Funds & ETFs: New property fund manager 32RE to focus on co-living, targets HNW investors and family offices
In the light of the global pandemic, which company — at its infancy when it is most vulnerable — would be brave enough to take a chance on the hospitality sector?
But that is exactly what new property fund management company 32RE, formed just last October, plans on doing. Jeremy Choy, CEO and one of the three co-owners of 32RE, thinks that co-living offers interesting opportunities for the new fund.
“Short-term difficulties in the hospitality sector may present us with some opportunities to acquire assets,” he says. “We don’t want to speculate but certain vendors may be more reasonable in their pricing expectations and [we] are optimistic we can get [these assets] for a slightly better price.”
Once the outbreak is over, Choy expects demand for co-living spaces to rebound. “Fundamentally, [our] co-living properties will cater to the growing expatriate population in Singapore. The government has maintained Singapore as an open economy and welcomes foreign talent,” Choy says. “We are trying to create an alternative for people who come to Singapore.”
At present, 32RE has sufficient capital to start hunting for assets. “We are currently in the process of raising capital for our first product — a $30 million fund to invest in the joint venture alongside Weave to acquire, refurbish and operate co-living assets in Singapore,” Choy says in a recent interview.
Weave refers to Weave Co-Living, a Hong Kong-based lifestyle-focused rental accommodation provider. It will inject $120 million equity into the joint venture with 32RE for acquiring assets in Singapore to be refurbished and branded as Weave Co-Living accommodation. With 32RE owing a 20% stake in the JV and loan-to-values of 50–70%, Choy reckons that the total value of the co-living assets could eventually be as large as $400–$500 million.
To be sure, the shared economy was fashionable before Covid-19 turned into a global pandemic. Now, WeWork’s co-working space model is in doubt after failing an attempt to go public last year. Uber Technologies’ IPO last May is seen as a failure, with its last done share price of around US$30 ($41.80) — way below its IPO price of US$45. Year to date,
Uber is down just 4% while Expedia has lost 33%. Elsewhere, Airbnb is looking to revive its IPO but doubts remain.
However, private markets may be more amenable for the shared economy, and Choy’s co-living model is not quite Airbnb. For instance, rooms would come with attached bathrooms. Minimum room or apartment sizes would also be around 200 sq ft to 250 sq ft, the size of a three- to four-star hotel room.
32RE will be the acquisitions and project manager for the joint venture, drawing on its experience and networks in Singapore to acquire and deliver the properties for Weave to operate according to the latter’s design and brand specifications.
Founded in 2017 by Sachin Doshi in Hong Kong, private equity firm Warburg Pincus invested US$181 million in Weave in November 2018, with an option to increase its investment up to US$413.5 million.
32RE has a paid-up capital of $3 million and three partners with one-third stake each
in the company. The partners are 32HPL, Catalist-listed SLB Developments, and Wee TC Investments (WTCI) owned by Wee Teng Chuen, son of Wee Ee Cheong, CEO of United Overseas Bank.
Choy’s vehicle is 32HPL which is owned by Choy and his partner Bryan Law. Law is 32RE’s CIO and CFO. Both Choy and Law were directors at MGPA and then BlackRock which bought MGPA in 2013. MGPA developed Asia Square Towers 1 and 2. Asia Square Tower 1 is now owned by a Qatari Investment Authority while Asia Square Tower 2 is owned by
CapitaLand Commercial Trust. Meanwhile, Westin Singapore hotel at Tower 2 is part of the portfolio of Japanese developer and investor, Daisho Co.
SLB Developments is the “sponsor” of the fund. Traditionally, sponsors provide support in terms of pipeline and fundraising. Wee joined 32RE in June as managing director in charge of capital raising, financial relationships and investor relations. Prior to joining 32RE, Wee was a banker at UOB.
Planning a value-add fund
32RE’s first fund is likely to be a Singapore-focused value-add property fund. These funds typically target properties that have modest cash flow, but seek to increase that over time by making improvements to or repositioning the property.
“Value- add” is often synonymous with growth and these funds have the potential to produce a much higher rate of cash flow once the value has been added. Buildings in value-add funds require the fund and property manager to have a deep knowledge of real estate, planning and daily oversight. In general, value-add funds have an LTV of 60– 70% to generate low double-digit returns of 11–15% a year.
