There are few companies as quintessentially British as Grosvenor. Owned by the Duke of Westminster, this blue-blooded company’s heritage is rooted in London’s West End. Yet, 6,000 miles east, it has had a firm foothold in Asia for 21 years.
Based in Hong Kong in Jardine House – the cuboid building with circular windows from which Pierce Brosnan’s character Ian Dunross controlled his business empire in the 1980s mini-series Noble House – Grosvenor’s presence here inevitably has a slight colonial undertone.
Although representing only 10% of Grosvenor’s business, its Asian exposure helps balance its overall portfolio and gives it exposure to different market cycles.
Benjamin Cha, the company’s new chief executive for Asia-Pacific, took on the role last spring and inherited interests valued at $1.8bn (£1.4bn) from outgoing chief executive Nicholas Loup who, having founded the Grosvenor business in the region, left after a 25-year tenure to join Dymon Asia Private Equity.
Cha’s pre-planned promotion came six months after he joined the business as managing director from UBS Global Asset Management, where he was head of global real estate for China.
He is tasked with taking the Asian business from 10% to 20% of Grosvenor’s overall porfolio.
As well as retaining any cash and profits from sales, Cha been given an additional £100m to invest over the next three to five years.
Alongside an estimated £400m of joint venture equity and co-investment at an asset level, as well as expected leverage of 50%, this will amount to a prospective £1bn of investment.
In Asia, the company usually invests alongside capital partners, including sovereign wealth funds and family offices within the region, forming joint ventures at an asset level, as well as with development partners such as Tokyo Tatemono, Nan Fung and Swire Group.
In order to maximise its returns, Grosvenor is looking to reduce the number of markets within Asia that it is focused on and build up a development capability in each. This will allow the company to take the development of its future projects in-house.
“So instead of being a pure financial investor, or instead of investing purely into income-generating assets,” says Cha, “we will be doing value add and repositioning – sometimes very extensive repositioning.”
“It is a big change. We won’t become a fully fledged developer where that is all we do,” he adds. “We will continue to invest in income generating assets, value add, core and core plus, but we won’t have to rely on joint ventures for that development activity. It is a natural evolution of skills.”
The company sold out of Osaka at the start of 2015 and is in the process of selling its eight-floor interest in the China Merchants Tower in Beijing.
This will leave it to focus on its core markets of Hong Kong, Tokyo and Shanghai.
“It is not at all because we are retrenching; it is because we are refocusing. We want to go deeper into our three key markets and resist the temptation to just plant flags and go broader in new cities and so on.
“We want to become experts at these markets and become a significant niche player in each,” Cha says. “We will never become as big as some of the local giants, nor do we think that’s right for Grosvenor, but we really want to command our niches.”
The team of 60 is split between the headquarters in Hong Kong, with around 25 staff based there, 25 in Tokyo and 10 in Shanghai.
A further eight or so are expected to join before the end of 2016, predominantly with development expertise.
By number of assets, Grosvenor is most heavily involved in Tokyo within Asia and, at present, this is exclusively within the residential sector.
“The rental apartment market is actually very stable, very robust and culturally there’s a tradition of renting apartments, whereas elsewhere in Asia it is very much a primary buying market, and we like that dimension,” Cha says.
Japanese yields are some of the lowest across the globe due to historic interest rate and quantitative easing measures taken by prime minister Shinzo Abe and, as a result, routes into the commercial market are tough, particularly for overseas investors.
However, Grosvenor is expecting there to be plenty of opportunities longer term.
“I would say at current price levels and cap rates there isn’t necessarily that much left on the table in terms of value. But that hasn’t always been the case; it’s really been post-2011 and post-Abenomics,” Cha says.
“With the degree of liquidity in the market, and institutional capital and investors looking for yield, pricing has tightened significantly in a very short time.
“But if we look back to four or five years ago, prime office yields were 4% to 5%. So I think it is more of a cyclical phenomenon than a secular phenomenon.”
Shanghai is where Grosvenor has the least exposure of its three target cities, owning just one asset.
The company’s reasons for picking the city over the capital Beijing is that Shanghai is more cosmopolitan.
“Shanghai is China’s most sophisticated city. It is incredibly diverse in terms of economic makeup, industry services, financial services, trading, media and fashion.
“It is the biggest city in terms of economic output, with the service sector accounting for about half of that,” Cha says.
“We would like to stay in the main city of Shanghai but the overall Yangtze River Delta region will be of interest at some point in time. We are still city-centre focused for opportunities, whether that be Jing’an, which is very much like the West End of London, or Lujiazui, which is where the stock exchange, banks and financial institutions are.
“There are different CBDs in Shanghai and we follow and track the different neighbourhoods.”
While Hong Kong isn’t home to Grosvenor’s biggest portfolio in Asia, the fact that the business is based there means there is an inevitable focus on the city.
However, there is a feeling that, like Tokyo, pricing is not sustainable, particularly within the residential sector.
Dramatic drops in residential sales volumes have occurred as a result of increased stamp duty for overseas buyers, a slowdown in China’s economy and, anecdotally, because of China’s corruption crackdown.
The effect on values has been limited thus far, but Cha predicts that it will not be long before they are, and that could bring about opportunities for Grosvenor.
“It is very tough right now because things are tightly priced so entering the market now is a bit of a stretch. Residential transaction volumes have declined between 30% and 40% year-on-year,” he says.
“Prices have held, but if you look at the primary markets, developers are starting to rebate stamp duties and some of the taxes to gain velocity in terms of sales. In our view, it is just a matter of time before the other shoe drops.”
For Grosvenor, it is a double-edged sword, however. Its ultra-luxury Monterey Court development in Jardine’s Lookout completes in 2017 and Cha admits to having a few jitters.
“I am a little bit nervous, yes. It’s 22 apartments, it’s not a big scheme. It’s a phenomenal location. Our in-going cost wasn’t exorbitant so we do have some insulation, but I think it wouldn’t be intellectually honest to say that we’re feeling ebullient about it,” he says.
But such ups and downs of the Asian market do not phase Cha, who says that it is important to invest through the cycles in a region that is ultimately likely to grow rapidly over the longer term.
“We still believe in the secular fundamentals of the region. This level of growth [in China] of 6.5% is perfectly fine. One can still run a business and make a profit,” Cha says.
“As mind-blowing as [returns were] 10 years ago, keep in mind the risks that existed back then were a lot greater.
“On a risk-adjusted basis, it should be quite a normal market, and this growth should be expected.”
With Cha freshly at the helm and the company pumping more funds into its portfolio, Grosvenor’s Asian empire looks destined to grow further, despite its footprint shrinking across the region.
Grosvenor’s Asia portfolio
PERKINS ROAD, Jardine’s Lookout
Owned with CSI Properties, the development will be a super-luxury 22-storey tower consisting of a flat on each floor. It is expected to complete in 2017.
Owned 50:50 with Swire Properties, the 544,000 sq ft office building at Taikoo Place is let to telecoms firm PCCW.
Shui On Plaza
A minority stake in a 26-storey office building totalling 700,000 sq ft on Huaihai Zhong Road.
Five residential assets
The Westminster Roppongi which Grosvenor is selling out of, and Grosvenor Place Kamizono-cho, The Belgravia Azabu, The Mark Minami-Azabu, Opus Arisugawa Terrace and Residence, all of which it plans to retain.