Businesses in the Asia-Pacific region are increasingly looking to relocate out of high-cost business districts into cheaper areas, creating new opportunities for investors, according to Partners Group, the Swiss alternative house.

The trend is taking off in Hong Kong, Singapore and Sydney, where the differential between rental prices in city centres and fringe locations is particularly pronounced. “Vacancy rates in traditional central business districts are down to extraordinary low levels,” said Bastian Wolff, head of Asia-Pacific real estate at Partners. “This is a core focus in our value creation strategy for Asia-Pacific.”

In April, Partners bought a HK$1 trillion ($129 billion), 13-storey, 200,000 sq ft warehouse in Kowloon East, a former industrial heartland the Hong Kong government is attempting to convert into a second central business district. It is converting the building into office space in the hope of raising the rental income by at least threefold. Rents in Kowloon East are just 40 per cent of those in the existing CBD.

“Significant rental gaps exist between the traditional CBD and decentralised office locations which are prompting occupiers to seek cost-efficient options in Kowloon East,” said Wolff. “Historically there hasn’t been great supply in these [fringe] markets that can cater to institutions.”

Separately, Partners said opportunities in US private debt markets are being eroded by a rise in issuance of covenant-lite loans, which are stripped of traditional promises that a company will keep debt below a certain level or interest payments below a pre-agreed proportion of earnings.

Cov-lite loan issuance reached $140 billion in the US in the first half of 2013, above the pre-crisis full-year peak of $96 billion, according to S&P Capital IQ, accounting for 53 per cent of all loans.

In Europe, 10 per cent of loans were covenant-lite in the year to June. Juri Jenkner, co-head of private debt at Partners, attributed the divide to lower liquidity in Europe and the fact that managers of European collateralised loan obligations have to keep 5 per cent “skin in the game”.

As a result, Partners sees “attractive relative value in European loans compared to the US”, where it is focusing on the “lower mid-market” where pricing is more “reasonable”.


— Financial Times