At this point of the cycle, hospitality assets have been suffering from decline in occupancy rates. For instance, Far East Hospi
tality Trust which comprises only Singapore hotels and serviced residences announced a 24 percentage point decline y-o-y in the occupancy rate of its hotels to 65.3% in 1Q2020, and a 32.8% decline in revenue per available room (RevPAR) which comprises of occupancy rate and average day rate.
However, FEHT’s serviced residences experienced a 3.44ppt uptick in occupancy rates to 83.6% in the first quarter. This was due to stay-in-place orders by companies which advised employees not to travel back to their home countries, and some guests made the decision to stay in Singapore as the outbreak worsened around the region and further afield.
Choy says the properties 32RE is targeting will have to be in good locations, such as transport nodes near MRT stations, with amenities and probably in the vicinity of institutes of higher learning, such as universities.
“We are trying to create a product for longterm stay, without having to spend too much money on renovation. We also need to create [shared] places. Everyone is worried [about contact] now but when the world gets over Covid, and things get back to normal, the product will have shared places where people can come down and make friends within the community,” Choy says.
In Choy’s view, certain gaps exist in current co-living operating models. “We believe these gaps may be addressed by an institutional, for-rent residential asset class — which presents an opportunity for us to create value and fundraise around it.” In addition, the partnership with Weave can draw on the latter’s experience, and allows 32RE to develop an organic acquisitions and project management track record in Singapore.
Challenging times for private equity
According to data compiled by AVCJ, Southeast Asia saw private equity deal value of US$12 billion in 2019 compared with US$18 billion in 2017, while exit values fell to US$4 billion from US$18 billion in 2017.
In a January survey, Bain & Co found that PE general partners were already concerned about exit conditions and a soft macroeconomic environment before Covid hit the region. PE funds attempting to raise capital will likely struggle because investors are struggling,
The Edge Malaysia also reported. Despite being a very young company, 32RE’s partners are said to be very experienced. “My partner [Bryan Law] and myself were colleagues at BlackRock for more than 12 years. I started with MGPA in Shanghai and Bryan in Tokyo. We relocated to Singapore to work on Asia Square,” Choy recalls.
“More recently we started having conversations with Matthew at SLB on coming together. SLB is the sponsor, providing us with some private equity and sponsorship, to establish 32RE in 2019,” he recounts. referring to Matthew Ong, CEO of SLB, which is the property development subsidiary of Ong’s father’s construction company, Lian Beng Group.
Choy says 32RE is not in it for the fees. “We are not driven by fees at this stage. We are driven by a need to build a track record and to bring investors aboard. It’s not about charging high fees, but investing in our platform to grow our funds. Our fees are no different from what other PE funds charge, but ours are at a cheaper rate,” he says.
Wee had known Ong for over 10 years, as a friend and as his banker. “I’ve seen how he built up a real estate company and always admired his prudence and creativity in terms of the products he offered,” he says. As for Choy, Wee got to know him via his brother, F&B entrepreneur Teng Wen of The Lo and Behold Group. Over the course of setting up the Extra Virgin Pizza restaurant at Asia Square, Choy made an impression with his commercial savvy. “This gives me the confidence that Jeremy is the right partner in growing our business together,” says Wee.
Source of funds
With the US Federal Reserve undertaking quantitative easing to infinity, there is a lot of liquidity sloshing around. The 32RE management team is likely to be disciplined though, and focus on accredited investors for now. “We have a network of high net worth individuals and family offices. $30 million is a bit small for institutional investors,” Choy says. At present, 32RE is only focusing on Singapore. At any rate, travel overseas is difficult because of the pandemic, he adds.
“We are investing our own money and if opportunities come along, we can scale up. We won’t do anything in an irresponsible way. We hope to build a strong organic track record,” Choy says. Although officially, the fund will be a long term fund with a life of five to seven years, the managers will maintain a flexible approach, especially if there are opportunities for an earlier exit.
Investing propitiously is likely to be part of 32RE’s DNA. “I’m Cantonese, and ‘32’ in Cantonese is pronounced as sang yee, similar to ‘business’. My home address is 32, and Matthew’s old home has 32 in it. We thought it was appropriate to reflect the same sense of commitment and ownership in our company name,” Choy concludes.