approach to investing and has already clinched nine deals across a number of sectors for its first dedicated property strategy in the region, John Pattar, who joined the firm in 2018 to head up its pooled real estate fund business, sees a few prime targets in the current environment.
Around the Asia Pacific, his team sees opportunities to invest in logistics real estate businesses, as the ongoing shift to online shopping has been accentuated by the public health crisis.
“These are opportunities that were there before COVID-19, but have now exploded in growth potential,” Pattar told Mingtiandi. “COVID has driven what would have been five years of e-commerce development within just 12 months.”
With some of the largest players in the warehouse sector already acting as their own fund managers, Pattar’s team has been focusing on backing entrepreneurs with backgrounds from some of the established firms as rapid market growth creates growth opportunities.
“We are investing in smaller boutique groups who have an identifiable pipeline of assets, and who may not have access to financing due to liquidity constraints in their home markets,” Pattar said.
In February of this year KKR had sold the BLK Pyeongtaek Logistics Center near Seoul to a local fund manager for an undisclosed sum after developing the 136,500 square metre (1.5 million square foot) facility through an earlier investment.
Multi-Family and Privatisations
In addition to deepening its logistics investments, Pattar and his team see benefits from another pandemic-resistant sector – multi-family residential, and are currently pursuing opportunities for apartment projects in mainland China.
“In China, there is a growing need for multi-family and we see some opportunity to work there with operating partners,” Pattar told Mingtiandi. He added that, after having done its homework on the growing rental apartment sector, his team expects to announce a mainland apartment deal no later than mid-year.
Within both rental housing and logistics, KKR is looking at opportunities to invest in platform and in individual projects, while also targetting ways to work with non-real estate corporates interested in monetising their real estate holdings.
Beyond targetting specific assets classes, KKR, which was among the pioneers of the leveraged buyout in the US, sees opportunities to profit from privatising publicly listed real estate entities.
“There are cases where the shareholders view the companies as not being properly priced in the market, particularly in Japan, Australia and Singapore,” Pattar noted.
In these situations, Pattar sees his KKR real estate team as able to work together with its experts on buyout strategies to help pull more value out of the listed entities. “With our privatisation experience, we are able to cross over from our “buy, fix and sell” real estate strategy to follow a more private equity-aligned approach,” Pattar notes.
With Asia Pacific having proved more resilient to the coronavirus challenge, and mass vaccinations expected to tamp down the current pandemic, Pattar points to Asian real estate as one of the most favoured asset classes in the current environment.
“A lot of global investors are still under-allocated to Asia, and there has been an under-allocation to real estate,” he said. “With increasing demands for yield and investors looking for positive carry, we see the demand for real estate continuing to go up.”
Around $400 million of KKR’s cash for the new fund was sourced from Korean investors, according to local press accounts, with the country’s National Pension Service (NPS) having committed $200 million. Also signing up were the MG Korean Federation of Community Credit Cooperatives, which put in $100 million and the Korean Teachers’ Credit Union (KTCU) which added another $50 million. Local securities brokers are said to have also backed the fund.
By mid-2019 KKR was already investing under the Asia Real Estate Partners strategy, including forming a HK$653 million ($84.2 million) joint venture with developer Wang On targetting neighbourhood retail assets in Hong Kong in May of that year.
Through the strategy KKR also last year invested in a seven-storey logistics facility in Incheon, South Korea.
Note: An earlier version of this story indicated that KKR had invested invested in Shanghai’s HiTone Neo project under the Asia Real Estate Partners strategy. That transaction was funded under a separate KKR venture. Mingtiandi regrets the error.