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Hedge Funds and Investors – When do they buy or sell property?

by • January 19, 2017 • Commercial Property Loan, General KnowledgeComments (2)2575

When do Hedge Funds buy and sell property in Singapore

Angeline C and Paul Ho (iCompareLoan.com)

Singapore’s property investment sales are likely to have hit a 3-year high in 2016 according to property consultants Savills Singapore, CBRE and Cushman & Wakefield[1].

This was due to a number of major deals such as: BlackRock’s S$3.4 billion sale of Asia Square Tower 1 to Qatar Investment Authority and the S$1.8 billion sale of the office and business park components of Mapletree Business City (Phase 1) to Mapletree Commercial Trust.

Property consultants have different definitions of investment sales though they typically usually refer to deals priced at more than S$5 million.

Does Property Doldrums affect Large Commercial Sales

In this article, we explore some of the reasons why property investors may buy or sell properties, taking a leaf from shares trading where appropriate.

For large-scale commercial buildings, industrial buildings, this is the domain of large funds and investors. There is a dedicated team from the banks to handle these mortgage loans amounting to hundreds of millions.

Picture 1: Poster boy for Hedge Funds, George Soros 

Price vs value

For an investor holding a portfolio of equities, one of the reasons for trade is to buy shares in a company which offers good prospects and is deemed to have a higher value compared to its price. The investor may do fundamental analysis, taking a top-bottom or bottom-up approach, researching extensively on the sector the company is in, peers, markets they operate in, etc. And if he/she thinks the value of the company is worth more than the current price, then it would be a buy. Conversely, if a stock in his/her portfolio is valued less than the current price, then it would be a sell.

This strategy works for property as well. An investor may do research on areas with potential for upside. For instance, a property in prime district in a developing country like Vietnam, could attract investors who believe prices will go up given the positive prospects of the country. Or a landed property in good condition that is priced cheaply because it is forced sold could prompt a buy. Conversely, a condo unit with a sea view that will soon be blocked by a new high-rise development could prompt an investor to sell.

Cost plus approach

Second, investors may invest on the basis that they will exit when their shares hit their target price, say 20% above cost. Similarly, property investors may decide to sell when they get an offer that meets the target price they have in mind. This usually is applicable for Private equity funds or a closed-end funds that may specify a time-frame and a profit target. An example of this could be: –

Buying Price $100 million. The fund aims to realize 50% profit over 24 months and end the fund with an option to extend the fund tenure from 24 months to 36 months. This is usually referred to as a 2 year + 1 year fund with a targeted return of 50% over 2 years, up to 3 years. Such a fund will try to sell the property at the end of the 2 years investment horizon, preferably at a profit.

Activist Hedge Funds – Investors

An activist Hedge fund or investor buys into an otherwise sleepy and listless area in large ownership. They may also buy up nearby facilities. They then agitate for change and lobby the local government or regulator for rezoning, reclassification or relaxation of certain rules.

They are otherwise known as trouble-makers.

If they succeed in doing so, they would be siting on huge profits and exiting the market. If they failed to effect change, they would also exit the investment.

Others

Another possible reason for sale is to avoid fees imposed by the government. For instance, the Qualifying Certificate requires a development to be completed in five years and all units to be sold two years after completion, failing which, a developer deemed to have foreign ownership would be charged a percentage for the unsold units. An example would be City Developments sale of its completed condo Nouvel 18 to avoid hefty penalties of close to S$40 million. This was achieved through a profit participation securities platform where shares were issued to high net worth Singaporeans and companies wholly owned by Singapore citizens.

Other factors may relate to the microenvironment such as expectations of interest rates, exchange rates and inflation relative to other countries could attract foreign investors to buy or sell a property. Current concerns include expectations for rising interest rates and a weaker Singapore dollar among others.

Personal reasons could be another driver for deals such as the need for funds, relocating to another country, asset diversification, taxation benefits, etc.

Conclusion

In conclusion, understanding the reasons behind a buy or sell decision can sometimes give insights to what big players think of the market, similar to share investing. When one sells, it does not necessarily mean that the market is over-priced, when another buys, it does not necessarily mean that the market is under-priced.

Image Credits: Wikimedia commons

[1] news.asiaone.com/news/business/property-investment-sales-surge-3-year-high

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